SBIR AND THE PHASE III CHALLENGE OF COMMERCIALIZATION

REPORT OF A SYMPOSIUM

Committee on Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program

Policy and Global Affairs Division

CHARLES W. WESSNER, EDITOR

NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES

THE NATIONAL ACADEMIES PRESS

Washington, D.C.
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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium SBIR AND THE PHASE III CHALLENGE OF COMMERCIALIZATION REPORT OF A SYMPOSIUM Committee on Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program Policy and Global Affairs Division CHARLES W. WESSNER, EDITOR NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES THE NATIONAL ACADEMIES PRESS Washington, D.C. www.nap.edu

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by Contract/Grant No. DASW01-02C-0039 between the National Academy of Sciences and the U.S. Department of Defense, N01-OD-4-2139 (Task Order #99) between the National Academy of Sciences and the U.S. Department of Health & Human Services, NASW-03003 between the National Academy of Sciences and the National Aeronautics and Space Administration, DE-AC02-02ER12259 between the National Academy of Sciences and the U.S. Department of Energy, and DMI-0221736 between the National Academy of Sciences and the National Science Foundation. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number-13: 978-0-309-10341-1 International Standard Book Number-10: 0-309-10341-X Limited copies are available from the Policy and Global Affairs Division, National Research Council, 500 Fifth Street, N.W., Washington, DC 20001; 202-334-1529. Additional copies of this report are available from the National Academies Press, 500 Fifth Street, N.W., Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu Printed in the United States of America Copyright 2007 by the National Academy of Sciences. All rights reserved.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium THE NATIONAL ACADEMIES Advisers to the Nation on Science, Engineering, and Medicine The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Wm. A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Wm. A. Wulf are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium Committee on Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program* Chair Jacques S. Gansler Roger C. Lipitz Chair in Public Policy and Private Enterprise School of Public Policy University of Maryland David Audretsch Ameritech Chair of Economic Development Director of the Institute for Development Strategies Indiana University Gene Banucci Chairman and CEO Advanced Technology Materials, Inc. Jon Baron Director Coalition for Evidence-Based Policy Michael Borrus Founding General Partner X/Seed Capital Gail Cassell Vice President, Scientific Affairs Distinguished Research Fellow Eli Lilly and Company Elizabeth Downing CEO 3D Technology Laboratories Kenneth Flamm Dean Rusk Chair in International Affairs Lyndon B. Johnson School of Public Affairs University of Texas at Austin M. Christina Gabriel Program Director, Innovation Economy The Heinz Endowments Trevor O. Jones Chairman and CEO BIOMEC, Inc. Charles Kolb President Aerodyne Research, Inc. Henry Linsert, Jr. Chairman and CEO Martek Biosciences Corporation W. Clark McFadden Partner Dewey Ballantine Duncan T. Moore Kingslake Professor of Optical Engineering University of Rochester Kent Murphy Chairman and CEO Luna Innovations Linda F. Powers Managing Director Toucan Capital Corporation

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium Tyrone Taylor Director, Washington Relations West Virginia High Technology Consortium Foundation Charles Trimble CEO (ret) Trimble Navigation Patrick Windham President Windham Consulting PROJECT STAFF Charles W. Wessner Study Director McAlister T. Clabaugh Program Associate David E. Dierksheide Program Officer Paul Fowler Senior Research Associate Jeffrey C. McCullough Program Associate Sujai J. Shivakumar Senior Program Officer

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium RESEARCH TEAM Zoltan Acs University of Baltimore Alan Anderson Consultant Philip A. Auerswald George Mason University Robert-Allen Baker Vital Strategies, LLC Robert Berger Grant Black University of Indiana South Bend Peter Cahill BRTRC, Inc. Dirk Czarnitzki University of Leuven Julie Ann Elston Oregon State University Irwin Feller American Association for the Advancement of Science David H. Finifter The College of William and Mary Michael Fogarty University of Portland Robin Gaster North Atlantic Research Nicholas Karvonides Albert N. Link University of North Carolina Rosalie Reugg TIA Consulting Donald Siegel University of California at Riverside Paula E. Stephan Georgia State University Andrew Toole Rutgers University Nicholas Vonortas George Washington University

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium POLICY AND GLOBAL AFFAIRS Ad hoc Oversight Board for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program Robert M. White, Chair University Professor Emeritus Electrical and Computer Engineering Carnegie Mellon University Anita K. Jones Lawrence R. Quarles Professor of Engineering and Applied Science School of Engineering and Applied Science University of Virginia Mark B. Myers Visiting Professor of Management The Wharton School University of Pennsylvania

