5
Commercialization

5.1
COMMERCIALIZATION STRATEGIES

The National Science Foundation (NSF) appears to have recognized early on that addressing commercial and financial issues throughout the initial stages of technology development—concurrently gathering information about markets, potential customers, competitors, strategic direction, and finance—is critical to effective and timely commercialization. This view has been “long recognized” by American industry.1 It is a view also strongly embraced by other, more recently created, public-private partnership programs such as the Advanced Technology Program (ATP).2

The NSF’s relative aggressiveness in encouraging early attention to business issues is particularly noteworthy. A likely reason for this early attention is the fact that, unlike the Department of Defense and other agencies, the NSF itself does not generally provide a market for the technologies it funds through the Small Business Innovation Research (SBIR) program. It likely also reflects the business training of the founders of the NSF program. Early on, the NSF’s SBIR program specified a proposal selection criterion that relates to commercialization. It set forth the six-part “Commercialization Plan Guidelines” and in 2003 began requiring that grantees’ commercialization plans have more fully developed financial projections at the beginning of Phase II. It has required all SBIR Phase I grantees

1

Dawnbreaker, Inc., makes this point, citing the work of Robert G. Cooper—Winning at New Products: Accelerating the Process from Idea to Launch (Basic Books, 2001)—in Dawnbreaker, Inc., “SBIR: The Phase III Challenge,” white paper, 2005, pp. 10–12.

2

The ATP is currently being phased out. It has been adopted as a model public-private partnership program by other countries.



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5 Commercialization 5.1 COMMERCIALIZATION STRATEGIES The National Science Foundation (NSF) appears to have recognized early on that addressing commercial and financial issues throughout the initial stages of technology development—concurrently gathering information about markets, potential customers, competitors, strategic direction, and finance—is critical to effective and timely commercialization. This view has been “long recognized” by American industry.1 It is a view also strongly embraced by other, more recently created, public-private partnership programs such as the Advanced Technology Program (ATP).2 The NSF’s relative aggressiveness in encouraging early attention to business issues is particularly noteworthy. A likely reason for this early attention is the fact that, unlike the Department of Defense and other agencies, the NSF itself does not generally provide a market for the technologies it funds through the Small Business Innovation Research (SBIR) program. It likely also reflects the business training of the founders of the NSF program. Early on, the NSF’s SBIR program specified a proposal selection criterion that relates to commercialization. It set forth the six-part “Commercialization Plan Guidelines” and in 2003 began requir- ing that grantees’ commercialization plans have more fully developed financial projections at the beginning of Phase II. It has required all SBIR Phase I grantees 1Dawnbreaker, Inc., makes this point, citing the work of Robert G. Cooper—Winning at New Products: Accelerating the Process from Idea to Launch (Basic Books, 2001)—in Dawnbreaker, Inc., “SBIR: The Phase III Challenge,” white paper, 2005, pp. 10–12. 2The ATP is currently being phased out. It has been adopted as a model public-private partnership program by other countries. 

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 SBIR AT THE NATIONAL SCIENCE FOUNDATION to attend a commercialization planning workshop. Since 2001, it has engaged the services of Dawnbreaker, Inc., a company that specializes in providing com- mercialization assistance to small advanced technology firms, to help Phase I grantees to prepare NSF’s required commercialization plan for Phase II submis- sions.3 In addition, the NSF’s SBIR program has encouraged commercialization at the Phase II stage by offering its Phase IIB supplemental option, conditioned on the grantee obtaining third-party financing. The Phase IIB supplement stands out as an innovative method of encouraging companies to attract funding from other sources—a critical step toward commercialization. The development and enhancement of the NSF’s Web-based Matchmaker program to promote partner- ing may also encourage commercialization. The NSF’s SBIR program is using Phase IIB Supplemental Grants as an innovative method of encouraging companies to attract funding from other sources, which • provides an incentive for firms to partner with the investment community, • can identify technologies with greater market potential, and • helps bridge the funding gap to commercialization. Management of NSF’s SBIR, the Office of Industrial Innovation (OII), has taken another recent step to provide more commercialization assistance to its Phase II grantees. The NSF’s SBIR program entered into a partnership with the Department of Energy’s (DoE) SBIR program to jointly sponsor the 2005 DoE Opportunity Forum.4 This forum brought selected SBIR grantees face-to-face with prospective investors and allowed them to present their commercialization opportunities to the investors. In addition to the 2005 DoE Opportunity Forum, OII brings together Phase II grantees on a regular basis at its annual grantee conferences. For example, OII cosponsored a Phase II Grantee Conference on May 18–20, 2006, in Louisville, Kentucky, with the Ewing Marion Kauffman Foundation, a Kansas City-based 3According to Dawnbreaker, Inc., it is difficult to give extensive attention to business planning during Phase I, despite the fact that early business planning is desirable. Factors limiting what can be done include the following: the short time duration of Phase I; the fact that small-company resources are generally tight during this phase; the difficulty of attracting external funding during this early phase; and limits on available funding for commercialization assistance through the SBIR program. 4The 2005 DoE Opportunity Forum brochure, “Partnering and Investment Opportunities for the Future.” The forum took place on October 24–25, 2005, in Tysons Corner, Virginia.

