3
SBIR Awards at DoD

3.1
INTRODUCTION

This chapter reviews SBIR awards made by DoD, based on data provided by the department. All awards at DoD are made in the form of contracts, and as such require a deliverable. At a minimum, this means a final report; in some cases, a prototype or working model is also delivered.

The chapter provides a comprehensive overview of the distribution of awards, giving a context into which questions regarding outcomes and program management can best be placed.

This is especially important because of the very decentralized character of the DoD SBIR program. Each agency or service in effect operates its own program within the guidelines sets by the Small Business Administration (SBA) and Defense Research & Engineering (DDR&E). Program objectives, mechanisms, and assessment are all developed and implemented primarily at the service and agency level.

Overall, the number of awards made at DoD has grown sharply in recent years, reflecting increases in the department’s R&D budget.

3.2
NUMBER OF PHASE I AWARDS

While SBIR funding for DoD has substantially increased in recent years (see Figure 3-1), the number of Phase I awards awarded has not. The number of Phase I awards remained relatively constant from 1993 to 2001 before increasing substantially in 2002. Since then the number of Phase I awards has again stayed relatively flat. (See Table 3-1.) The substantial (65 percent) increase in the number of Phase I awards made by DoD in 2002 resulted from a number of factors.



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3 SBIR Awards at DoD 3.1 INTRODUCTION This chapter reviews SBIR awards made by DoD, based on data provided by the department. All awards at DoD are made in the form of contracts, and as such require a deliverable. At a minimum, this means a final report; in some cases, a prototype or working model is also delivered. The chapter provides a comprehensive overview of the distribution of awards, giving a context into which questions regarding outcomes and program management can best be placed. This is especially important because of the very decentralized character of the DoD SBIR program. Each agency or service in effect operates its own pro- gram within the guidelines sets by the Small Business Administration (SBA) and Defense Research & Engineering (DDR&E). Program objectives, mechanisms, and assessment are all developed and implemented primarily at the service and agency level. Overall, the number of awards made at DoD has grown sharply in recent years, reflecting increases in the department’s R&D budget. 3.2 NUMBER OF PHASE I AWARDS While SBIR funding for DoD has substantially increased in recent years (see Figure 3-1), the number of Phase I awards awarded has not. The number of Phase I awards remained relatively constant from 1993 to 2001 before increasing substantially in 2002. Since then the number of Phase I awards has again stayed relatively flat. (See Table 3-1.) The substantial (65 percent) increase in the num - ber of Phase I awards made by DoD in 2002 resulted from a number of factors. 

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 SBIR AWARDS AT DOD 1,134 1,200 1,074 1,016 Millions of Current Dollars 1,000 894 778 800 638 554 553 541 600 400 200 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year FIGURE 3-1 SBIR funding at DoD, FY1998–2006. SOURCE: Michael Caccuitto, DoD SBIR/STTR Program Administrator, and Carol Van Wyk, DoD CPP Coordinator, Presentation to SBTC SBIR in Rapid Transition Conference, September 27, 2006, Washington, DC. 3-01 After several years of relatively constant funding, the DoD R&D set-aside increased by 15 percent in FY2001. Cautiously, DoD awarded less than 8 percent more Phase I contracts. In 2002, DoD received a further increase of 22 percent in R&D funding and it became clear that the FY2003 and FY2004 DoD R&D budgets were likely to grow even further. TABLE 3-1 SBIR Awards at DoD, 1992–2005 Number of Number of Year Phase I Awards Phase II Awards Total 1992 1,065 433 1,498 1993 1,303 591 1,894 1994 1,370 406 1,776 1995 1,262 575 1,837 1996 1,372 611 1,983 1997 1,526 638 2,164 1998 1,286 672 1,958 1999 1,393 568 1,961 2000 1,220 626 1,846 2001 1,310 702 2,012 2002 2,162 661 2,823 2003 2,113 1,078 3,191 2004 2,075 1,173 3,248 2005 2,344 998 3,342 Total 21,801 9,732 31,533 SOURCE: DoD awards database.

