AN ASSESSMENT OF THE SBIR PROGRAM

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

Policy and Global Affairs

Charles W. Wessner, Editor

NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES

THE NATIONAL ACADEMIES PRESS

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Committee for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program Policy and Global Affairs Charles W. Wessner, Editor

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THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the Councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by Contract/Grant No. DASW01-02-C-0039 between the Na- tional Academy of Sciences and the U.S. Department of Defense, NASW-03003 between the National Academy of Sciences and the National Aeronautics and Space Administra- tion, DE-AC02-02ER12259 between the National Academy of Sciences and the U.S. Department of Energy, NSFDMI-0221736 between the National Academy of Sciences and the National Science Foundation, and N01-OD-4-2139 (Task Order #99) between the National Academy of Sciences and the U.S. Department of Health and Human Services. The content of this publication does not necessarily reflect the views or policies of the Department of Health and Human Services, nor does mention of trade names, commercial products, or organizations imply endorsement by the U.S. Government. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number-13: 978-0-309-11086-0 International Standard Book Number-10: 0-309-11086-6 Limited copies are available from the Policy and Global Affairs Division, National Re- search Council, 500 Fifth Street, N.W., Washington, DC 20001; 202-334-1529. Additional copies of this report are available from the National Academies Press, 500 Fifth Street, N.W., Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu. Copyright 2008 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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

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Committee for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program Chair Jacques S. Gansler (NAE) Roger C. Lipitz Chair in Public Policy and Private Enterprise and Director of the Center for Public Policy and Private Enterprise School of Public Policy University of Maryland David B. Audretsch Charles E. Kolb Distinguished Professor and President Ameritech Chair of Economic Aerodyne Research, Inc. Development Henry Linsert, Jr. Director, Institute for Development CEO Strategies Columbia Biosciences Corporation Indiana University W. Clark McFadden Gene Banucci Partner Executive Chairman Dewey & LeBoeuf, LLP ATMI, Inc. Duncan T. Moore (NAE) Jon Baron Kingslake Professor of Optical Executive Director Engineering Coalition for Evidence-Based Policy University of Rochester Michael Borrus Kent Murphy Founding General Partner President and CEO X/Seed Capital Luna Innovations Gail Cassell (IOM) Linda F. Powers Vice President, Scientific Affairs and Managing Director Distinguished Lilly Research Scholar Toucan Capital Corporation for Infectious Diseases Tyrone Taylor Eli Lilly and Company President Elizabeth Downing Capitol Advisors CEO on Technology, LLC 3D Technology Laboratories Charles Trimble (NAE) M. Christina Gabriel CEO, retired Director, Innovation Economy Trimble Navigation The Heinz Endowments Patrick Windham Trevor O. Jones (NAE) President Founder and Chairman Windham Consulting Electrosonics Medical, Inc. 

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PROJECT STAFF Charles W. Wessner Sujai J. Shivakumar Study Director Senior Program Officer McAlister T. Clabaugh Adam H. Gertz Program Associate Program Associate David E. Dierksheide Jeffrey C. McCullough Program Officer Program Associate RESEARCH TEAM Zoltan Acs David H. Finifter University of Baltimore The College of William and Mary Alan Anderson Michael Fogarty Consultant University of Portland Philip A. Auerswald Robin Gaster George Mason University North Atlantic Research Robert-Allen Baker Albert N. Link Vital Strategies, LLC University of North Carolina Robert Berger Rosalie Ruegg Robert Berger Consulting, LLC TIA Consulting Grant Black Donald Siegel University of Indiana South Bend University of California at Riverside Peter Cahill Paula E. Stephan BRTRC, Inc. Georgia State University Dirk Czarnitzki Andrew Toole University of Leuven Rutgers University Julie Ann Elston Nicholas Vonortas Oregon State University George Washington University Irwin Feller American Association for the Advancement of Science i

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POLICY AND GLOBAL AFFAIRS Ad hoc Oversight Board for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program Robert M. White (NAE), Chair University Professor Emeritus Electrical and Computer Engineering Carnegie Mellon University Anita K. Jones (NAE) Mark B. Myers Lawrence R. Quarles Professor of Senior Vice President, retired Engineering and Applied Science Xerox Corporation School of Engineering and Applied Science University of Virginia ii