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 COMMERCIALIZATION organization whose goal is to catalyze an entrepreneurial society.5 The confer- ence showcased nearly 300 grantees to potential industrial strategic partners and venture capital investors. It also enabled one-on-one meetings of OII program officers with grantees, compensating at least in part for the general inability of program managers to conduct site visits to grantee companies due to a shortage of program administrative funding. At this conference, business and financial panels met, firms had poster presentations and maintained tables or booths, and the grantees made presentations grouped by industry sector. 6 The NSF funds many very small, scientist-led firms that find commercializa- tion quite challenging. OII’s strategic plan includes a number of additional initia- tives aimed at firms needing assistance to encourage commercialization. OII hopes to: develop plans to work with incubators, business schools, and other resources; provide innovation management courses to grantees; revise Phase I requirements to include more commercial information upfront; bring more business reviewers into the Phase I process; and bring investors and corporate partners to grantee conferences and workshops. Thus, it appears that the NSF is formulating plans to continue and intensify strategies aimed at fostering commercialization. 7 5.2 COMMERCIAL RESuLTS It seems clear that the NSF’s SBIR program intends for its grants to result in commercial goods and services. But how well is it doing in achieving this goal? In this section we examine evidence of commercial results drawn from five sources: (1) a survey of grantee firms that focuses on firm characteristics; (2) a survey of Phase II projects to focus on projects that went forward; (3) a survey of Phase I projects to find out why some projects did not continue into Phase II; (4) case studies of ten companies that received NSF SBIR grants; and (5) NSF- initiated data and analysis on commercialization. While each section following focuses on each of these sources in turn, to some extent findings from the various sources are interwoven. 5.2.1 Characteristics of SBIR-Funded Firms as Indicated by NRC Firm Survey Data Influence of the SBIR program on Company Founding. The NRC Firm Survey found that 20 percent of 137 respondents attributed the founding of their 5“About the Foundation,” Ewing Marion Kauffman Foundation Web site, . 6National Science Foundation, Office of Industrial Innovation, “SBIR/STTR Phase II Grantee Conference, Book of Abstracts,” May 18–20, 2006, Louisville, Kentucky. 7In 2003 the NSF expanded the Phase I commercialization assistance program and awarded three-year contracts to Dawnbreaker, Inc., and Foresight Science & Technology. In a new contract competition in 2006, the NSF awarded three-year contracts to Dawnbreaker and Development Capital Networks (DCN).

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 SBIR AT THE NATIONAL SCIENCE FOUNDATION companies to the SBIR program in full or in part. This finding was supported by the case studies in which several companies attested to the important role of the SBIR program in either the creation of their company (e.g., Language Weaver) or the restarting of their company after they encountered setbacks (e.g., ISCA Technologies). Previous Business Experience. The survey found that founders of SBIR- awardee firms tended to have previous business experience. Fifty-six percent of the founders of respondent firms had started one or more other companies, and 52 percent of the founders had a business background. Furthermore, most of the founders had been employed with another private company prior to founding the survey firm. Grants Received. Most of the respondent firms (86 percent) had received more than one Phase I grant from federal agencies. The reported range per firm was 1 to 462 Phase I grants, and the average number received was 31. Fourteen percent had received only one grant; 32 percent had received from two to five grants; 8 percent had received more than 100 Phase I grants. For most of the firms, these grants were spread over a number of years. Most of these firms also had received more than one Phase II grant from federal agencies, but fewer Phase II than Phase I grants. The reported range was 1 to 182 Phase II grants, and the average number received was 14—less than half the average number of Phase I grants. Twenty-three percent received only one Phase II grant; 44 percent received from two to five grants; 7 percent received more than 50 Phase II grants. Company Growth. A large proportion of the firms surveyed attributed a con- siderable part of their companies’ post-SBIR grant growth to the SBIR program. Forty-six percent attributed more than 50 percent of their growth to the SBIR program. Table 5.2-1 summarizes the responses to the relevant survey question. Surveyed firms reported employment growth from the time they received their first Phase II grant to the time of the survey. Figure 5.2-1 shows how the surveyed firms tended to increase their number of employees from the time of the firms’ first SBIR grants to the time of the survey. At the time they received their first Phase II award, 60 percent of the firms had 5 or fewer employees, whereas by the time of the survey, this percentage had been nearly cut in half. The average number of employees increased from 13 to 36, and the range increased from 1 to 175 employees to 1 to 750 employees. Three percent of the firms had more than 200 employees at the later time. Firm Revenue. Figure 5.2-2 shows the distribution of surveyed firms by their total revenue. At the low end, 13 percent of firms had annual revenues under $100,000. At the high end, 4 percent of the firms reported $100 million or more

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7 COMMERCIALIZATION TABLE 5.2-1 Company Growth Attributed to the SBIR Program Percentage Growth Percentage of Companies Attributing Growth to the SBIR Program < 25 27 25 to 50 28 51 to 75 24 >75 22 SOURCE: NRC Firm Survey. 60 50 40 Percent 30 At time of survey 20 At time of 1st Phase II award 10 0 ≤5 6–20 21–50 >50 Number of Employees FIGuRE 5.2-1 Firm Employment after First Phase II Award and at the Time of the Survey. SOURCE: NRC Firm Survey. 5.2-1 in annual revenue. The largest group reported annual revenue of $1 million to $5 million. Thirty-six percent of all the surveyed firms reported that more than half of their company’s revenue during its last fiscal year was comprised of SBIR and/ or STTR funding. Forty-two percent reported that SBIR and/or STTR funding comprised 10 percent or less of revenue in the company’s last fiscal year, and 28 percent reported that it comprised 0 percent of company revenue. Business Activity. Four of the firms in the survey sample had made an initial public stock offering—one in 2004, one in 2000, one in 1994, and one in 1983. Two more planned an initial public stock offering in 2005/2006. Eighteen percent of the surveyed firms had established one or more spin-off companies, for a total of 49 new spin-off companies.

