Appendix D
Case Studies



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Appendix D Case Studies

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 APPENDIX D 3e Technologies International (formerly known as AEPTEC) Zoltan Acs Uniersity of Baltimore FIRM OVERVIEW 3e Technologies International (3eTI), formerly known as AEPTEC, special- izes in secure wireless network applications and wireless condition-based main - tenance solutions. Condition-based maintenance refers to the use of advanced technologies to determine equipment condition, and potentially predict failure. The company’s main service is providing wireless infrastructure and specialized applications of wireless technologies. Steven Chen founded 3eTI in 1996. Chen originally sought to develop hard disk drives, but shifted the company’s focus to secure wireless technology and condition-based maintenance because of product development opportunities made available through the SBIR program. As a more flexible small business, 3eTI is able to economically customize solutions for the government market, gaining an advantage over larger companies that are focused primarily on mass market products. 3eTI specializes in custom - ized, high-tech total solutions designed to meet a customer’s specification, while still destined for a future in applications for the commercial market. For example, the company’s wireless access point products (devices that connect computing platforms together to form a wireless network) compete with products from ven - dors such as Cisco and Motorola. 3eTI’s customized solutions capabilities were demonstrated in a prior contract, where the company developed a robust one-box wireless sensor networking product, which compares to four-box solutions from competitors such as Cisco. 3eTI/AEPTEC was named the 5th fastest growing company in the Wash- ington, DC metropolitan area in 2003. The company has also received the Navy SBIR Success Story Award, the Tibbetts award in 2002, and was #62 on the list of top Department of Defense contractors in 2003. THE ROLE OF SBIR 3eTI has been the recipient of 28 Phase I and 10 Phase II awards. Approxi- mately eight percent of the company’s revenue comes from SBIR Phase I and II awards. The SBIR awards have been integral to the firm’s current position. They al - lowed the company to keep its technology fresh and on the leading edge, which

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 APPENDIX D is imperative for a small company. 3eTI considers SBIR as a leading source of funding and the company anticipates applying for further SBIR awards. 3eTI has continued with its focus—determined mostly by early SBIR awards—on wireless technologies. Within that area, the company explored various possibilities and partnerships. For example, while the majority of the company’s work has been geared towards U.S. Navy ships, 3eTI has expanded into wireless technologies that provide for antiterrorism and force protection at military bases and other government facilities. The majority of the firm’s commercialization activities are due to SBIR. Phase III awards have allowed the company to commercialize their technology by providing seed funding. It allowed 3eTI to build a reputation and further de - velop its products, leading to 3eTI’s acquisition by EFJ, Inc.—a leading wireless telecommunications solutions company—in 2006. 3eTI has used SBIR’s sole source justification to gain a competitive advan - tage over large systems integrators, like Lockheed Martin, in federal procure - ment. Under this provision, the procurement advantage remains even if the small business enters a partnership with, or is bought out by, a large publicly traded company. SBIR also informs small firms about the technical direction federal agencies are taking, and allows them to provide input for those technical solutions. SBIR affords small companies like 3eTI an opportunity to understand what direction federal agencies are heading and what their expectations are in terms of technol - ogy and product development. It would be difficult for a small company to get that kind of information outside the program. In 1998, when the company first started receiving SBIR awards, it had less than 20 employees. Currently, 3eTI has approximately 95 employees. 3eTI has a ratio of four research personnel to one manufacturing personnel. This ratio is due to the fact that the company has historically manufactured only prototypes or small orders of units, and outsourced larger volume manufacturing of finished products. The firm has sold products resulting from the SBIR projects to both the federal and private sector. 3eTI has also filed several patents and has published several scientific papers. 3eTI trademarks include AirGuard, InfoMatics, and Virtual Perimeter Monitoring System (VPMS). IMPROVING SBIR Surviving Funding Gaps Concern has been expressed regarding the delay between Phase I and Phase II awards. Funding gaps may be fatal to commercialization opportunities for small companies. When a company is counting on an award that is being dragged out, it may lose an important window of opportunity and customers that have their

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 APPENDIX D own timelines to follow. If a commercialization opportunity is lost, companies often have to start the award process all over with a new project. Unfortunately, agency contract officers often do not consider the real-world limitations their awardees face. Such delays may occur because contracts must pass through several levels of bureaucracy, and delays accumulate at each level. The preferred solution to this problem includes establishing a timeline for the government to follow in administering awards, and requiring the agency to advance the company a small portion of the award after making the Phase II decision, but before the contract is finalized. 3eTI has survived such delays (sometimes as long as one year) only because the company was fortunate enough to receive overlapping SBIR awards and con - ducted successful commercialization activities. Although to some extent delay is built into the budget and manpower process, it cannot be sustained without win - ning multiple awards. In fact, the company very rarely stops work when waiting for the funding to arrive. While it has encountered delays in receiving Phase II money, it knew the award was approved. Nevertheless, such delays are hurdles for both the firm and the customer. Commercialization Programs The company has participated in meetings organized by the SBIR, includ - ing meetings where various federal agencies participated as commercialization customers. 3eTI finds these events very helpful. Award Size The amount of the Phase I award is seen as being adequate, considering an award period of six months. Phase I awards can be utilized well by companies that have a good idea formulated, giving the company an opportunity to make its plan and state its case. However, 3eTI believes that the size of Phase II awards should be increased. The standard award, approximately $750,000, is small con - sidering today’s market standards, and it has not changed in the past 5 years. The price of doing business increases as the project grows and diversifies. The ideal award would be a minimum of $1,000,000, with another $250,000+ available for Phase II Options. Also, companies need additional funding because it takes a long time to get Phase II awards to commercialization and transform them into finished products. Procurement Individuals charged with procurement require extensive training. They must understand their legal responsibilities in the procurement process. According to