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Reports in the Series Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program An Assessment of the Small Business Innovation Research Program— Project Methodology Washington, DC: The National Academies Press, 2004 SBIR: Program Diversity and Assessment Challenges Washington, DC: The National Academies Press, 2004 SBIR and the Phase III Challenge of Commercialization Washington, DC: The National Academies Press, 2007 An Assessment of the SBIR Program at the National Science Foundation Washington, DC: The National Academies Press, 2008* An Assessment of the SBIR Program at the Department of Energy Washington, DC: The National Academies Press, 2008* An Assessment of the SBIR Program at the National Institutes of Health Washington, DC: The National Academies Press, 2009* An Assessment of the SBIR Program at the Department of Defense Washington, DC: The National Academies Press, 2009* An Assessment of the SBIR Program at the National Aeronautics and Space Administration Washington, DC: The National Academies Press, 2009* *The NSF report and this overview report were released in prepublication in July 2007. The NIH and DoD reports were released in prepublication in November 2007, and the DoE and NASA reports were released in prepublication in June 2008 and December 2008, respectively. viii

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Contents PREFACE xiii SUMMARY 1 1 INTRODUCTION 12 1.1 Program History and Structure, 14 1.1.1 The SBIR Development Act of 1982, 16 1.1.2 The SBIR Reauthorizations of 1992 and 2000, 16 1.1.3 Previous Research on SBIR, 17 1.1.4 The Structure and Diversity of SBIR, 22 1.2 Role of SBIR in the U.S. Innovation Ecosystem, 26 1.2.1 The Importance of Small Business Innovation, 26 1.2.2 Challenges Facing Small Innovative Firms, 27 1.2.3 The Challenge of Market Commercialization, 29 1.2.4 The Federal Role in Addressing Early-stage Financing Gap, 33 1.3 SBIR: Strengths and Limitations, 35 1.3.1 SBIR: A Tool for Entrepreneurs to Innovate, 35 1.3.2 SBIR’s Advantages for Government, 39 1.3.3 SBIR’s Role in Knowledge Creation: Publications and Patents, 41 1.3.4 SBIR and the University Connection, 42 1.4 Assessing SBIR, 43 1.4.1 The Challenges of Assessment, 43 1.4.2 Addressing SBIR Challenges, 48 ix

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x CONTENTS 1.5 Changing Perceptions about SBIR, 52 1.5.1 SBIR Around the World, 52 1.6 Conclusion, 53 2 FINDINGS AND RECOMMENDATIONS 54 3 STATISTICS OF SBIR AWARDS 91 3.1 Introduction, 91 3.2 SBIR Phase I Awards, 91 3.3 SBIR Phase II Awards, 95 3.4 Oversized Awards—NIH, 95 3.5 Applications and Success Rates, 97 3.6 Geographical Distribution, 99 3.7 Gauging Participation by Women and Minorities, 102 3.8 Multiple Award Winners and New Entrants, 105 3.8.1 New Program Participants, 106 4 SBIR PROGRAM OUTPUTS 108 4.1 Introduction, 108 4.1.1 Compared to What?, 109 4.2 Commercialization, 112 4.2.1 Challenges of Commercialization, 112 4.2.2 Commercialization Indicators and Benchmarks, 114 4.2.3 Sales and Licensing Revenues, 115 4.2.4 Additional Investment Funding, 122 4.2.5 Additional SBIR Funding, 124 4.2.6 SBIR Impact on Further Investment, 125 4.2.7 Small Company Participation and Employment Effects, 126 4.2.8 Sales of Equity and Other Company-level Activities, 128 4.2.9 Commercialization: Conclusions, 129 4.3 Agency Mission, 129 4.3.1 Procedural Alignment of SBIR Programs and Agency Mission, 131 4.3.2 Program Outcomes and Agency Mission, 134 4.4 Support for Small, Woman-owned, and Disadvantaged Businesses, 143 4.4.1 Support for Woman- and Minority-owned Firms, 143 4.4.2 Small Business Support, 147 4.4.3 Project-level Impacts, 148 4.4.4 SBIR Impacts Different Types of Companies in Different Ways, 150 4.4.5 Growth Effects, 153 4.4.6 Conclusions, 154