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 SBIR AT THE NATIONAL SCIENCE FOUNDATION 40 35 30 25 Percent 20 15 10 5 0 ≥100,000 <100 100- 500- 1,000- 5,000- 20,000- 499 999 4,999 19,999 99,999 Thousands of Dollars FIGuRE 5.2-2 Distribution of Surveyed Firms by Annual Revenue. SOURCE: NRC Firm Survey. NSF-surveyed firms tended to be proactive in assessing the potential com- mercial markets for their SBIR products, processes, or services—slightly more so than the total of surveyed firms for all five of the agencies examined. Sixty-nine 5.2-2 percent reported that they first determined potential commercial markets prior to submitting their Phase I proposal, and another 22 percent prior to submitting the Phase II proposal. Only 1 percent reported waiting until after Phase II. The survey results revealed that market research/analysis in these firms is carried out by a variety of people, including the director of marketing, employees for whom marketing is their primary job, employees who take on marketing in addition to their regular duties, consultants, the principal investigator, and the company president or CEO. However, the company president or CEO was most often responsible for market research and analysis. Similarly, sales were handled in various ways by the firms, as illustrated by Table 5.2-2. Corporate officers were most often responsible for sales, but a substantial percentage of firms surveyed reported having an in-house sales force. Firms designated as NSF grant recipients were more likely than firms in the total survey to achieve sales through the use of licensing, independent distributors or other companies with which they had formed marketing alliances, other compa- nies that incorporate the product into their own, and spin-off companies. Firm R&D Devoted to SBIR Activities. Thirty-six percent of the firms reported that more than half of their total R&D effort was devoted to SBIR activi- ties during the most recent fiscal year, and 16 percent reported that more than 75 percent was devoted to SBIR activities. Thus, the SBIR funded a substantial share of the R&D activity of many grant-recipient firms.

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9 COMMERCIALIZATION TABLE 5.2-2 Methods of Accomplishing Sales of Product, Process, or Service Percentage of 130 Survey Respondents Method of Accomplishing Sales Using This Method Corporate officers 50 An in-house sales force 39 Licensing to another company 39 Independent distributors or other company with which they have 36 marketing alliances Other company(ies) which incorporate product into their own 34 Other employees (other than corporate offices and sales force) 28 Spin-off company(ies) 9 None of the above 8 SOURCE: NRC Firm Survey. NOTE: More than one method could be selected; thus, percentages do not add up to 100 percent. Protection of Intellectual Property. The 137 firms in the survey reported 842 patents resulting at least in part from their SBIR and/or STTR awards, for an average of 6 patents per firm related at least in part to SBIR awards. This was double the average reported for the total firm survey sample covering all five agencies. The range for the firms in the survey identified as recipients of NSF SBIR awards was from 0 to 66 patents per firm, with 26 percent reporting no pat- ents from SBIR/STTR and 28 percent reporting more than six patents each. This result is distinct from later patent results (from the Phase I and Phase II Surveys) that relate patents to the technology developed with funding from an individual award. The average number of patents attributed to individual SBIR projects is substantially lower than the number reported for the firm as a whole as resulting “at least in part to SBIR awards.” 5.2.2 Commercialization Progress Indicated by NRC Phase II Survey Data The NRC Phase II Survey provides recent evidence on the extent to which SBIR grant recipients have achieved commercialization and/or progress toward commercialization. The survey provides information on sales, on modes of com- mercialization, and on steps important to achieving commercialization, including marketing activities, interactions with other companies and investors, and attrac- tion of funding from non-SBIR sources. It also provides information on employ- ment effects, including the extent to which women and minorities are involved in the projects as principal investigators. Finally, it explores the extent to which the reported effects are believed by survey respondents to be attributable to impacts

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90 SBIR AT THE NATIONAL SCIENCE FOUNDATION 162 PII Projects More favorable (69%) Less favorable (31%) Products/processes/services Efforts discontinued, are in use but sales, licensing, (22%) or attraction of funding reported (10%) Commercialization Project discontinued underway with no sales, licensing, or funding (19%) (20%) Project continuing post-Phase II technology development Project not yet completed (28%) (1%) FIGuRE 5.2-3 Commercialization Status of 162 Surveyed Phase II NSF SBIR Projects. SOURCE: NRC Phase II Survey. 5.2-3 to the SBIR program. Figure 5.2-3 summarizes the commercialization status of 162 Phase II NSF SBIR projects. Projects Achieving Commercialization and Continuing Progress. Twenty- two percent of 162 respondents indicated that the referenced projects had resulted in products, processes, or services that were in use and still active. Fifty-one percent of the 162 respondents in the survey indicated some form of commer- cialization or progress toward commercialization of the technologies resulting from the referenced projects. Included in this 51 percent are those for which commercialization was under way (19 percent); those that had already achieved commercial results (22 percent); and those that had achieved sales, licensing, or additional funding before discontinuing the projects (10 percent). Another 28 per- cent of respondents indicated that the project was continuing technology develop- ment in the post-Phase II period. Altogether, 69 percent of respondents indicated some form of continuing progress—either in terms of commercial development (41 percent) or technology development (28 percent). Average Sales Data. Reported sales incorporating the technology devel- oped in the referenced projects were compiled from the 162 survey respondents. Average sales across the 162 projects were nearly $400,000, and average sales