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 APPENDIX D the law, products developed under SBIR should receive priority consideration in purchase decisions. Sometimes procurement specialists fail to provide that con - sideration. In such instances, 3eTI has protested and educated those involved. A lack of knowledge about the procurement process may inhibit a firm’s participation in SBIR. When companies begin writing proposals, without under- standing exactly the customer’s needs, they invest valuable time and resources in a process doomed to failure. Venture Capital Participation Small publicly traded companies should be allowed to participate in the SBIR program, even if they have access to private sources of funding, because the SBIR’s objective is to promote innovation. Additionally, if small publicly traded companies are excluded from the program, the government will have to pay a higher price for their product by acquiring it commercially. Enlarging SBIR The SBIR program should be larger and invest in its administration and customer service. The government benefits greatly from the program, because for $750,000, it gets a better and more cost-efficient product compared to the commercial sector alternative. Large commercial companies can have greater expenses, compared to small companies, and may reflect that in their prices.

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 APPENDIX D Advanced Ceramics Research1 Irwin Feller American Association for the Adancement of Science Advanced Ceramics Research (ACR) was originally incorporated as a start- up, self-financed firm in 1989 by Anthony Mulligan who had recently graduated in mechanical engineering from the University of Arizona, and Mark Angier who was still a student in mechanical engineering, also at the University of Arizona. Shortly after they were joined by Dr. Donald Uhlmann, a professor at the Univer- sity of Arizona, and Kevin Stuffle, a chemical engineer previously employed at Ceramatec Corporation, Salt Lake City, Utah. In late 1996 Dr. Daniel Albrecht, retired CEO of Buehler Corporation, joined as a shareholder and officer until 2000. Since 2000, Angier and Mulligan have remained as the only shareholders and are active in the management of the company. From its inception, ACR sought to become a product development company, capable of manufacturing products for a diverse set of industries based on its technological developments. Although its competitive advantage has been in its advanced technology, it has sought to avoid being limited to being a contract R&D house. Over its history, the relative emphasis on R&D, product develop - ment, and manufacturing has varied, being primarily shaped by market demand conditions for its end-user products. The firm has both an extended set of col - laborative, network relationships with university researchers, who conduct basic research on materials, and “downstream” customers for its products. Also, from its early inception, the firm knew about the SBIR program, but viewed its profit ceiling margins, placed at 5–7 percent, as too low to warrant much attention. Only commercial products were seen as yielding an adequate profit margin. Over time though, it has participated in the SBIR program of several federal agencies, including DoD, NASA, Department of Energy, and the National Science Foundation. ACR’s initial 2 products were PVA-SIC grinding stones and Polyurethane friction drive belts for the aluminum memory disk manufacturing industry. These two products were a direct result of a NASA Phase I SBIR program entitled “Laser Induced Thermal Micro-cracking for Ductile Regime Grinding of Large Optical Surfaces.” While the program did not go on to Phase II, the commercial sales generated from the first two products was significant for the growth of the company. The firm also saw market potential in developing products from advanced ceramics. The attractiveness of the SBIR program was that it would underwrite concept development. Firm representatives had several discussions with DoD 1 Draft based on interview with Dr. Ranji Vaidyanthan, May 3, 2005, at the Navy Opportunity Forum and publicly available information.

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 APPENDIX D ADVANCED CERAMICS RESEARCH : COMPANY FACTS AT A GLANCE Address: 3292 E. Hemisphere Loop, Tucson, AZ 85706 Phone: 520-573-6300; Year Started: 1989 Ownership: Private Annual Sales: FY2002: $5 million FY2003: $8.3 million FY2004: $11.5 million FY2005: $20+ million Number of Employees: 83 3-Year Sales Growth Rate: 250 percent 4-Year Sales Growth Rate: 400 percent SIC: Technology Focus: Advanced composite materials; rapid prototyping, UAV’s, sensors Number of SBIR Awards—Phase I (DoD Phase I): 75 Number of SBIR Awards—Phase II (DoD Phase II): 18 Awards: 2002 R&D 100 Awards (Fibrous monolith wear-resistant com- ponents that increased the wear life of mining drill bits), 2001 R&D 100 Award for water-soluble composite tooling material, 2000 R&D 100 Award for water-soluble rapid prototyping support material officials about the SBIR program, but the catalytic event was a meeting with a DARPA program officer, Bill Coblenz. Coblenz already held a patent (issued in 1988) on ceramic materials. He was interested in supporting “far out” ideas related to the development of low-cost production processes on advanced ceram - ics, based on the technique of rapid prototyping. DARPA already was supporting research at the University of Michigan. ACR was encouraged to begin work on low-cost production techniques. It did this under a series of DARPA awards and SBIR awards, although never con- centrating on SBIR. Drawing in part on the advanced research being done at the