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xi CONTENTS 4.5 Multiple-Award Winners and New Program Entrants, 154 4.5.1 The Incidence of Multiple-Award Winners, 154 4.5.2 Commercialization and Multiple-Award Winners, 154 4.5.3 The Incidence of New Entrants, 158 4.6 SBIR and the Expansion of Knowledge, 159 4.6.1 Patents, 162 4.6.2 Scientific Publications, 163 4.6.3 SBIR and Universities, 163 4.7 Conclusions, 168 5 PROGRAM MANAGEMENT 170 5.1 Introduction, 170 5.2 Topic Generation and Utilization, 170 5.2.1 Acquisition-oriented Approaches, 171 5.2.2 Management-oriented Approaches to Topic Utilization, 174 5.2.3 Investigator-driven Approaches, 176 5.2.4 Topics: Conclusions, 177 5.3 Outreach Mechanisms and Outcomes, 178 5.3.1 Introduction, 178 5.3.2 Outreach Mechanisms, 179 5.3.3 Outreach Outcomes, 180 5.3.4 Conclusions—Outreach, 182 5.4 Award Selection, 183 5.4.1 Introduction, 183 5.4.2 Approaches to Award Selection, 184 5.4.3 Fairness, 188 5.4.4 Efficiency, 192 5.4.5 Other Issues, 193 5.4.6 Selection—Conclusions, 193 5.5 Funding Cycles and Timelines, 195 5.5.1 The Standard Model, 195 5.5.2 The Gap-reduction Model, 196 5.5.3 Conclusions, 201 5.6 Award Size and Beyond, 201 5.6.1 Size/Duration of Phase I, 202 5.6.2 Size/Duration of Phase II, 204 5.6.3 Extra-large Phase II Awards at NIH, 206 5.6.4 Supplementary Funding, 208 5.6.5 Bridge Funding to Phase III, 209 5.7 Reporting Requirements and Other Technical Issues, 212 5.8 Commercialization Support, 213 5.8.1 Commercialization Planning, 213 5.8.2 Business Training, 213

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xii CONTENTS 5.9 Conclusions, 217 5.9.1 Differentiation and Flexibility, 217 5.9.2 Fairness, Openness, and Selection Procedures, 218 5.9.3 Topics, 218 5.9.4 Cycle Time, 219 5.9.5 Award Size, 219 5.9.6 Multiple Award Winners, 220 5.9.7 Information Flows, 222 5.9.8 Commercialization Support, 223 APPENDIXES A NRC Phase II Survey and NRC Firm Survey 227 B NRC Phase I Survey 252 C Case Studies 260 Advanced Ceramics Research, 261 Creare, Inc., 266 Faraday Technology, Inc., 275 Immersion Corporation, 286 ISCA Technology, Inc., 293 Language Weaver, 300 MicroStrain, Inc., 310 National Recovery Technology, Inc., 318 NVE Corporation, 326 Physical Sciences, Inc., 333 SAM Technologies, 340 Savi Technology, 349 Sociometrics Corporation, 353 D Bibliography 371

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

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xi PREFACE As the SBIR program approached its twentieth year of operation, the U.S. Congress asked the National Research Council to conduct a “comprehensive study of how the SBIR program has stimulated technological innovation and used small businesses to meet federal research and development needs” and to make recommendations on still further improvements to the program.3 To guide this study, the National Research Council (NRC) drew together an expert committee that included eminent economists, small businessmen and women, and venture capitalists. The membership of this committee is listed in the front matter of this volume. Given the extent of ‘green-field research’ required for this study, the Committee in turn drew on a distinguished team of researchers to, among other tasks, administer surveys and case studies, and develop statistical information about the program. The membership of this research team is also listed in the front matter of this volume. This report is one of a series published by the National Academies in re- sponse to the Congressional request. The series includes reports on the Small Business Innovation Research Program at the Department of Defense, the De- partment of Energy, the National Aeronautics and Space Administration, the National Institutes of Health, and the National Science Foundation—the five agencies responsible for 96 percent of the program’s operations. It includes, as well, an Overview Report that provides assessment of the program’s operations across the federal government. Other reports in the series include a summary of the 2002 conference that launched the study, and a summary of the 2005 confer- ence on SBIR and the Phase III Challenge of Commercialization that focused on the Department of Defense and NASA. PROJECT ANTECEDENTS The current assessment of the SBIR program follows directly from an ear- lier analysis of public-private partnerships by the National Research Council’s Board on Science, Technology, and Economic Policy (STEP). Under the di- rection of Gordon Moore, Chairman Emeritus of Intel, the NRC Committee on Government-Industry Partnerships prepared eleven volumes reviewing—the drivers of cooperation among industry, universities, and government; operational assessments of current programs; emerging needs at the intersection of biotech- nology and information technology; the current experience of foreign government partnerships and opportunities for international cooperation; and the changing roles of government laboratories, universities, and other research organizations in the national innovation system.4 This analysis of public-private partnerships included two published studies 3 See the SBIR Reauthorization Act of 2000 (H.R. 5667—Section 108). 4 For a summary of the topics covered and main lessons learned from this extensive study, see National Research Council, Goernment-Industry Partnerships for the Deelopment of New Technolo- gies: Summary Report, op. cit.