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 SBIR AT THE DEPARTMENT OF DEFENSE DoD responded by increasing the number of SBIR topics by about 10 percent in FY2002, but received about 75 percent more proposals as the private, venture- funding technology bubble burst and small technology companies sought new sources of funding. The confluence of increased funding available, more topics, and more demand led to a significantly higher number of Phase I awards. Agency-specific factors also played a part. In 2001, the Missile Defense Agency (MDA) was seeking to exit the SBIR program. This led to a reduced number of MDA contracts in FY2001 and the “loaning-out” of MDA set-aside funding for use by other agencies. When this exit strategy was rejected by DoD, MDA found that the low number of Phase I contracts it awarded in FY2001 re - sulted in a reduced number of Phase II contracts in FY2002. But because MDA was now fully committed to spending its entire SBIR set-aside, it had to give out an extra-large number of Phase I contracts in FY2002. The substantial increase in Phase I contracts in 2002 helps to explain the 59 percent increase in the number of Phase II awards between 2001 and 2003. Since this step jump, numbers have increased only slightly (see Table 3-1). 3.2.1 Phase I—Median Award Size Figure 3-2 shows that DoD Phase I awards have generally averaged just under $90,000 since 1997. The increase from 1994–1997 resulted from changes in SBA guidelines after the 1992 SBIR reauthorization. 3.2.2 Phase I—New Winners The share of Phase I awards going to new winners—firms that have not pre- viously participated in the DoD SBIR program—is an important measure of the Median Size of DoD Phase I Awards (Dollars) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year FIGURE 3-2 Phase I Awards at DoD: Mean award size, FY1992–2003. SOURCE: DoD awards database. 3-02

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 SBIR AWARDS AT DOD 6+ Phase II Awards New (13%) Awardees (37%) 1-5 Phase II Awards (50%) FIGURE 3-3 Prior SBIR participation/success of the pool of Phase I award winners, FY2005. SOURCE: Michael Caccuitto, DoD SBIR/STTR Program Administrator, and Carol Van Wyk, DoD CPP Coordinator, Presentation to SBTC SBIR in Rapid Transition Conference, September 27, 2006, Washington, DC. 3-03 openness of the program. In this context, “openness” means the extent to which the SBIR program remains open to new entrants and has not been “captured” by a limited set of winning companies with well-established connections to DoD. DoD has provided data covering FY2005 (as of March 2006) that show that 37 percent of awards went to firms that had not previously won a DoD SBIR award. An additional 50 percent of awards were given to companies with five or less Phase II awards. Only 13 percent of Phase I awards went to companies with more than five Phase II awards. (See Figure 3-3.) Data from the Navy also suggest that the program is open to outside firms without an SBIR track record. For example, about half of all Phase I contracts from NAVAIR go to companies which have never won an SBIR at NAVAIR be- fore; about 40–45 percent of Phase II contracts go to “new” firms as well. 1 Figures for NAVAIR alone are naturally higher than for DoD overall, as some of the “new” winners at NAVAIR previously have won SBIR awards elsewhere within DoD, and would therefore not be classified as “new” winners for the department as a whole. Fundamentally, the evidence is clear that DoD SBIR programs are system- atically including large numbers of new entrants. SBIR awards have thus not become the preserve of a small group of multiple winners. While some companies 1 Carol Van Wyk, NAVAIR SBIR Program Manager, presentation to PMA-209, September 2005.