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7 APPENDIX D University of Michigan and drawing on its expertise in both advanced ceramics and manufacturing, ACR developed a general purpose technology of being able to convert autoCAD drawings into machine readable code, then to direct genera - tion of ceramic, composite, and metal parts. Initially SBIR awards accounted for nearly all of ACR’s revenues. By 1993 the firm had transitioned to nearly 50 percent of its revenues from the commercial sector and about 25 percent of its revenues from non-SBIR government R&D funding, with the remaining 25 percent as SBIR revenues. For 2005 the company projects about $20 million in sales with about 15-20 percent of the revenues coming from STTR/SBIR Phase I and Phase II programs. The firm’s R&D also has been underwritten by revenues generated by its manufacturing operations. Its primary use of SBIR awards was to develop specific application technologies based about its core technology. One market that it saw as having considerable potential was that of develop- ing and manufacturing “flexible carriers for hard-disk drives” for the electronics industry. After aggressively “knocking on doors” to gain customers, it soon be - came a major supplier to firms such as SpeedFam Corporation, Komag, Seagate, and IBM. ACR’s competitive advantage rested in its ability to make prototypes accurately, quickly, and at competitive prices. Demand for this product line grew rapidly, enabling the firm to go to a 3-shift 7-day-a-week operation. In addition, ACR developed ancillary products related to testing and quality control tied to this product line. The firm financed its expansion through a combination of retained earnings and license revenues, primarily from Smith Tools International, an oil and rock drilling company, and Kyocera, a Japanese based firm, which specialized in ceramics for communications applications, which licensed its Fibrous Monolith technology. ACR also reports receiving approximately $100,000 in the form of a bridge loan between a Phase I and Phase II award from a short-lived Arizona’s state economic development program, funded from state lottery revenues. It re- ports no venture capital financing. It remains a privately held firm. Demand for ACR’s electronic products seemed to be on an upward trajectory through the 1990s. In response to demands from its primary customers for an increase in output from 5,000 to 60,000 units monthly, ACR built a new 30,000 square foot plant. The electronics market for ACR’s products however declined abruptly in 1997, when 2 of its major customers—Seagate and Komag, two of the largest producers of hard disk drives, shifted production to Asia. This move represented both the shift from 8 inch to 5 inch and then 3.5 inch disks, and lower production costs, which drove down the price of the carrier components they produced from $16 to $1.50 per unit. The loss of its carrier business was a major reversal for the firm. Heavy layoff resulted, with employment declining to low of about 28 employees in 1998. 1998–1999 are described as years of reinvention for survival for ACR. The firm’s R&D division, which formerly had been losing money, was now seen as

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 APPENDIX D having to become its primary source of revenue. The explicit policy was to under- take only that R&D which had discernible profit margins and the opportunity for near term commercialization. Previously, ACR had conducted a small number of Phase I SBIR awards, but had not actively pursued Phase II awards unless it could readily see the commercial product that was likely to flow from this research or it had a commercial partner. ACR reports several outcomes from its participation in the SBIR program. As of 2005, it has received 75 Phase I and 21 Phase II awards. The larger number of awards have been from DoD, followed by NASA, with a few from the other agencies such as NSF and DoE. Products based on SBIR awards received from DARPA and NASA have had commercial sales of approximately $14 million. ACR is now actively engaged in development and marketing of Silver Fox, a small unmanned aerial vehicle (UAV). R&D for the Silver Fox has been supported by awards under DoD’s STTR program, and involves collaboration between ACR and researchers at the University of Arizona, University of California-Berkeley, the University of California-Los Angeles, and MIT. The genesis of the project highlights the multiple uses of technological in - novations. In 2000, while in DC to discuss projects with Office of Naval Research (ONR) program managers, ACR representatives also had a chance meeting with program manager for the Navy interested in small SWARM unmanned air ve- hicles (UAVs). At the time, ONR expressed and interest and eventually provided funding for developing a new low-cost small UAV as a means to engage in whale watching around Hawaii, with the objective of avoiding damage to the Navy’s underwater sonic activities. Once developed however, the UAV’s value as a more general purpose battlefield surveillance technology soon became apparent and ONR provided additional funding to further refine the UAV for warfighter use in Operation Iraqi Freedom. ACR has a bonus compensation plan that rewards employees for invention disclosures, patents, licenses, and presentations at professional meetings. These incentives are seen as fostering outcome from SBIR awards (as with all other company activities). ACR owns a 49 percent stake in a joint venture manufacturing company called Advanced Ceramics Manufacturing, LLC, which is located on the Tohono O’Odham Reservation south of Tucson, Arizona. Fifty-one percent is owned by Tribal Land Alotees. The company, which employs about 10 people who manu - facture ceramic products in a multimillion dollar facility (15,000 square feet), is expected to do about $2.5 million in sales revenues over the next 12 months. ACR also has also recently opened 2,500 square feet of laboratory and office space in Arlington, VA, where it is basing its new Sensors Division and providing customer support to its military customers with an initial staff of 8 persons. Funding delays between Phase I and Phase II awards have been handled primarily through a process of shared decision making, leading to consensus- based reallocations of firm resources and staff assignments. ACR typically has