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9 COMMERCIALIZATION of associated licensees of the technologies exceeded $1.4 million. When respon- dents were asked to identify the types of sales either they or their licensees had experienced, 38 percent indicated sales of product, 22 percent, sales of services, and 3 percent, sales that involved processes.8 For projects with sales and those without sales who expected future sales from the technology developed in the referenced projects, respondents were asked to estimate the amount of sales expected for their company and its licensees between now (the time of the survey in mid-2005) and the end of 2006. Average expected sales across all 162 projects exceeded $800,000 for this time interval appropriate for the referenced projects. These estimates of expected sales were based largely on educated guesses, ongoing negotiations, projections derived from current sales, and past experience. When asked the basis of the expected sales estimates, respondents said market research figured in only 26 percent of the future sales estimates. “Educated guess” was reported by 40 percent and “ongoing negotiations” was reported by 38 percent as the basis of the sales estimates. “Projection from current sales” was reported by 34 percent and “past experience” by 32 percent. In contrast, “consultant esti- mates” figured in 5 percent of the estimates.9 For novel/disruptive technologies, educated guesses may be all that is available for market estimates. At the same time, program officials should be skeptical when Phase I applicants initially are very positive in their educated guesses of expected market size, closely followed by an educated guess that there is insufficient commercial promise to warrant a follow-on proposal or other effort. As has been observed in other technology programs, a few projects often account for the majority of sales revenue.10 This tendency was also observed in the SBIR survey results, where just eight of the projects—each of which had $2.3 million or more in sales—accounted for over half the total reported sales dol- lars for the surveyed projects. The project with the highest reported amount had $4.8 million in sales. Similarly, the results for sales by licensees of those survey projects’ technologies were highly skewed by a single licensee that accounted 8These results are consistent with findings from a study of small companies funded by the Advanced Technology Program, which found that only 12 percent of applications of small firms in single-firm projects involved processes. ATP’s inquiry cites the work of Utterback (1994) who noted that advances during early stages of innovation tend to be focused on a new product area, and later stages are more oriented to increased process efficiencies. According to the ATP report, “Small firms with limited, or no, existing product lines, such as is the case for the start-ups . . . are more likely to be addressing the earliest stages of innovation (i.e., those involving new products, or products with new capabilities) rather than process efficiencies.” See Jeanne W. Powell, Business Planning and Progress of Small Firms Engaged in Technology Deelopment through the Adanced Technology Program, NISTIR 6375, October 1999, p. 15. 9The source of these data is the NRC Phase II Survey. 10Venture capitalists report that, typically, a very few projects account for the bulk of their invest- ment return. Similarly, the Advanced Technology Program reported a distribution of project successes that found a smaller percentage in the top than in the middle.

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9 SBIR AT THE NATIONAL SCIENCE FOUNDATION TABLE 5.2-3 Customers for Sales Derived for the Referenced Grants Percentage of Total Sales to Types of Customers Each Type of Customer Domestic private sector 57 Department of Defense (DoD) 11 Export markets 11 Prime contractors for DoD or NASA 5 State or local governments 4 Other federal agencies 2 NSF 1 NASA 1 Support to universities and other institutions 9 SOURCE: NRC Phase II Survey. for over half the total licensee sales dollars, amounting to $200 million or more in licensee sales. Customers. Respondents reporting sales from the referenced NSF SBIR projects were able to identify their customers. As shown in Table 5.2-3, the majority of these sales (57 percent) went to the domestic private (civilian) sec- tor. A total of 20 percent went to federal agencies or their prime contractors. Of this, 11 percent went to DoD and 5 percent to DoD or NASA prime contractors. Responses to a separate question revealed that 4 percent reported that the result- ing technology was used in a federal system or acquisition program. As would be expected given that the NSF is, for the most part, not a pro- curement agency, only 1 percent of total sales went to the NSF. Sales to export markets accounted for 11 percent of the total, and state and local governments accounted for 4 percent. Customers other than those listed accounted for the remaining 9 percent. Mode of Commercialization. Respondents with sales or expecting sales were asked about their mode of commercializing technologies resulting from the referenced projects. Table 5.2-4 summarizes the responses. The most frequent answer was “as hardware” (54 percent), followed by “as process technology” (32 percent)11 and “as software” (32 percent). The next most frequent responses were “as new or improved service capability” (24 percent) and “as a research tool” (21 percent). Twelve percent indicated the mode of commercialization to 11The previously noted low incidence of sales revenue reported from process technology (3 percent) seems in contrast to the reported 32 percent of respondents who reported their mode of commercial- izing to be process technology.

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9 COMMERCIALIZATION TABLE 5.2-4 Mode of Commercializing Percentage of Respondents Choosing Mode This Mode As hardware (final product, component, or intermediate hardware product) 54 As process technology 32 As software 32 As new or improved service capability 24 As a research tool 21 As educational materials 12 As a biologic 3 No commercial product, process, or service was/is planned 2 As a drug 0 Other 8 SOURCE: NRC Phase II Survey. be “as educational materials.” “As a drug” (0 percent) was not an avenue for commercialization, but “as a biologic” (3 percent) was occasionally indicated. Eight percent of the modes used or expected to be used apparently fell outside the modes listed, and 2 percent responded that no commercial product, process, or service was/is planned even though they previously had indicated the contrary. Marketing Activities. Asked about their marketing activities, respon- dents who had not discontinued their efforts without sales or additional funding indicated an emphasis on market planning, with approximately three-quarters reporting they had planned, had under way, or had completed preparation of a marketing plan. Their attention was also on market research and publicity and advertising, with about two-thirds of respondents indicating they had planned, had under way, or had completed these activities. About half the respondents also had planned, had under way, or had completed the hiring of marketing staff and test marketing, but a near equal percentage indicated these marketing activities were not needed. Interactions with Other Companies and Investors. Asked about their activities with other companies and investors in the United States and abroad, respondents for 121 Phase II projects indicated the frequency with which they either had ongoing negotiations or had finalized agreements with other companies or investors. Overall, interactions with domestic firms and investors far exceeded interactions with foreign firms and investors.