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 SBIR AT THE DEPARTMENT OF DEFENSE have won a large number of awards, there are structural characteristics of DoD that tend to encourage staff to work with companies that have performed well in the past. Overall, the SBIR program is remarkably open to new entrants even as some companies are able to repeatedly win in open competitions for awards. 3.2.3 Phase I—The States and Regions One of the persistent questions about SBIR concerns how the awards are distributed across the states. Like other federal R&D funding distributed by merit, SBIR funding tends to cluster in high-tech states and high-tech regions within those states. DoD Phase I SBIR awards go disproportionately to states with well- established traditions of science and engineering (see Table 3-2). The top five award-winning states received 53.8 percent of all DoD Phase I awards between 1992 and 2005. California and Massachusetts together account for 37.42 percent of all Phase I awards between 1992 and 2005.2 Concentration at the top is mirrored in the limited number of awards given to companies in low-award states (see Table 3-3). The bottom 15 states accounted for 1.85 percent of Phase I awards over the same time period, and 10 states aver- aged less than three awards per year. This concentration of awards is not unique to the SBIR program. The GAO pointed out in its 1999 study of the SBIR program that, according to the SBA, one-third of the states received 85 percent of all SBIR awards, but also found that the distribution of SBIR awards tends to mirror the distribution of R&D funds in general.3 The same 1999 GAO study also noted concern about the concentration of awards, not only by company (see below), but also by geographic location. With regard to geographic distribution, the GAO report noted that “Companies in a small number of states, especially California and Massachusetts, have submitted the most proposals and won the majority of awards, although the distribution of awards generally follows the pattern of distribution of non-SBIR expenditures for R&D, venture capital investments, and academic research.”4 The study notes further that the data on the “proposal-to-award ratios show that proposals from companies in states with historically lesser amounts of federal research funding won awards at almost the same rate as proposals from compa - nies in other states” (i.e. those receiving fewer awards).5 This suggests that rates 2As a comparison, California and Massachusetts accounted for 36.5 percent of Phase I awards at NIH. 3The SBA study mentioned in the report (no citation given) referred to SBIR awards from FY1983 through FY1986. U.S. Government Accounting Office, “Federal Research: Evaluation of Small Business Innovation Research Can Be Strengthened,” GAO/RCED-99-114, Washington, DC: U.S. Government Accounting Office, June 1999, p. 17. 4 Ibid., p. 21. See also pp. 26-27. 5 Ibid, p. 27.

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TABLE 3-2 Phase I Awards 1992–2005 by State Number of Phase I Awards State 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total AK 1 1 1 1 1 1 1 7 AL 14 20 24 32 24 31 21 38 21 32 45 59 63 89 513 AR 1 1 2 1 3 1 3 1 2 15 AZ 14 16 14 23 41 41 31 31 38 32 40 44 46 50 461 CA 262 336 370 294 332 344 275 321 254 302 500 439 436 464 4,929 CO 30 43 47 38 47 68 52 57 76 59 114 101 99 97 928 CT 35 33 55 27 30 30 24 22 14 15 35 27 26 19 392 DC 2 2 3 4 3 2 8 4 3 6 3 3 6 49 DE 6 3 7 3 3 3 4 3 2 3 1 6 6 6 56 FL 31 30 35 36 36 44 35 37 38 38 51 46 60 65 582 GA 6 11 10 7 13 17 16 17 15 13 20 19 17 21 202 HI 4 3 3 4 3 8 3 6 7 4 14 59 IA 1 1 3 1 3 4 1 5 2 21 ID 1 4 2 1 2 5 7 3 3 8 36 IL 12 15 4 11 14 10 12 17 15 9 23 17 29 26 214 IN 5 4 1 4 5 3 8 4 2 3 14 9 8 24 94 KS 4 3 2 3 2 5 3 3 3 4 1 6 1 5 45 KY 1 1 3 3 1 2 2 1 2 2 1 1 20 LA 4 5 1 5 6 2 3 2 1 3 5 8 7 5 57 7 continued

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TABLE 3-2 Continued  Number of Phase I Awards State 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total MA 181 219 199 194 204 247 189 198 182 176 317 310 298 298 3,212 MD 37 65 59 48 63 73 48 84 53 68 118 101 108 122 1,047 ME 6 5 3 3 1 1 4 1 1 11 9 8 10 63 MI 14 13 20 26 20 37 27 19 23 18 54 41 40 68 420 MN 13 19 25 19 18 26 15 25 20 18 27 23 20 26 294 MO 4 4 6 7 3 10 8 4 5 4 12 6 7 12 92 MS 2 2 3 1 3 4 4 5 2 26 MT 1 2 2 3 2 4 3 4 6 4 8 8 47 NC 9 10 13 10 10 8 10 9 13 15 9 20 26 16 178 ND 2 1 1 1 2 1 1 9 NE 3 1 1 1 2 3 3 3 1 18 NH 8 15 14 17 10 12 15 20 14 18 27 29 22 27 248 NJ 40 42 55 41 44 51 44 44 41 36 63 68 53 65 687 NM 37 40 24 38 37 27 32 33 26 27 35 35 35 30 456 NV 3 2 1 6 4 5 1 6 2 5 14 12 4 4 69 NY 36 53 64 50 57 54 50 52 40 56 78 89 82 108 869 OH 38 51 50 56 45 63 64 58 63 56 92 87 95 111 929 OK 5 2 3 2 6 3 4 3 1 5 6 7 21 16 84 OR 5 7 10 13 8 12 6 5 4 11 13 14 15 17 140 PA 44 38 52 44 53 61 48 46 48 56 74 80 92 101 837