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9 APPENDIX D several R&D projects occurring simultaneously. When delays occur, researchers are assembled to determine whether the firm’s internal funds, including its IR&D funds, will be used to continue a specific project. DoD’s SBIR review and award procedures are seen as fair and timely. The dollar amounts of Phase I and Phase II awards and SBIR “paperwork” require- ments likewise are seen as reasonable. The Navy is seen as especially good in the speed with which it handles the selection process. It has reduced the length of time to make awards from 3 to 4 months to 2 months; NSF, by way of contrast, takes 6 months. The length of the selection process across federal agencies does influence ACR’s decisions. It is more likely to pursue Phase I awards from agencies such as DoD that have short selection cycles than those with long(er) ones. The company has seen great benefit in accelerating commercialization of its SBIR/STTR programs through participation of the Navy’s Technology Assistance Program (TAP). ACR first participated in the TAP program for its Water Soluble Tooling Technology, its Fibrous Monolith Technology, and its UAV technology. ACR’s diligent following to what it learned in the Navy’s TAP program has assisted it in receiving 3 separate Indefinite Deliverables, Indefinite Quantities (ID/IQ) Phase III contracts totaling $75 million. Each of the three technologies has received a $25 million ID/IQ contract to facilitate continued government use of the technology.

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90 APPENDIX D Applied Signal Technology Irwin Feller American Association for the Adancement of Science Applied Signal Technology (AST) was founded in 1984 by Gary Yancey, John Trieichler, Jim Collins, and Jane Sanchez. The four founders had been em- ployed by Argo Systems, a California-based defense contractor, specializing in signal technology related to strategic intelligence, but left to start their own firm. Each of them invested their own funds and deferred their salaries for a year to provide the firm’s initial working capital. The firm subsequently received several rounds of private financing prior to going public. AST went public in 1993, and is currently listed on the NASDAQ as ASPG. The firm’s initial revenues were derived largely from a 1-year consulting contract with Lockheed, augmented by smaller size contracts from DoD. The firm grew steadily throughout much of the 1990s, reaching a peak level of employment (650) and revenues ($115 million) in about 1999. The fall of the Berlin Wall, and the subsequent large reductions in expenditures by U.S. intelligence agencies led APPLIED SIGNAL TECHNOLOGY: COMPANY FACTS AT A GLANCE Address: 400 West California Avenue Sunnyvale, CA 94086 Phone: 408-749-1888 Year Started: 1984 Ownership: Publicly traded equity; NASDAQ Annual Sales (FY2004) $142 million Number of employees: 500 Sales Growth Rate: Doubling between 2002–2004 SIC Code: 3669 Technology Focus: Advanced digital signal processing products, sys- tems, and services; signal intelligence Number of SBIR Awards—Phase I: 3 Number of SBIR Awards—Phase II: 1 Number of Patents: 4

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 APPENDIX D Delays between Phase I and Phase II awards also created problems for Tri- dent during the early years of its SBIR awards. It found it necessary to shift staff among projects, to deal with tight financial squeezes at the end of fiscal periods, and at times to shut down or tie off projects. Over time, it learned to hire staff who had the ability to “shift gears” among projects; its growth also provided with additional internal funds to cope with delays. INVOLVEMENT IN STATE GOVERNMENT PROGRAMS Although favorably noting that Virginia has had an active state-level program that both provides technical assistance to firms on how to compete for SBIR awards and awards some small grants, Trident itself has not participated in any of these programs. RECOMMENDATIONS SBIR has been a highly successful program. Because it provides one of the few niches in DoD’s research program that is compatible with the capabilities of small firms, size should be expanded. Making the program larger would obviate a need to make stringent trade-offs between the number and size of SBIR awards. Moreover, DoD’s topic selection process likewise has improved over time. The increase since 1999 in the number of Phase III awards also is a desirable trend, with the qualifier that the larger percentage of these awards—an estimated 80 percent—have been concentrated in the Navy. Another desirable trend has been that some agencies are starting to award larger Phase II awards. DoD’s SBIR program could still be improved. However, the focus of the really needed changes are in the Defense Acquisition System. Among the recom - mended changes are the following: 1. Establish an education initiative for prospective program managers at the Defense Acquisition University. The Defense Acquisition University should provide clear guidance on the advantages of using the Phase I and Phase II SBIR and STTR contracts to identify and qualify capable small businesses and their in- novative technologies for transition to DoD Acquisition programs and in use of the Phase III contracting mechanism for transitioning SBIR-developed technologies into the mainstream of acquisition programs. Appropriate SBIR program employ - ment guidance should be included in each of the online and in-class courses taught by the Defense Acquisition University in the program management career track. 2. Require ACAT 1 and 2 program managers to include program-plan spe - cific milestones for the transition of SBIR developed technology and utilization of other small business developed commercial-off-the-shelf (COTS) technology in their program plans and budgets. Program managers and their staffs should be directly involved in generation of SBIR topics, the selection of Phase I and