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium Contents PREFACE   xiii I. INTRODUCTION   3 II. PROCEEDINGS         Opening Remarks Charles W. Wessner, National Research Council   33     Introduction Jacques S. Gansler, University of Maryland   37     Meeting Mission Needs Charles J. Holland, Department of Defense   44 Panel I:   The SBIR Program: Different Needs, Common Challenges   52      Moderator: Bill Greenwalt, Senate Committee on Armed Services          Michael Caccuitto, Department of Defense          Michael McGrath, U.S. Navy          Mark D. Stephen, U.S. Air Force          John A. Parmentola, U.S. Army          Carl G. Ray, National Aeronautics and Space Administration    

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium     Panel II: Transitioning SBIR: What Are the Issues for Prime Contractors?   75      Moderator: Max V. Kidalov, Senate Committee on Small Business and Entrepreneurship          Richard H. Hendel, Boeing Corporation          Mario Ramirez, Lockheed Martin          John P. Waszczak, Raytheon Company          Earle Rudolph, ATK          Discussant: Trevor O. Jones, BIOMEC, Inc.         Keynote Speech: Accelerating Innovation: The Luna Innovation Model   95      Kent Murphy, Luna Innovations         Panel III: Challenges of Phase III: SBIR Award Winners   102      Moderator: Kevin Wheeler, Senate Committee on Small Business and Entrepreneurship          Anthony C. Mulligan, Advanced Ceramics Research, Inc.          Nick Karangelen, Trident Systems          Thomas Crabb, Orbitec          Robert M. Pap, Accurate Automation Corporation          Mark Redding, Impact Technologies, LLC          Tom Cassin, Materials Science Corporation          Discussant: James Turner, House Committee on Science         Panel IV: Best Practice for Agency Programs: PEOs and Program Offices   124      Moderator: Peter Levine, Senate Committee on Armed Services          Richard McNamara, U.S. Navy          Stephen Lee, U.S. Army Research Office          Tracy Van Zuiden, U.S. Air Force          Peter Hughes, NASA Goddard Space Flight Center    

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium     Panel V: Lessons Learned   104      Moderator: Jacques S. Gansler, University of Maryland          Richard Carroll, Innovative Defense Strategies          John P. Waszczak, Raytheon Company          John Williams, U.S. Navy         Concluding Remarks Jacques S. Gansler, University of Maryland   146 III. APPENDIXES     A.   Biographies of Speakers   149 B.   Participants List 14 June 2005 Symposium   171 C.   Bibliography   177

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium Preface Today’s knowledge economy is driven in large part by the nation’s capacity to innovate. One of the defining features of the U.S. economy is a high level of entrepreneurial activity. Entrepreneurs in the United States see opportunities and are willing and able to take on risk to bring new welfare-enhancing, wealth-generating technologies to the market. Yet, while innovation in areas such as genomics, bioinformatics, and nanotechnology present new opportunities, converting these ideas into innovations for the market involves substantial challenges.1 The American capacity for innovation can be strengthened by addressing the challenges faced by entrepreneurs. Public-private partnerships are one means to help entrepreneurs bring new ideas to market.2 The Small Business Innovation Research (SBIR) program is one of the largest examples of U.S. public-private partnerships. Founded in 1982, SBIR was designed to encourage small business to develop new processes and products and to provide quality research in support of the many missions of the U.S. government. By including qualified small businesses in the nation’s R&D effort, SBIR grants and contracts are intended to stimulate innovative new technologies to help agencies meet the specific research and development needs of the nation in 1 See Lewis M. Branscomb, Kenneth P. Morse, Michael J. Roberts, and Darin Boville, Managing Technical Risk: Understanding Private Sector Decision Making on Early Stage Technology Based Projects, Washington, D.C.: Department of Commerce/National Institute of Standards and Technology, 2000. 2 For a summary analysis of best practice among U.S. public-private partnerships, see National Research Council, Government-Industry Partnerships for the Development of New Technologies: Summary Report, Charles W. Wessner, ed., Washington, D.C.: National Academies Press, 2002.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium many areas, including health, the environment, and national defense. The SBIR program is today the largest of the government’s efforts to draw on the inventiveness of small, high-technology firms, with a budget of $1.85 billion for 2005.3 THE NATIONAL RESEARCH COUNCIL ASSESSMENT OF SBIR As the SBIR program approached its twentieth year of operation, the U.S. Congress asked the National Research Council (NRC) to conduct a “comprehensive study of how the SBIR program has stimulated technological innovation and used small businesses to meet federal research and development needs” and make recommendations on improvements to the program. HR 5667 directs the NRC to evaluate the quality of SBIR research and evaluate the SBIR program’s value to the mission of the agencies that administer it. It calls for an assessment of the extent to which SBIR projects achieve some measure of commercialization, as well as an evaluation of the program’s overall economic and non-economic benefits. It also calls for additional analysis as required to support specific recommendations on areas such as measuring outcomes to enhance agency strategy and performance, increasing Federal procurement of technologies produced by small business, and overall improvements to the SBIR program. It is important to note that the NRC Committee assessing the SBIR program was not asked to consider if SBIR should exist or not—Congress has affirmatively decided this question on three occasions.4 Rather, the Committee was charged with providing an empirically based assessment of the program’s operations, achievements, and challenges to improve public understanding of the program and to develop recommendations to enhance the program’s effectiveness. With regard to the program’s effectiveness, it became apparent in the course of the Academies’ review that the Phase III element of the SBIR program would benefit from further examination. This need seemed particularly apparent for the agencies most often involved in the procurement of technologies developed using SBIR awards. Some in the SBIR community believe that this phase of the program could be improved. Some agencies seem to have adopted effective means of managing the Phase III transition. And in the course of the study, the prime contractors responsible for major systems at the Department of Defense (DoD) and the National Aeronautics and Space Administration (NASA) have shown greater interest in the SBIR program, seeing it increasingly as a wellspring of innovative technologies. 3 U.S. Small Business Administration TechNet Data Base, <http://tech-net.sba.gov/>, Accessed on July 25, 2006. 4 These are the 1982 Small Business Development Act and the subsequent multi-year reauthorizations of the SBIR program in 1992 and 2000.