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09 COMMERCIALIZATION Box B The SBIR Program as an Enabler and a Lifeline for High-Tech Companies Faraday Technologies, Inc.: The SBIR grant enabled the company to under- take research that it otherwise would not have done. It sped the development of proof of concepts and pilot-scale prototypes, opened new market opportunities for new applications, led to the formation of new business units in the company, and enabled the hiring of key professional and technical staff. The SBIR [program] “is well structured to allow taking on higher risk. . . .” Immersion Corporation: SBIR grants gave Immersion the ability to grow its intellectual property portfolio, the core of its commercial success. The com- pany leveraged the government funding to attract investment funding from private sources. It has grown to a capitalized value of $173 million. ISCA Technologies: The SBIR program was essential to the survival of the company after it hit a major financial setback on its initial path. “The NSF SBIR gave us lots of prestige; it gave us credibility.” The company used SBIR funding to upgrade its technology and find new markets. MER Corporation: The SBIR program allowed the company to steadily im- prove and advance its R&D capabilities. It also enabled the owners to not lose control of the company. Language Weaver: “The STTR/SBIR from NSF created Language Weaver and what we are today. Without that we would have shelved the technology.” MicroStrain, Inc.: The company found the NSF SBIR program, with its “more open topics,” particularly helpful in the early stages when the company was build- ing capacity. National Recovery Technologies, Inc.: “Without the SBIR program, NRT wouldn’t have a business. We couldn’t have done the necessary technical develop- ment and achieved the internal intellectual growth. . . . SBIR saved our bacon.” NVE Corporation: The SBIR program is “the mother of invention.” SBIR and other government R&D funding programs are essential to NVE being able to perform the advanced R&D that has allowed the company to produce products for sale and to license intellectual property. T/J Technologies, Inc.: “The SBIR grants served as building blocks. . . .With- out the SBIR, we couldn’t have won the ATP. And, without the ATP and SBIR, we may not have had the technology with which to earn larger contracts and joint development agreements. So they are all linked. . . . The cutting edge intellec- tual property that we have developed through the SBIR and ATP programs has attracted multiple players to us. Small companies have a stronger negotiating posi- tion when more than one company competes for their technology.” WaveBand Corporation: Initially, the company (which is a spin-out of another company) was dependent on SBIR grants. After focusing on military objectives, the company went through a cycle of Phase I, Phase II, and Phase IIB NSF SBIR grants to develop not only technical prowess but also commercial strength for the company. “The technologies the company developed under Phase II SBIR research are vital to its commercialization success.” See Appendix D for more details.

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0 SBIR AT THE NATIONAL SCIENCE FOUNDATION Language Weaver has more than 50 patents pending worldwide; these patents underpin its commercialization approach. (See Appendix D.) The other companies in the set of case studies reported similar essential roles for their intellectual property. (See Appendix D.) . . . intellectual capital—the core strength and source of competitive advantage Multiple Paths to Commercialization. The case study companies were found to be pursuing a mix of approaches to commercialization, including licens- ing, partnering, providing contract services, and producing and selling product (see Appendix D). Licensing was an important route to commercialization for about half the case study companies. This finding is consistent with NRC Phase II Survey results, which also showed the importance of licensing as a path to commercialization. For example, the major route to commercialization for Fara- day Technology has been to license “fields of use” to interested customers. As another example, Language Weaver describes itself as “a core technology house based on licensing its software” directly to customers and indirectly through partners who license Language Weaver’s technology and incorporate it into their own products. And, as noted in the section that follows, licensing as a commer- cialization strategy was also emphasized by Immersion, MER Corporation, and NVE Corporation. . . . agencies who collect information about SBIR impacts typically ask only about product sales, whereas, in fact, most SBIR grantees are not OEM suppliers of product. Most of these companies generally had not built, and did not plan to build, large, commercial-scale production facilities. However, it was not unusual for the companies to maintain small-scale production capabilities or to arrange for small-scale contract production and to sell directly to customers on a limited basis. Some maintained pilot-scale production facilities for making prototypes or limited production facilities to produce a single line of product. In keeping with this finding, interviewees frequently commented that the strength of the company was research, not manufacturing. Another comment heard several times was that the scale of a production facility needed for competitiveness was huge and the capital cost requirements were enormous—far beyond the capacity of a small