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RI 9 6 4 8 7 1 5 3 6 2 6 10 2 4 73 SC 2 2 3 4 1 1 7 5 12 12 3 4 56 SD 1 2 1 1 1 1 7 TN 7 10 15 9 9 8 13 11 10 9 9 11 11 10 142 TX 26 45 42 55 53 55 54 38 41 51 80 95 98 115 848 UT 13 8 9 10 16 4 11 14 2 8 14 12 7 23 151 VA 75 88 86 79 105 113 112 94 95 109 151 170 144 186 1,607 VT 2 3 2 1 4 6 3 3 1 1 4 5 4 4 43 WA 16 26 17 23 16 22 17 25 17 14 35 34 32 32 326 WI 5 4 9 5 4 12 5 8 5 2 3 5 8 8 83 WV 3 4 2 1 7 15 10 8 50 WY 1 1 1 1 2 1 3 10 Total 1,065 1,303 1,370 1,262 1,372 1,526 1,286 1,393 1,220 1,310 2,162 2,113 2,075 2,344 21,801 SOURCE: Department of Defense. 9

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TABLE 3-3 Phase I Awards to the 15 Lowest Award-receiving States, FY1992–2005 0 Number of Phase I Awards State 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total AK 1 1 1 1 1 1 1 7 SD 1 2 1 1 1 1 7 ND 2 1 1 1 2 1 1 9 WY 1 1 1 1 2 1 3 10 AR 1 1 2 1 3 1 3 1 2 15 NE 3 1 1 1 2 3 3 3 1 18 KY 1 1 3 3 1 2 2 1 2 2 1 1 20 IA 1 1 3 1 3 4 1 5 2 21 MS 2 2 3 1 3 4 4 5 2 26 ID 1 4 2 1 2 5 7 3 3 8 36 VT 2 3 2 1 4 6 3 3 1 1 4 5 4 4 43 KS 4 3 2 3 2 5 3 3 3 4 1 6 1 5 45 MT 1 2 2 3 2 4 3 4 6 4 8 8 47 DC 2 2 3 4 3 2 8 4 3 6 3 3 6 49 WV 3 4 2 1 7 15 10 8 50 SOURCE: DoD awards database.

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 SBIR AWARDS AT DOD TABLE 3-4 Phase I Awards— Top Zip Codes Zip Number of Phase I Code Awards 92121 353 01801 324 90501 314 01803 257 02154 253 35805 203 01824 193 80301 192 02451 191 01810 190 85706 177 02138 163 94043 144 90505 141 24060 137 93117 135 87109 132 77840 131 01730 129 03755 129 SOURCE: DoD awards database. of application are a major determinant of success in winning awards from the program. Awards are also distributed unequally within states. The top 20 winning zip codes account for 17.8 percent of Phase I awards overall (see Table 3-4). This is a lower degree of concentration than at NIH, but in both cases, the data illustrate that the SBIR awards, like other innovation activity, tend to be concentrated in relatively small geographic areas. These clusters of innovation are, in effect, the relevant unit of measure. Even states with high numbers of awards find that they are not distributed across the state but instead are concentrated in these innovation clusters. Moreover, other sources of early-stage funding such as venture capital tend to be concentrated as well, and normally in the same areas. 6 6 For example, venture capital investment is widely recognized to be concentrated in California with some 47 percent of national venture funding, yet 35 percent of the nation’s VC investments are in Sili - con Valley, just under 7 percent in Los Angeles/Orange County, 4.6 percent in San Diego, while the rest of California receives 0.5 percent of the $7.6 billion invested there in 2005. See the presentation “The Private Equity Continuum” by Steve Weiss, Executive Committee Chair of Coachella Valley Angel Network, citing PricewaterhouseCoopers Money Tree data at the Executive Seminar on Angel Funding, University of California at Riverside, December 8-9, 2006, Palm Springs, California.