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7 APPENDIX D Phase II SBIR awards, the evaluation of the Phase II contract products, and the transition of successful Phase II efforts into their program. The programs’ long- range multiyear budget should include funds designated for Phase III contracts and other proven commercially available technologies from small businesses in the same manner these out-year budgets are established for other program activi - ties. Program managers should be required to report on SBIR utilization at each major program milestone and specifically on Phase III SBIR contracts awarded. 3. Require all contracts awarded over $100 Million in ACAT 1 and 2 pro- grams to include SBIR Phase III subcontracting goals for the prime contractor with attendant fee incentives for exceeding and penalties for not achieving those goals. When a prime contractor bids a small business subcontract as part of a proposal, the prime contractor should be required to execute the subcontract on award of the prime contract unless the prime can show due cause. In situations where subcontracts are not awarded, a letter report stating the reasons should be provided by the prime contractor to the program office and the SBA, and a rebut- tal to that letter should be solicited from the small business. From these inputs the SBA and the program office could make a determination to either release the subcontracting requirement or not. In addition, the DoD AT&L Office should provide a plan for requiring and incentivizing prime and subprime defense con - tractors to subcontract to DoD SBIR firms, as they currently do with minority, woman-owned and veteran-owned small businesses. Such a plan would include recording SBIR Phase III contract award metrics just as other small business metrics are recorded and yearly report to Congress. 4. Establish a SBIR Phase III Acceleration program in the DoD that would require each service to identify at least 25 topics each year that have completed Phase II for accelerated transition to development and production in acquisition programs of record. Each of these topics would also be approved by the respective Requirements and Budget directorates of the service chiefs to ensure that they address high priority military requirements and that sufficient funds have been budgeted to complete development and production of the selected topics. This program is intended to expand the very small cadre of DoD Program Executive Officers and program managers who have successfully embraced the SBIR pro - gram and taped the wealth of affordable and innovative technology resources for their programs. SUMMARY Trident ascribes a significant portion of its success and growth to the SBIR program. Without SBIR, it wouldn’t have survived, grown, or flourished. The ability to compete for SBIR awards, and the technical and economic successes it achieved because of these awards, permitted the firm to follow a totally differ- ent business model than would have been possible had it been forced to secure external capital.

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 APPENDIX D SBIR solicitations provide a range of opportunities for small firms to iden - tify, bid for, and perform DoD-related R&D; the list of topics is described as akin to a college catalogue. Trident revenues and employment levels have grown steadily, although not continuously since the late 1980s, and considers its experi - ences under the SBIR to have been at the heart of this growth. The contribution of the SBIR program to the firm’s growth has taken several different forms. One project, described as a highly successful SBIR, led to the development of a handheld situational awareness system. Trident contrasted its success in designing and developing this product with the experiences of larger DoD contractors, which has received far larger awards for comparable technolo - gies but which were unable to produce a useful product. The technological and mission benefits generated by DoD’s SBIR program are dissipated in the transition between R&D and acquisitions. SBIR produces fruit, which is not picked up by the acquisition system. DoD’s acquisition sys - tem is overly resistant to change, especially in allowing more open competition. Program offices and prime contractors have a strong investment in the existing monolithic approach (i.e., one large prime contractor who is responsible for the program). Prime contractors are seen as firmly entrenched and skilled at con - structing the case for their continuing role as monolithic system provider and gate keeper for innovative, competitive (and potentially disruptive) technologies. DoD program offices have been open to discussing the merits of the open archi - tecture (OA) approach and quick to identify how they are currently implement - ing OA elements into their programs, they also are not often successful forcing significant change on their prime contractors who largely determine the fate of the program.

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9 APPENDIX D ViaSat, Inc.8 Peter Cahill BRTRC, Inc. BACKGROUND ViaSat, Inc., was formed in 1986. Three outstanding engineers, who were in their early thirties, founded the firm. The founders were fellow employees at M/A-COM Linkabit, a San Diego based satellite telecommunication firm. Linkabit had been founded by Andrew Viterbi and Irwin Jacobs, who later founded QUALCOMM. Linkabit was very high tech, extremely innovative, a magnet for the very best in digital communications. It has spun off about 40–50 firms in southern California. Following the classic path of newborn technology firms, the three, who were unaware of SBIR at the time, began business in a garage with under $25,000 in capital. Initially, ViaSat consulted with defense firms, which were preparing proposals for satellite programs, with agreements that a winning proposal would result in an engineering subcontract to ViaSat. After two such “proposal” con - tracts, ViaSat obtained venture financing of $300,000 from Southern California Ventures. Venture funding had little impact on company growth compared to the im- pact of the SBIR program. The venture funding was used as a financial safety net, while SBIR fueled growth, providing research and development (R&D) dollars, and providing entry to contract dollars without the extensive red tape of competi - tion. ViaSat won its first Phase I award ($49,955.00) from the Navy in the summer of 1987. This led to a Phase II in 1988. Subsequent modifications to the Phase II contract made its ultimate value $1.2 million. From the beginning, every contract, whether consulting with defense firms, conducting SBIR, or doing follow on R&D, was aimed at developing products to manufacture. The first breakthrough was the initial SBIR for a Communications Environment Simulator, for use in air combat test and evaluation. That SBIR cre- ated a specialized test equipment product basis, and demonstrated ViaSat’s ability to design and manufacture. ViaSat credits that product as producing $42 million in sales to the Department of Defense (DoD) and $17 million in sales to private industry. Subsequent to the Phase II, DoD contributed an additional $5 million to developing the technology. ViaSat’s initial successes in defense and government related products con - tinues today in its Government Systems division. Products include terminals, 8 Case study is based on an interview in July 2004 with James P. Collins, the vice president for Busi - ness Development, and on information in ViaSat Annual Reports and on the ViaSat Web site.