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 COMMERCIALIZATION company. One company’s marketing director noted that agencies who collect information about SBIR impacts typically ask only about product sales, whereas in fact, most SBIR grantees are not OEM suppliers of product. T/J Technologies, a materials development company facing a relatively long product development cycle and what were described as “prohibitive” costs to build production facilities, is emphasizing partnerships with large global com- panies to reach markets. MER Corporation is commercializing through a mix of strategic alliances, joint ventures, licensing, and production and sale of product. NVE is also pursuing a mixed strategy—commercializing its MRAM technology primarily through “an intellectual property business model,” while it continues to design, fabricate, and sell directly a variety of sensors and signal coupler devices for both commercial and defense applications. Although it has the largest annual sales revenue to date and the largest revenue from direct product sales among the companies in the case study set, Immersion Corporation has limited manufactur- ing operations, arranges for some contract manufacturing, and “far and away, depends on licensing fees as its major source of revenue.” NRT has maintained a steady annual revenue stream on the order of $2 million–4 million for a number of years from the sale of equipment and now is seeking larger markets through partnerships both to operate and to sell equipment. Among the case study companies, those that appeared most focused on direct product sales as the major path to commercialization were ISCA Technolo- gies and MicroStrain. Currently, ISCA’s annual revenue from sale of product is approximately $1.5 million. It has multiple product lines and is anticipating a dramatic increase in sales in the near future from a new trademarked product. Likewise, MicroStrain’s main path to commercialization has been the sale of sensors and systems of networked sensors. In the past, WaveBand has mainly focused on sales of antenna systems to defense agencies. More recently, it has also worked with suppliers in the auto industry on adaptive cruise control for cars and with suppliers in the avionics industry on guidance and landing systems. In any case, WaveBand’s recent acquisition by a large systems integrator may alter its commercialization strategies. Contract Research as an Ongoing Line of Business. Another recurring theme from the case studies was that contract research is often used as a bridge to commercialization, and is also seen by some as a way of life. One interviewee, for example, characterized his company as “an innovation house for a number of companies that are not well positioned to innovate themselves.” Other inter- viewees said the large number of innovative small companies performing contract research had, in aggregate, provided a practical replacement for the large corpo- rate research labs of the past that have been reduced in size or shut down. More often, the case study companies appeared to pursue contract research as a busi- ness sideline to generate revenue. For example, MER Corporation relies heavily on government engineering contracts as a source of revenue, and describes itself

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 SBIR AT THE NATIONAL SCIENCE FOUNDATION as operating as an engineering services company. MicroStrain performs contract research as a source of revenue, but it reportedly focuses on product sales. T/J Technologies currently obtains most of its revenue from contract research, but its longer-term strategy is reportedly to develop partnerships for commercializing its material technologies. Contract research appears to be important to most of these companies either as an interim or an ongoing commercialization strategy. Challenges of Commercializing. These 10 cases emphasize that even under the best of circumstances getting to market is difficult. Even those companies that were relatively successful in commercializing spoke of the difficult challenges faced by small companies trying to develop and commercialize a technology. “I think commercialization is very hard for people,” said an interviewee from one of the most rapid commercializers, commenting on the challenge of finding additional funding sources and partners as early as needed. Another interviewee noted the trepidation of entering into partnerships and negotiating arrangements with large, powerful companies early in development. But the difficulties did not end with start-up. Several of the companies that appeared to have achieved commercialization had then come close to folding as a result of events outside of their control, such as a default on product orders from a foreign buyer (see the ISCA Technologies case study in Appendix D) and a collapse of markets due to an adverse Supreme Court decision (see the National Recovery Technologies case study in Appendix D). “. . . commercialization is very hard . . .” Multiple Benefits from Commercialized Technologies. All of these case study companies linked commercialization of their technologies to SBIR grants and, in turn, linked commercialization of their technologies to the generation of multiple benefits, including direct economic benefits. Though net income or profit data are confidential and not available, revenue data are available and summarized in Table 5.2-10. Annual revenue ranged from $2 million to nearly $24 million and averaged $7.7 million across the 10 companies. Beyond the return to company owners, there may be employment benefits. Table 5.2-10 gives employment data as of the time the 10 case studies were

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 COMMERCIALIZATION conducted. The number of employees ranged from 14.5 to 141 and averaged 42 employees per company. Although attribution of employment to the SBIR grant was not attempted, we can conclude that all these companies have grown since their founding and, from statements of the company founders, CEOs, and presidents, we have evidence that SBIR grants played an important role in the development of all of these companies. Each of the companies identified a number of additional benefits conveyed by their products or services. For example, Faraday’s process technologies result in lower cost manufacturing and higher quality output for its customers, as well as potential beneficial environmental effects. Immersion’s technology can boost the productivity of software users, enhance online shopping experiences, enhance entertainment from computer-based games, improve skills of medical professionals, increase auto safety, enable industry to experience prototypes virtually before building costly physical prototypes, capture 3-D measurement from physical objects, and assist visually impaired computer users. ISCA’s tech- nology offers cost savings, quality improvements, and increased profitability for its customers, as well as environmental, health, and safety benefits. Language Weaver’s technology offers a significantly higher rate of accuracy in language translation than counterpart rule-based machine translation systems and greater speed than human translators—this could have important military and civilian applications. MicroStain’s sensors and networks of sensors offer the benefits of alerting managers to emerging problems in time to take preventative action, conserve resources, improve performance, and increase safety. Potential benefits from the resulting products and services—beyond those accruing to the companies—include lower costs and higher quality for customers, reduced threats to the environment, improved safety, improved outcomes for medical patients, alerts to emerging structural problems, and faster translations in military and civilian situations. 5.2.5 Commercial Progress as Indicated by Agency-Initiated Data and Analysis The NSF’s approaches to analysis and data compilation are discussed in Section 8.8. The results of program-initiated analysis of commercialization are summarized in this section. In addition to the routine publication of “nuggets” and “success stories” (see Exhibits 4.5-1 and 4.5-2), several ad hoc survey studies have been conducted by the program since 1995. The survey studies have relied primarily on telephone interviews using a structured interview guide. The studies collected data to show measures of perfor-