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 SBIR AT THE DEPARTMENT OF DEFENSE 3.2.4 Commercialization and Multiple-award Winners In the first eight years of the program, a number of companies were success - ful in winning multiple awards. Many of the projects funded by these awards were not commercialized. There are several reasons for this. In part, the low com - mercialization rates reflect the uncertainties inherent in the funding of relatively early-stage technology development. It may also reflect imperfect alignment between solicitations and the needs of procurement agencies and the complexities and long lead times of the procurement process. Perhaps most important, it may reflect the lower emphasis on commercialization in the early years of the pro - gram than is now the case.7 Lastly, it reflects the different goals of participating companies documented in previous NRC research.8 Understanding these different goals is important in this context. Companies that participate in the program, like the agencies themselves, often have multiple objectives. • Firms approach the SBIR award process at different stages of devel- opment and with different objectives. Some firms are developing technology concepts; some firms see their vocation as contract research organizations; others actively seek to develop commercial products, either for public agencies or for the marketplace.9 • Investigator-led firms, limited in size and focused on a single concept may seek multiple awards as they advance research on a promising technology. 10 7As a Creare representative, Nabil Elkouh, points out, in the early years of the program, small companies had not figured out how to use it, nor had the departments figured out how to run the program, and the award process was less competitive than it is today. Emphasis on commercialization was minimal. Program managers defined topics that represented an interesting technical challenge. See the case study of Creare, Inc., August 2005, in National Research Council, An Assessment of the SBIR Program at the Department of Energy, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2008. 8 National Research Council, The Small Business Innoation Research Program: An Assessment of the Department of the Defense Fast Track Initiatie, Charles W. Wessner, ed., Washington, DC: National Academy Press, 2000. 9 See Reid Cramer, “Patterns of Firm Participation in the Small Business Innovation Research Pro - gram in the Southwestern and Mountain States,” in National Research Council, The Small Business Innoation Research Program: An Assessment of the Department of Defense Fast Track Initiatie, op. cit., p. 151. The author describes the incremental nature of technical advance, which sometimes necessitates several awards. See also John T. Scott, “An Assessment of the Small Business Innovation Research Program in New England: Fast Track Compared with Non-Fast Track,” in National Re - search Council, The Small Business Innoation Research Program: An Assessment of the Department of Defense Fast Track Initiatie, op. cit., p. 109, for a discussion of Foster-Miller, Inc. 10 Ibid. The mirror image of this approach is the program manager that makes several awards for similar technologies among different companies. In fact, it is not uncommon to have multiple award - ees on the same Phase I topic. For an example, see the Navy’s SBIR Web site selections page for their FY-06.1 awardees, available at . This page not only shows several awardees for each topic, but if you click on the “Details” link, you can see the differences in companies’ approaches to the topics.

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7 SBIR AWARDS AT DOD 800,000 Median Phase II Award Size (Dollars) 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year FIGURE 3-8 Phase II median award size, 1992–2005. SOURCE: DoD awards database. 3.3.2 Phase II Awards—By Company 3-08 As with Phase I, some companies have received numerous Phase II awards. The companies receiving many Phase I awards are often also successful in ap- plying for multiple Phase II awards, as on average, 42 percent of Phase I winning proposals receive Phase II awards. 9,000,000 Average and Maximum Phase II 8,000,000 7,000,000 Award Size (Dollars) 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year Average Maximum FIGURE 3-9 Oversized Phase II awards at DoD, 1992–2005. SOURCE: DoD awards database. 3-09