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0 APPENDIX D control systems, and training terminals for UHF and wideband military satcom; MIDS/Link-16 tactical communication terminals; data messaging processors and software for clear communication over noisy tactical channels; RF communica- tion simulation systems; and secure networking products enabling encrypted communication over nonsecure networks. ViaSat had its initial public offering (NASDAQ: VSAT) in 1996, an IPO that the firm attributes to the impact of their SBIR awards. Unlike management in many emerging technology firms, which change their upper level manage- ment as they obtain venture funding, grow and go public, ViaSat founders, Mark Dankberg, Mark Miller, and Steve Hart, continue to provide strategic vision and control of the company. The three had complementary skills and remain in key roles at the company today. Dankberg is Chairman and CEO, Miller is Chief Technical Officer, and Hart is Vice President of Engineering. ViaSat “graduated” from the SBIR program in late 2001 with the acquisi - tion of Comsat Laboratories. This acquisition of the satellite products group of Lockheed Martin Global Telecommunications brought the company size to over 500 employees. By the end of their fiscal 2005, annual revenue had grown to $346 million (18th consecutive profitable year) and employment to 1,029 employees. Prior to going public, ViaSat was listed on the INC.00 list of fastest growing private companies three times. The company is on the Forbes list of “200 Best Small Companies,” and the Business Week list of “100 Best Small Corporations.” ViaSat is an ISO9001 certified company. ROLE OF SBIR The R&D of SBIR has been a huge determinant in company growth. SBIR developed products, and particularly in the early years provided credibility with prime contractors. The company would have succeeded without SBIR due to the strength of the ownership team, but they would have been unlikely to have achieved their current level of success, and it would have been a much different company. SBIR spurred the growth of technical capabilities at a much faster pace and provided opportunities to develop technical strengths in new areas. Lack of SBIR would have slowed growth tremendously. In a highly competi- tive field, ViaSat requires a continuous significant stream of R&D to maintain and grow its share of the telecommunications manufacturing market. In the early years almost all R&D was either SBIR or contracts resulting from SBIR success. In 1994 the company began internal R&D (IR&D), which has amounted to as much as ten percent of its revenue. In spite of this large internal investment, SBIR remained vital in that it was used for higher risk, more innovative ideas. IR&D could then mature the proven idea. Forty-nine Phase I, 24 Phase II, and follow-on developmental contracts from DoD have provided ViaSat with a quarter billion dollars in R&D funding and a resulting wealth of products.

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 APPENDIX D INNOVATION AND IMPACT ViaSat views Demand Assignment Multiple Access (DAMA) Networking as its most significant innovation. DAMA resulted from two Air Force Phase II awards in 1991 for 5 KHZ and 25 KHZ SATCOM DAMA modems. The Phase II awards provided credibility and money to exploit their key technology. For a period of time, ViaSat was recognized as the world expert. This development has resulted in an ongoing product line providing satellite terminal equipment for ships, aircraft, ground station terminals, and missiles. Using SBIR and additional R&D, ViaSat has advanced DAMA from its roots in Code Demand Multiple Ac- cess (CDMA) to two proprietary technologies, Paired Carrier Multiple Access (PCMA) and Code Reuse Multiple Access (CRMA). ViaSat has established itself as a trusted provider of both equipment and technology development to DoD. DoD customers include the Army, Navy and Air Force. It is one of two prime contractors for Multifunctional Information Distribution System (MIDS) Link 16 systems, which provide the primary tactical data distribution system for DoD. In June 2004, ViaSat won a equipment delivery order valued at approximately $47 million for MIDS terminals from the Space and Naval Warfare Systems Command (SPAWAR), San Diego. MIDS provides secure, high capacity, jam resistant, digital data and voice communications ca - pability for U.S. Navy, U.S. Air Force, and U.S. Army platforms. Soon after this production contract, in December 2004, ViaSat was awarded an Engineering Change Proposal modification and corresponding delivery order anticipated to be valued at approximately $60 million for development of a Joint Tactical Radio System (JTRS) compliant version of the MIDS terminal. JTRS is a program - mable radio technology that contributes to the new “network-centric” vision of the military by enabling a variety of military wireless communications devices to easily communicate with each other. In the commercial arena, ViaSat produces innovative satellite and other wireless communication products that enable fast, secure, and efficient com - munications to any location. Products include network security devices, and communication simulators. ViaSat also has a full line of VSAT products for data and voice applications, and is a market leader in Ka-band satellite systems, from user terminals to large gateways. Just as technology developed under DoD SBIR has led to commercial prod - ucts, ViaSat commercial satellite IP networking products are finding a number of applications for the military. For example ViaSat LinkStar® and LINKWAY® IP-based satellite networking products, widely used in commercial enterprise networking, are the core networking technology for the Coalition Military Net - work (CMN), recently fielded by Lockheed Martin for U.S. Central Command (USCENTCOM). Rather than multiple tactical Satcom units, the new commercial technology, under the Kuwait Iraq Command, Control, Communications and Computers (C4) Commercialization (KICC) project, is creating a permanent communications infrastructure.