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x PREFACE of the SBIR program. Drawing from expert knowledge at a 1998 workshop held at the National Academy of Sciences, the first report, The Small Business Innoa- tion Research Program: Challenges and Opportunities, examined the origins of the program and identified some operational challenges critical to the program’s future effectiveness.5 The report also highlighted the relative paucity of research on this program. Following this initial report, the Department of Defense (DoD) asked the NRC to assess the Department’s Fast Track Initiative in comparison with the operation of its regular SBIR program. The resulting report, The Small Business Innoation Research Program: An Assessment of the Department of Defense Fast Track Initiatie, was the first comprehensive, external assessment of the Depart- ment of Defense’s program. The study, which involved substantial case study and survey research, found that the SBIR program was achieving its legislated goals. It also found that DoD’s Fast Track Initiative was achieving its objective of greater commercialization and recommended that the program be continued and expanded where appropriate.6 The report also recommended that the SBIR program overall would benefit from further research and analysis, a perspective adopted by the U.S. Congress. SBIR REAUTHORIZATION AND CONGRESSIONAL REQUEST FOR REVIEW As a part of the 2000 reauthorization of the SBIR program, Congress called for a review of the SBIR programs of the agencies that account collectively for 96 percent of program funding. As noted, the five agencies meeting this criterion, by size of program, are the Department of Defense, the National Institutes of Health, the National Aeronautics and Space Administration, the Department of Energy, and the National Science Foundation. Congress directed the NRC, via H.R. 5667, to evaluate the quality of SBIR research and evaluate the SBIR program’s value to the agency mission. It called for an assessment of the extent to which SBIR projects achieve some measure of commercialization, as well as an evaluation of the program’s overall economic and non-economic benefits. It also called for additional analysis as required to support specific recommendations on areas such as measuring outcomes for 5 See National Research Council, The Small Business Innoation Research Program: Challenges and Opportunities, Charles W. Wessner, ed., Washington, DC: National Academy Press, 1999. 6 See National Research Council, The Small Business Innoation Research Program: An Assess- ment of the Department of Defense Fast Track Initiatie, Charles W. Wessner, ed., Washington, DC: National Academy Press, 2000. Given that virtually no published analytical literature existed on SBIR, this Fast Track study pioneered research in this area, developing extensive case studies and newly developed surveys.

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xi PREFACE agency strategy and performance, increasing federal procurement of technologies produced by small business, and overall improvements to the SBIR program. 7 ACKNOWLEDGMENTS On behalf of the National Academies, we express our appreciation and recognition for the insights, experiences, and perspectives made available by the participants of the conferences and meetings, as well as by survey respondents and case study interviewees who participated over the course of this study. We are also very much in debt to officials from the leading departments and agen- cies. Among the many who provided assistance to this complex study, we are especially in debt to Kesh Narayanan, Joseph Hennessey, and Ritchie Coryell of the National Science Foundation; Ivory Fisher and later Michael Caccuitto of the Department of Defense; Robert Berger and later Larry James of the Department of Energy; Carl Ray and Paul Mexcur of NASA; and Jo Anne Goodnight and Kathleen Shino of the National Institutes of Health. The Committee’s research team deserves major recognition for their in- strumental role in the preparation of this study. In particular, Dr. Robin Gaster deserves special recognition and thanks for his energy, commitment, and many insights. Without the research team’s collective efforts, amidst many other com- peting priorities, it would not have been possible to prepare these reports. NATIONAL RESEARCH COUNCIL REVIEW This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures ap- proved by the National Academies’ Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the process. We wish to thank the following individuals for their review of this report: Robert Archibald, The College of William and Mary; Richard Bendis, Innovation Philadelphia; David Bodde, Clemson University; Anthony DeMaria, DeMaria Electro-Optics Systems; George Eads, CRA International; John Foster, TRW De- fense and Space Sector (Retired); Fred Gault, Statistics Canada; Bronwyn Hall, University of California, Berkeley; Thomas Pelsoci, Delta Research Company; 7 Chapter 3 of the Committee’s Methodology Report describes how this legislative guidance was drawn out in operational terms. See National Research Council, An Assessment of the Small Business Innoation Research Program—Project Methodology, Washington, DC: The National Academies Press, 2004, accessed at .

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xii PREFACE Charles Phelps, University of Rochester; Michael Rodemeyer, Pew Initiative on Food and Biotechnology; Michael Squillante, Radiation Measurement Device, Inc.; Roland Tibbets, Search Corporation; and Richard Wright, National Institute of Standards and Technology (Retired). Although the reviewers listed above have provided many constructive com- ments and suggestions, they were not asked to endorse the conclusions or recom- mendations, nor did they see the final draft of the report before its release. The review of this report was overseen by Robert Frosch, Harvard University, and Robert White, Carnegie Mellon University. Appointed by the National Acad- emies, they were responsible for making certain that an independent examina- tion of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the institution. Jacques S. Gansler Charles W. Wessner

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