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7 SBIR AT THE DEPARTMENT OF DEFENSE TABLE 3-9 Phase II Multiple-award Winners 1992–2005 at DoD Phase I/ Number of Number of Phase II Phase I Phase II Conversion Firm Name Awards Awards Rate FOSTER-MILLER, INC. 361 140 38.8 PHYSICAL OPTICS CORP. 316 117 37.0 PHYSICAL SCIENCES, INC. 170 75 44.1 MISSION RESEARCH CORP. 126 69 54.8 ALPHATECH, INC. 117 68 58.1 CREARE, INC. 129 60 46.5 CHARLES RIVER ANALYTICS, INC. 112 60 53.6 CFD RESEARCH CORP. 107 56 52.3 TRITON SYSTEMS, INC. 125 55 44.0 COHERENT TECHNOLOGIES, INC. 101 53 52.5 TECHNOLOGY SERVICE CORP. 90 42 46.7 CYBERNET SYSTEMS CORP. 95 41 43.2 SCIENTIFIC SYSTEMS CO., INC. 91 38 41.8 DIGITAL SYSTEM RESOURCES, INC. 48 36 75.0 STOTTLER HENKE ASSOC., INC. 84 36 42.9 TEXAS RESEARCH INSTITUTE AUSTIN, INC. 77 36 46.8 ORINCON CORP. 97 36 37.1 METROLASER, INC. 66 35 53.0 SYSTEMS & PROCESS ENGINEERING CO. 69 35 50.7 TOYON RESEARCH CORP. 65 34 52.3 Total and Average (conversion rate) 2,446 1,122 48.6 SOURCE: DoD awards database. Table 3-9 shows the top Phase II award winners. Note that these results are estimates only.25 Together, the top 20 winners account for 11.5 percent of all Phase II awards made at DoD from FY1992 to FY2005. This compares with 11.1 percent at NIH. It is also worth noting that some of the top 20 winners are no longer eligible. For example, Foster-Miller, Inc., has been purchased by a foreign-owned corpora - tion; Alphatech, Inc., Digital System Resources, Inc., and Triton Systems, Inc., have each been acquired and are now part of companies which have more than 500 employees. 3.3.3 Phase II Awards—By State As would be expected with merit-based R&D awards, the geographical distribution of Phase II awards approximates but does not equal the distribution for Phase I awards. As can be seen in Table 3-10, the states with many Phase I 25 Because companies change names, and in some cases tax ID numbers, a precise count would require a manual examination of all records.

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TABLE 3-10 Phase II Awards—By State Number of Phase II Awards State 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total AK 1 1 2 AL 11 13 3 7 16 21 16 6 18 8 15 32 31 30 227 AR 2 1 3 2 8 AZ 1 5 8 5 7 11 15 10 11 16 14 16 17 19 155 CA 100 130 114 132 147 155 160 103 133 163 160 236 254 211 2,198 CO 11 22 13 22 19 25 31 33 29 39 32 54 57 48 435 CT 20 19 5 18 20 15 10 7 7 12 6 18 17 17 191 DC 2 1 1 2 1 1 2 2 1 13 DE 1 4 1 3 2 2 2 2 1 1 2 21 FL 4 17 4 16 17 13 19 18 15 18 14 33 26 26 240 GA 3 1 2 5 1 8 8 10 8 9 6 12 9 10 92 HI 3 1 3 3 1 2 3 4 20 IA 1 1 3 2 1 1 9 ID 1 1 1 4 2 1 3 13 IL 7 6 6 2 2 2 4 3 10 8 3 12 13 16 94 IN 1 3 1 2 3 4 1 1 2 7 6 5 36 KS 1 2 2 1 2 4 2 1 3 1 3 22 KY 1 2 1 1 1 1 7 LA 1 1 1 1 2 2 2 1 2 3 2 18 77 continued

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TABLE 3-10 Continued 7 Number of Phase II Awards State 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total MA 67 102 66 87 92 91 106 87 86 100 98 152 159 119 1,412 MD 19 19 20 25 24 26 24 23 35 29 25 52 56 54 431 ME 5 2 2 2 3 9 3 26 MI 12 5 6 10 7 14 22 9 11 15 9 30 24 20 194 MN 5 9 3 6 14 9 4 7 12 9 12 18 10 9 127 MO 2 1 1 1 2 6 1 5 1 2 1 6 1 30 MS 1 1 1 1 3 4 11 MT 1 1 3 1 2 2 2 3 3 2 5 25 NC 3 4 7 5 2 7 5 6 4 5 4 5 12 10 79 ND 1 1 1 2 1 6 NE 2 2 1 2 2 1 1 11 NH 8 11 2 7 11 7 5 7 10 7 8 11 22 8 124 NJ 12 25 19 26 24 17 19 21 21 20 21 28 32 24 309 NM 20 14 10 15 7 16 15 19 14 11 10 13 17 12 203 NV 3 3 1 1 2 2 4 1 2 3 6 6 11 3 48 NY 24 26 16 29 21 29 23 25 23 21 20 44 49 50 400 OH 14 13 14 31 27 19 36 25 31 39 29 57 53 59 447 OK 1 1 2 3 2 3 1 1 3 2 4 6 29 OR 2 2 3 4 7 4 4 4 1 5 4 6 8 9 63 PA 15 27 16 32 16 32 29 31 22 28 30 49 47 39 413