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 SBIR AT THE NATIONAL SCIENCE FOUNDATION mance for a selected group of companies. One such study was completed in 2004. It is referred to here either as the “2004 NSF SBIR Commercialization Survey” or the “Coryell Study,” after the NSF SBIR program manager who conducted it.17 Another study, conducted in 1996, will be called the “Tibbetts Study,” after another NSF SBIR program manager.18 A related study carried out by a contrac- tor, but never completed and released, will be called the “Dawnbreaker Study,” after the contractor. All three studies were internal studies, not published in the open literature. A new internal effort to collect commercialization data was begun in the summer of 2005, and provides limited data. The Tibbetts Study, according to the NSF’s SBIR program office, was the first agency-initiated study to produce program performance metrics. Study results were included in an earlier NRC report.19 The study covered a group of 50 companies, all of which had commercialized results of their SBIR grants. The Dawnbreaker Study (intended to extend the Tibbetts Study but never completed) conducted interviews with 30 companies and developed approxi- mately 20 “success stories” based on the interviews. The study also reported quantitative indicators of success for the 20 “successful companies,” including cumulative sales dollars, total investment, number of new jobs, number of patents and copyrights, use of trade secrets and trademarks, and number of collaborators from industry and universities. The results of this study were much less favorable for NSF commercialization than the previous Tibbetts Study. Between 2000 and 2004, the Coryell Study surveyed 34 companies. Among the companies surveyed were 17 “stars” selected by program managers as com- panies for which they had high expectations of outstanding accomplishments. Among the findings of the Tibbetts Study are the following: • 100 percent of the 50 selected firms had commercialized their SBIR- funded innovation. • Sixteen of 50 firms said that the SBIR projects were key to starting the company. • Forty-five of the 50 companies said the SBIR projects were critical to their growth and/or survival. • $2.2 billion in sales were reported to be directly related to NSF SBIR. • The 50 companies were granted an estimated 377 U.S. and 732 for- eign patents that related directly or indirectly to SBIR program research or funding.20 17Alan Baker, “Commercialization Support at NSF” (draft), p. 2. 18The two former program managers are Ritchie Coryell and Roland Tibbetts, both identified earlier as playing key roles in the founding of the program. 19National Research Council, The Small Business Innoation Research Program: Challenges and Opportunities, Charles W. Wessner, ed. Washington, DC: National Academy Press, 1999. 20Thus, the Tibbetts Study found an average of seven and a half U.S. patents per company in the survey that were directly or indirectly related to SBIR research or funding. This figure is comparable

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 COMMERCIALIZATION • Private follow-on investment was $963 million, of which $527 million was considered directly related to NSF SBIR projects. • The 50 companies had 959 research collaborations: 404 with industrial firms, 394 with universities, and 111 with national laboratories (not attributed to specific projects). • The 50 companies achieved specific technical breakthroughs and innovations. • The 50 companies achieved specific commercial successes. • A table of performance indicators was developed from data compiled for the 50 companies. Among the results of the Dawnbreaker Study (based on a draft report pro- vided by the NSF’s SBIR program office) are the following: • Cumulative sales directly or indirectly attributable to the selected 20 NSF SBIR projects totaled $31.8 million—much lower than the amount reported in the Tibbetts Study even when adjusted for differences in the number of companies. • A conclusion that the 50 companies included in the Tibbetts Study represented the “cream of the crop,” including three of the most successful commercializers. • A conclusion that companies in the Tibbetts Study had been funded for a longer time prior to the interviews than those included in the Dawnbreaker Study, thus contributing to the larger revenues found by the Tibbetts Study. • Twenty draft “success stories.” • A table of indicator data for 20 companies. The Coryell Study includes survey data for approximately 300 projects; those data are summarized in Table 5.2-12. Using a criterion of “fully success- ful”—defined as having achieved a “first sale”—the study (based on preliminary results) concluded that 40 percent of the companies surveyed (FY96–98) were “fully successful.” The Coryell Study provided more extensive results for 34 grant winners: 10 with no Phase IIB grants and 24 with Phase IIB grants (fifteen of which had more than one). Figure 5.2-5 shows commercial results for 33 of the 34 companies reporting commercialization. Product sales attributed to NSF SBIR grants aver- aged $3.5 million for the 33 companies. (NOTE: Questions used to develop the findings given in Figure 5.2-5 are shown in Appendix E.) The Postproject Annual Commercialization Report. A postproject annual to the average of six per firm reported by the NRC Firm Survey, as reported in Section 5.2.1—that is, assuming that the NRC Firm Survey patents reported were U.S. patents. It would be expected that the Tibbetts group of firms would show a higher average than the NRC Firm Survey, because the Tibbetts firms were drawn from the highest achievers.

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 SBIR AT THE NATIONAL SCIENCE FOUNDATION TABLE 5.2-12 Survey Results of the “Coryell Study” NSF Initial Survey Results, 2003 Fiscal Year Fiscal Year Fiscal Year Fiscal Years 1998 1997 1996 1996–1998 Number Percent Number Percent Number Percent Number Percent Full success 36 29 55 46 31 53 122 40 Likely success 20 16 25 21 2 3 47 16 Commercial failure 35 28 22 18 16 27 73 24 Technical failure 21 17 11 9 7 12 39 13 Other 12 10 7 6 3 5 22 7 SOURCE: National Research Council Symposium, “The Small Business Innovation Research Program: Identifying Best Practice,” Washington, DC, May 2003. Results for 33 Companies Reporting 27 companies had product sales by NSF SBIR • 70 product lines are due to NSF SBIR • 42 of these would not have been developed • NSF SBIR product sales have totaled $116 million • • Average time to first sale is 2.5 years FIGuRE 5.2-5 Commercial Findings from the Coryell Study. SOURCE: NSF. commercialization report was long required by the program of all Phase II grant- ees. While it would appear to be a potential source of evaluative information, 5.2-5 reporting compliance by grantees has been low. Moreover, the reports that were filed have not been used to assess commercialization. Hence, there are no findings available from this effort. New Monthly Postcompletion Telephone Interview of Grantees. A new interview survey was implemented in July 2005. Thirty companies reaching the third-, fifth-, or eighth-year anniversary after project start were interviewed by an NSF program manager in this telephone survey. Using the OII’s definition of commercial success,21 the first survey report found that half the 24 companies 21The “minimum requirement for success” for each group is defined by the NSF’s SBIR program of- fice as follows: (1) For the third-anniversary group, success is defined as having sales (of any amount)