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 APPENDIX D COMMERCIALIZATION STRATEGY The focus of every ViaSat R&D effort, whether under contract or IR&D, is development of a product that it can manufacture and sell. Its expertise is in design, development, assembly and test. They contract out lower cost components like Chasses and cables, while retaining in house high value such as integration and test. One of its acquisitions, U.S. Monolithics (USM) is exceptionally adept at packaging RF transceivers in high performance low-cost MMIC modules, which are designed into ViaSat military and commercial products. In the early years ViaSat subcontracted to larger DoD Primes. Now, ViaSat, due to its proprietary technology and Phase III noncompetitive awards, is the often prime and many of these larger firms subcontract to it. PRIVATE RETURNS AND SPILLOVER EFFECTS ViaSat-developed technology provides increased capability at a lower cost. Communications Satellites have an inherent capacity using their as built tech- nology. ViaSat software allows increasing that capacity without putting up a new satellite. Its research has driven the market to keep up. In other cases it has allowed them to keep up. It has increased efficiency allowing more users at improved quality of service. These improvements provide an increased number of messages/calls at any instant in time and over any period of time. They allow improved use and allocation of the spectrum. The net result is the same system of satellites can handle nine to ten times as many users, messages or calls. ViaSat views its major competitors to be Rockwell, BAE, Harris and Ray- theon. In the area of other SBIR success metrics (besides sales and growth), neither publications nor patents would provide much evidence of success. They make presentations at military Communications sessions and chair sessions but this is a relatively small effort. Presentation to the military user and RDTE com - munity has value. Sharing with their competitors does not. As of 1999, ViaSat reported only one patent resulting from SBIR. Instead of patents, they rely on data rights from SBIR and rapid innovation and fielding to stay ahead of market. They do more patenting of the research funded by their IR&D program. The commercial side lacks the protection of DoD funded research. VIASAT VIEWS CONCERNING SBIR APPLICATION AND AWARD PROCESSES The interviewee was not sure how ViaSat learned of SBIR, but during the timeframe of the first SBIR, the firm was actively seeking new sources of fund- ing, and the founders were well connected with other leaders of small innovative companies in the communication technology rich San Diego area. Geographical location was important to the firm’s opportunity for propos - ing and receiving SBIR. San Diego in the 1980s and 1990s did quite well in

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 APPENDIX D communications technology. The University of California in San Diego was at the cutting edge in telecommunications. This impacted where the firm was founded. The Navy’s SPAWAR, also in San Diego, had an active SBIR program in telecommunications. Topics, technology, and prior experience have determined the agency to which the company proposed. The founders were experienced in working with DoD. DoD was in constant pursuit of improved communications. DoD provided the best opportunities. In addition to satellite communication, about half of the awards have dealt with line of sight, terrestrial communications. All of their SBIR has been with DoD. ViaSat felt that the minor differences among the application and award processes of DoD component SBIR programs gave no perceived enduring advantage to one agency over another. The firm’s SBIR proposal strategy was to stay within its core competen - cies. It has had several awards on broad topics, others on narrow topics. It has worked with agencies to try to influence future topics. The number of proposals it submitted for any solicitation depended more on what topics were requested than any other factor. However, when business looked slow, more proposals may have occurred. Most proposal work was done at night and on weekends. Its average invest - ment on a Phase I was about $2000 to $3000. They once put in 22 proposals on a single solicitation. “Once you are doing a few, you often can raise that by a factor of two to three without that much additional work by taking advantage of similarities.” The real work in obtaining a Phase II was in finding follow on sponsorship. This required finding and convincing other program managers to go to the SBIR sponsor and say that they wanted the result of the Phase II. SPAWAR, Hanscom AFB, MA; Rome AFB, NY; and Ft. Monmouth, NJ, were mentioned as locations that they visited ViaSat has experience in applying for and receiving awards from other government R&D (non-SBIR) programs. In comparison to SBIR, they tend to partner more on other government R&D programs, which tend to be bigger and require much more complicated proposals. SBIR provides natural access and a much easier proposal process. They would recommend reducing some of the bureaucratic requirements of SBIR application process. They pointed out that commercialization data requires more work. (It should be noted that they had to enter data for many awards, and that they only participated in one solicitation that required that data before outgrowing the program. Once entered, updating for subsequent solicitations requires only a small fraction of the effort.) ViaSat believes some topics are well thought out, but some are not. Some are more rigorous, and validated. It is easier to propose if the topic is clear. It does believe that having some catch-all broad topics is a good thing. Topics should allow Phase I to focus on innovation.