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RI 2 4 2 2 3 2 2 3 2 4 5 1 32 SC 1 1 2 4 1 5 1 4 19 SD 1 1 2 TN 3 3 4 5 8 4 4 3 5 7 3 1 9 10 69 TX 10 19 9 16 24 14 22 25 25 26 22 40 50 44 346 UT 4 12 4 4 6 5 4 4 4 4 4 10 5 6 76 VA 29 48 30 37 48 56 48 47 42 60 63 73 83 77 741 VT 1 2 1 2 2 2 3 5 1 19 WA 8 7 7 11 9 11 11 8 9 11 12 18 29 14 165 WI 5 2 2 3 4 4 3 4 2 2 1 5 6 3 46 WV 1 2 2 1 5 9 5 25 WY 1 1 1 3 Total 433 591 406 575 611 638 672 568 626 702 661 1,078 1,173 998 9,732 SOURCE: DoD awards database. 79

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0 SBIR AT THE DEPARTMENT OF DEFENSE award-winners tended to get the most Phase II awards. Not surprisingly, states with few Phase I awards had few Phase II awards. Still, states do vary substantially in the degree to which their companies successfully convert Phase I awards into Phase II. Table 3-11 shows the percent - age share of Phase II awards between 1992 and 2005, by state, expressed as a percentage of the Phase I awards between 1992 and 2005, by state. This metric indicates which states appear to be particularly successful at converting Phase I awards into Phase II awards. The data show that the top 10 states on this metric had companies that con - verted Phase I into Phase II at a rate of 50 percent or better; the ten lowest receiv - ing states all converted at rates of less than 35 percent. This suggests avenues for state-level research. It is possible that enthusiastic outreach efforts at the state level—perhaps by state S&T or economic development agencies—have encour- aged firms to submit Phase I proposals that in the end have not justified Phase II funding. This may not necessarily be a good strategy for either the firm or the state. On the other hand, states can perhaps help companies learn to develop a more successful approach to Phase II. These data may also be impacted by sample size. None of the 15 states with the most Phase II awards are on either list. The number of “low award” states—those with 10 or fewer Phase II awards per year—has fallen substantially between 1992 and 2005, from 28 to 16. This may be partly explained by the substantial increase that took place during this period in the number of awards. Nonetheless, it is clear that companies from ar- eas traditionally not regarded as S&T hubs do have opportunities to win Phase II wards at DoD, an advantage of the program given the required concentration of early-stage capital. TABLE 3-11 Phase II Awards— Conversion Rates for Phase IIs by State, 1992-2005, Expressed as a Percent of Phase Is High Conversion Low Conversion NV 69.6 OK 34.5 ND 66.7 SC 33.9 NE 61.1 HI 33.9 WI 55.4 AZ 33.6 AR 53.3 MO 32.6 MT 53.2 LA 31.6 WA 50.6 WY 30.0 UT 50.3 AK 28.6 NH 50.0 SD 28.6 WV 50.0 DC 26.5 SOURCE: DoD awards database.