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7 COMMERCIALIZATION responding were “fully successful,” and overall, the 24 companies had achieved in sales an amount that equaled at least the value of their grants.22 Of the half that were deemed not successful, the reasons given were technical failure, poor cost competitiveness, and insufficient demand. The postproject Annual Com- mercialization Report and the new monthly interview are discussed further in Section 8.8. 5.2.6 Commercialization Insights Provided by a Committee of Visitors Expert review of the SBIR program is provided every three years by the NSF SBIR Committee of Visitors (COV). Findings from its 2004 review concerning commercialization are timely and relevant in a number of ways to the current NRC assessment of program performance and its efforts to provide recommenda- tions for program improvements. The COV recommended that “more consideration be given to commercial potential in evaluating Phase I proposals. . . .” Specifically, it recommended that the review panels for Phase I proposals have more well-qualified representatives from the business sector. (The COV’s mode of assessment is discussed in Sec- tion 8.8.1.) 5.3 CONCLuSIONS ON COMMERCIALIZATION Frequency of Commercialization. The NRC surveys, the case studies, the three surveys conducted by the NSF, and the new postcompletion telephone survey all show a range of commercialization results. The Tibbetts survey, which provides the largest revenue estimates, had a concentration of the most success- ful companies. The NRC Phase II Survey results showed that 22 percent of the referenced projects reported products/processes/services in use. An additional 10 percent of the referenced projects had produced sales, had licensing fees, or had attracted additional funding, but were discontinued.23 Because the 10 percent figure includes attracting additional funding, we cannot conclude that 32 percent (22 percent + 10 percent) achieved sales. Furthermore, we do not know to what extent “sales” includes samples put out to customers for trial or testing rather than commercial sales. Hence, we can conclude only that between 22 percent one year after completion; (2) for the fifth-anniversary group, success is defined as having sales on the order of $600,000 three years after completion; and (3) for the eighth-anniversary group, success is defined as having more than $1.5 million in cumulative sales 6 years after completion. (Based on a description provided by NSF SBIR program staff.) 22Note that this statement should not be confused with the more generally accepted cost-effective- ness criterion that project benefits equal or exceed project costs. This is because sales revenue does not equal net income or net private benefits accruing to companies. 23For projects funded by procurement agencies, producing product and then discontinuing may mean the intended goal of the project was met, but for NSF-funded projects, discontinuing may more realistically be taken to mean that the project was not fully successful commercially.

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 SBIR AT THE NATIONAL SCIENCE FOUNDATION and 32 percent of projects in the Phase II survey had achieved some degree of sales revenue. Of course, the percentage of projects resulting in sales revenue may rise in the future, as indicated by the 19 percent of respondents reporting commercial- ization under way and the 28 percent of projects still active in the developmental stage. Yet, these could be offset in the future by some of those projects now active becoming inactive, and some of the prospective projects not achieving sales. If half those expecting commercialization achieve it and remain active, and if a quarter of those still in development achieve commercialization and remain active, this would raise the upper bound of projects achieving sales revenue and remaining active to as high as 38.5 percent. This projected upper-bounds figure approaches the finding of the larger Coryell Study, which found that 40 percent of the projects surveyed had achieved a first sale. Commercialization as Signaled by Sales Revenue. The NRC Phase II Survey showed that relatively few of the projects had achieved significant sales revenue. When the total reported sales revenue was averaged across all survey projects, sales revenue averaged about $0.4 million per project and licensee sales averaged about $1.4 million per project. Furthermore, just eight of the projects—each of which had $2.3 million or more in sales—accounted for over half the total sales dollars reported by survey projects. The project with the high- est reported annual sales amount had $4.8 million in sales. Similarly, a single licensee accounted for over half the total licensee sales dollars. The set of 10 case study companies reported annual company revenue ranging from $2 million to nearly $24 million. The average annual company revenue per company was $7.7 million. This included revenue from all company projects—not just a single NSF project. The Tibbetts Study, which included some of the most successful NSF SBIR projects and was taken over a longer period of time than did the other studies, found much larger sales revenue. It was reported cumulatively by the study rather than annually; hence, the data from the various sources are not comparable as reported. Cumulative direct sales attributable to NSF SBIR projects ranged from $1 million to $500 million. Cumulative direct and indirect sales ranged from $2 million to $2.6 billion. To the extent that the past is a predictor of the future, more than half the projects funded by SBIR likely will not achieve commercialization. Somewhere between 20 percent and 40 percent will probably achieve some level of commer- cialization. For most of these projects, sales revenue will likely remain relatively small, with approximately 10 percent having more robust sales in the range of $2 million to $10 million annually—again, if the past is a predictor of the future. A smaller percentage of projects will likely achieve large growth and huge sales revenues, i.e., be commercial “home runs.” These patterns are similar to those found in other private and public investments in high-risk advanced

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9 COMMERCIALIZATION technology investments, where many research projects must be seeded to yield a few commercial home runs. Meanwhile, many small successes together will continue to comprise a potentially important component of the nation’s innova- tive capability. Based on the counterfactual data, the NSF’s SBIR program can take credit for most, but not all, of the observed effects. A reported 14 percent of the sur- veyed firms believe that they definitely or probably would have done the refer- enced projects anyway, although most of these projects reportedly would have been narrower in scope, delayed in starting, and slower in progressing without the NSF SBIR program.