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium To capture these various perspectives, the Academies convened the conference on “SBIR and the Phase III Challenge of Commercialization” on June 14, 2005. The meeting focused on the commercialization of SBIR-funded innovations at DoD and NASA, where commercialization often takes the form of agency acquisition. It was held under the leadership of Jacques Gansler, vice president for research at the University of Maryland and former Under Secretary of Defense for Acquisition, Technology and Logistics. A unique feature of the conference is that it brought together, for the first time, the program managers, small business leaders, and prime contractor personnel involved in commercializing the results of SBIR awards through procurement at the DoD and NASA. These participants identified the challenges as well as highlighted existing and evolving best practices among successful cases in the third (or commercialization) phase of the SBIR program. This conference, summarized in this report, covered a rich variety of topics though, given the one-day timeframe of the meeting and the richness of the subject, did not (and indeed could not) cover the many possible issues associated with the program. The conference and this report do have the virtue of focusing on a key element of the SBIR program—the Phase III transition.5 ACKNOWLEDGMENTS On behalf of the National Academies, we express our appreciation and recognition for the insights, experiences, and perspectives made available by the participants in the conference. A number of individuals deserve recognition for their contributions to the preparation of the conference and this report. These include Ken Jacobson, Robin Gaster, Sujai Shivakumar, McAlister Clabaugh, and David Dierksheide. Without their collective efforts, amidst many other competing priorities, it would not have been possible to prepare this report in the required period. NATIONAL RESEARCH COUNCIL REVIEW This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the National Academies’ Report Review Committee. The purpose of 5 This conference focuses on commercialization, one of four goals of the Small Business Innovation Research (SBIR) program. Created in 1982 through the Small Business Innovation Development Act, the program is designated with four distinct purposes: “(1) to stimulate technological innovation; (2) to use small business to meet federal research and development needs; (3) to foster and encourage participation by minority and disadvantaged persons in technological innovation; and (4) to increase private sector commercialization innovations derived from Federal research and development.”

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SBIR and the Phase III Challenge of Commercialization: Report of a Symposium this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for quality and objectivity. The review comments and draft manuscript remain confidential to protect the integrity of the process. We wish to thank the following individuals for their review of this report: Robert Archibald, College of William and Mary; Robert Genco, State University of New York at Buffalo; Jere Glover, Small Business Technology Coalition; and Richard Hendel, The Boeing Company. Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the content of the report, nor did they see the final draft before its release. The review of this report was overseen by Robert White, Carnegie Mellon University, appointed by the National Academies, he was responsible for making certain that an independent examination of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authors and the institution. STRUCTURE Following this preface, the report’s introduction describes the challenges of early stage finance in the United States and the SBIR program as well as the particular challenges of procurement for DoD and NASA. It also summarizes the key issues from the conference. The final Proceedings section of this volume provides a detailed compilation of the presentations and discussion remarks of the various speakers at the conference. Jacques S. Gansler Charles W. Wessner