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 SBIR AWARDS AT DOD Naturally, Phase II awards are further concentrated within states. However, the zip code with the largest number of Phase II awards received only 1.6 percent of Phase I awards, and 1.5 percent of Phase IIs. Overall, the top 10 zip codes accounted for 11.2 percent of both Phase I and Phase II awards. This contrasts with NIH, where the top zip code accounted for 19.9 percent of Phase I awards, and the top 10 zip codes for 13.6 percent. Science and engineering talent in the disciplines relevant to DoD appear to be more widely distributed than that in the life sciences.26 3.3.4 Phase II—Awards by Component Like Phase I, Phase II awards are concentrated in the major components of DoD—Army, Navy, Air Force, MDA, and DARPA (see Table 3-12). As shown by Figure 3-10, Army, Navy, Air Force, and MDA account for 83 percent of Phase II awards on average since FY2000: The remaining 17 percent is largely accounted for by DARPA. These percentages vary somewhat over time, although that has stabilized at about 85 percent since 2002 (see Figure 3-11). 3.4 WOMAN- AND MINORITY-OWNED FIRMS One of the stated objectives of the SBIR program is to expand opportunities for women and minorities in the federal S&T contracting process. One way to measure program performance in this area is to review the share of awards being made to woman- and minority-owned firms. While Phase I awards to woman-owned firms have continued to increase as a percentage of all Phase I awards, the percentage of Phase I awards being made to minority-owned firms has declined quite substantially since the mid-1990s. The percentage fell below 10 percent for the first time in 2004. DoD data suggest that the decline in Phase I award shares for minority- owned firms is reflected in Phase II, although there was in fact an uptick in the percentage of awards to minority-owned firms in FY2005. (See Figure 3-12.) These data also indicate that both woman- and minority-owned firms are converting Phase I awards into Phase II at a rate very close to that of all award winners. On average, their share of all Phase II awards is 0.3 percent higher than their share of Phase I awards. This suggests that the overall quality of Phase I awards from woman- and minority-owned firms is comparable to that of all firms, in that these awards appear equally deserving of the substantially greater invest - ment required from the agency at Phase II. Further analysis of applications data is required to determine whether the declining Phase I awards rate for minority-owned firms reflects a declining share 26 Data from DoD awards database and NIH IMPAC database respectively.

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TABLE 3-12 Phase II Awards, by Agency and Component  Number of Phase II Awards MDA/ DSWA/ Year AF ARMY BMDO NAVY CBD DARPA DTRA NGA NIMA OSD SOCOM Total 1992 110 172 46 52 0 41 12 0 0 0 0 433 1993 199 123 60 120 0 83 6 0 0 0 0 591 1994 152 78 23 107 0 43 3 0 0 0 0 406 1995 191 131 34 127 0 84 6 0 0 0 2 575 1996 217 100 36 156 0 78 3 0 0 16 5 611 1997 221 113 51 164 0 57 6 0 0 23 3 638 1998 243 111 69 136 0 71 7 0 0 33 2 672 1999 212 105 43 107 6 44 7 0 0 37 7 568 2000 195 112 56 186 8 45 5 1 0 13 5 626 2001 221 180 59 136 7 53 6 3 0 29 8 702 2002 233 124 28 170 11 47 6 1 0 36 5 661 2003 234 323 184 193 10 66 3 1 0 50 14 1,078 2004 317 273 211 212 11 75 3 2 0 60 9 1,173 2005 339 123 102 290 7 80 4 1 0 38 14 998 Total 3,084 2,068 1,002 2,156 60 867 77 9 0 335 74 9,732 SOURCE: DoD awards database.

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 SBIR AWARDS AT DOD OTHERS 17% AF 27% NAVY 23% ARMY 20% MDA 13% FIGURE 3-10 Distribution of Phase II awards by component, FY2000–2005 (annual average percent). SOURCE: DoD awards database. 3-10 new of applications, the rejection rate that is increasingly greater than that for all other applicants, or whether the rate of increase in awards is growing faster than number of minority firms. Finally, a note on data. NRC research has determined that the DoD applica - tions database is a poor source of information on the woman/minority status of the approximately 15,000 entries for a given year. The data come directly from the proposals, but firms are sometimes inaccurate in what they enter for owner- ship status. In FY2005 we identified 53 firms that listed minority or woman own- ership on some, but not all of the proposals they submitted. Looking across years, firms were identified that showed woman ownership some years, then no status, then woman ownership again. One firm that had about ten proposals annually listed itself as minority-owned, then several years of no special ownership, then woman-owned. After awards are made and moved to a separate database table, DoD works to correct some obvious errors in the demographic status.

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100  90 80 70 60 50 40 30 20 10 Percent of Phase II Awards to Four Largest Components 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year FIGURE 3-11 Percentage share of all Phase II awards for the four largest components, 1992–2005. SOURCE: DoD awards database. 3-11 new Broadside

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 SBIR AWARDS AT DOD 30 25 Percent of All Phase II Awards 20 15 10 5 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year Woman-owned Minority-owned Either woman- or minority-owned Linear (Minority-owned) FIGURE 3-12 Phase II awards to woman- and minority-owned firms. SOURCE: DoD awards database. 3-12