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 APPENDIX D From their perspective, the DoD practice of two SBIR solicitations per year was frequent enough. They believe that the selection process appeared fair. The money pool seems to allow multiple awards on the same topic when appropriate. VIEWS ON FUNDING AMOUNTS AND TIMING They often experienced delay between Phase I and II. Bridge funding, when available, was never enough. Delay used to require taking people off the effort. In the later years, once they had a healthy cash flow, it became an inconvenience, but in the early years delay was critical. Reduction in delay, and covering the gap would improve the program. ViaSat no longer qualifies for Phase I but believes continuing to make small awards is better than increasing the size and giving less awards. However, the award needs to be large enough for the firms to demonstrate that they can make something of it at reasonable cost. OVERALL PROGRAM VIEWS ViaSat identified dedicated government sponsors and noncompetitive Phase III as real strengths of the program. A sponsor who never gives up and advocates company efforts can be key to success. After Congress tried to clarify that the government could award Phase III noncompetitively, ViaSat still had dif- ficulty convincing contracting officers that noncompetitive Phase III awards could be made. That gradually improved. ViaSat learned how to prove its case, but it may still be a problem for some firms and contracting officers. Noncompetitive Phase III gives small firms some leverage with primes. For ViaSat, outgrowing participation in Phases I and II does not prevent the award of Phase III. Continued eligibility for noncompetitive Phase III contracts is important to the continued positive impact of SBIR on firms that grow or are acquired. A weakness that ViaSat perceives in the SBIR program is the disconnect between the SBIR firms and the primes. The primes have no incentives to use SBIR firms. Primes often see no advantage. Recommended Change The government Planning and Programming process for R&D and Procurement makes it difficult to transition from Phase II. Every PE is programmed far in advance to be spent in a particular way. The successful Phase II becomes a spoiler. To get funded, you have to get support from an es - tablished program. They would like to see a change in the Planning and Program - ming process to make funding available for Phase III at conclusion of Phase II.

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 APPENDIX D RESEARCHER INSIGHTS Each of the Armed Services are involved in what Secretary of Defense Rumsfeld refers to as Transformation—transformation in how they organize and how they fight. Central to all other DoD Transformation Initiatives is the concept of Network Centric Warfare (NCW). In simplest terms, NWC is waging war in the information age. NCW means that information is acquired, processed into intelligence and provided to everyone who needs it seamlessly. Thus an aircraft would know ex - actly where all the threat acquisition and air defense weapons were on its path. A platoon would know the path to take to avoid observation and fires until it could flank and attack a threat force from an unexpected direction. A general would know where all the threat forces were and what they were doing, and everyone on the friendly side would be able to distinguish between threat combatants and friendly forces and noncombatants. Air, land and sea forces would be completely interoperable and mutually supporting. There are many technical challenges to making the concept of NCW a real- ity, challenges in sensor systems, in information architectures, protocols and hardware, in understanding individual and group behavior and in the communica- tions hardware required. ViaSat is a critical player in providing the interoperable communication pipes that will enable the Network. It has that capability because of the stimulus of SBIR. The act establishing the SBIR program identified four goals for the program: technological innovation, commercialization, the use of small businesses to meet agencies’ research and development needs, and participation by minorities and disadvantaged persons. How do the SBIR awards at ViaSat measure up to these goals? ViaSat in- novations spurred by SBIR have changed the industry; their $350 million in annual revenue (from a standing start) and their involvement in meeting not just the research and development needs of the agency, and in fact some of the most vital needs, gives evidence that they embody what the Congress was trying to foster. (They are not, however, minority or disadvantaged.) Two points need to be made in light of current consideration by elements of the administration and Congress of Venture Capital and possible limits on the number of Phase II awards. • ViaSat had Venture Capital before its first SBIR. Although the founding individuals never relinquished control of the company, this enormous program success and their significant contributions to National Defense might not have occurred under some interpretations of the presence of VC. • ViaSat used 24 Phase II awards to develop its most innovative technol- ogy. It was a frequent winner. Some current initiatives under discussion for the SBIR Program would have eliminated it from SBIR, treating them as an “SBIR Mill.” Such initiatives would limit SBIR eligibility to relatively few Phase II

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 APPENDIX D awards per firm. The loss of the last nine or sixteen (choose the cutoff) of the ViaSat Phase II awards and the resulting Phase III would have materially reduced the contributions of ViaSat. We know that very few awards and very few SBIR companies succeed in achieving significant innovation, significant impact on meeting agency needs, and large-scale commercialization. Is SBIR best spent nurturing proven winners or in spreading it thinly with no focus on successful commercialization?