AN ASSESSMENT OF THE SBIR PROGRAM AT THE DEPARTMENT OF ENERGY

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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AN ASSESSMENT of ThE SBIR PRogRAM AT ThE DEPARTMENT of ENERgY 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 THE NATIONAL ACADEMIES PRESS Washington, D.C. www.nap.edu

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THE NATIONAL ACADEMIES PRESS 500 Fifth Street NW 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 National Academy of Sciences and 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: 978-0-309-11412-7 International Standard Book Number-10: 0-309-11412-8 Limited copies are available from the Policy and Global Affairs Division, National Research Council, 500 Fifth Street, NW, Washington, D.C. 20001; (202) 334-1529. Additional copies of this report are available from the National Academies Press, 500 Fifth Street, NW, Lockbox 285, Washington, D.C. 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); 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 National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. 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 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 M. Christina Gabriel Distinguished Professor and Director, Innovation Economy Ameritech Chair of Economic The Heinz Endowments Development Trevor O. Jones Director, Institute for Development Strategies Chairman and CEO Indiana University BIOMEC, Inc. Gene Banucci Charles E. Kolb Executive Chairman President ATMI, Inc. Aerodyne Research, Inc. Jon Baron Henry Linsert, Jr. Executive Director Chairman and CEO Coalition for Evidence-Based Policy Martek Biosciences Corporation Michael Borrus W. Clark McFadden Founding General Partner Partner X/Seed Capital Dewey & LeBoeuf, LLP Gail Cassell Duncan T. Moore Vice President, Scientific Affairs and Kingslake Professor of Optical Distinguished Lilly Research Scholar Engineering for Infectious Diseases University of Rochester Eli Lilly and Company Kent Murphy Elizabeth Downing President and CEO CEO Luna Innovations 3D Technology Laboratories 

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Linda F. Powers Charles Trimble Managing Director CEO, retired Toucan Capital Corporation Trimble Navigation Tyrone Taylor Patrick Windham President President Capitol Advisors Windham Consulting on Technology, LLC PROJECT STAFF Charles W. Wessner Sujai J. Shivakumar Study Director Senior Program Officer McAlister T. Clabaugh Jeffrey McCullough Program Associate Program Associate David E. Dierksheide Program Officer i

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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 Benjamin Roberts Robert Berger Consulting, LLC Harvard University Grant Black Rosalie Ruegg University of Indiana South Bend TIA Consulting Peter Cahill Donald Siegel BRTRC, Inc. University of California at Riverside Dirk Czarnitzki Paula E. Stephan University of Leuven Georgia State University Julie Ann Elston Andrew Toole Oregon State University Rutgers University Irwin Feller Nicholas Vonortas American Association for the George Washington University Advancement of Science ii

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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, Chair University Professor Emeritus Electrical and Computer Engineering Carnegie Mellon University Anita K. Jones 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 iii

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Contents PREFACE xiii SuMMARY 1 1 INTRODuCTION 11 1.1 SBIR Creation and Assessment, 11 1.2 SBIR Program Structure, 12 1.3 SBIR Reauthorizations, 13 1.4 Structure of the NRC Study, 14 1.5 SBIR Assessment Challenges, 15 1.6 Assessing SBIR at the Department of Energy (DoE), 19 1.6.1 Surveys of DoE SBIR Award-recipient Companies, 19 1.6.2 Case Studies, 21 1.7 Structure of the Report, 24 2 FINDINGS AND RECOMMENDATIONS 25 3 AWARD STATISTICS 42 3.1 Trends in Energy Research and Development, 43 3.2 Size of Individual Awards, 45 3.2.1 Phase I Awards, 46 3.2.2 Phase II Awards, 47 3.3 Geographic Concentration, 47 ix

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x CONTENTS 3.4 Multiple-Award Winners, 50 3.4.1 SBIR Award Clustering to Support Technology Development, 52 3.4.2 Development Funding Prior to SBIR Award, 54 4 COMMERCIALIZATION 56 4.1 Challenges of Commercialization, 56 4.2 Project Status, 57 4.2.1 Project Discontinuation, 58 4.3 Sales and Licensing, 58 4.3.1 Skew Effects, 59 4.3.2 Sales Expectations and Likely Future Sales, 59 4.3.3 Licensing, 61 4.3.4 Customers, 61 4.3.5 Marketing, 62 4.3.6 Additional Development Funding, 62 4.4 Further Investment: Phase III at DoE, 64 4.4.1 DoE SBIR and Venture Capital (VCs), 64 4.4.2 Equity Investments from Large Corporations, 65 4.4.3 Other Resources, 65 4.4.4 Matching Funds and Cost-sharing, 66 4.4.5 Non-SBIR Federal Funding, 66 4.5 Employment Effects, 66 4.6 Phase I Commercialization, 67 4.6.1 Commercialization Resulting from the Phase I Projects, 67 4.6.2 Follow-on Development Funding Resulting from the Phase I Projects, 68 4.6.3 Other Benefits of Phase I-only Projects, 69 4.7 Multiple-Award Winners, 70 5 AGENCY MISSION 72 5.1 Managing a Program with Multiple Objectives, 72 5.2 Alignment Issues for SBIR and the DoE Mission, 74 5.2.1 Research vs. Commercial Culture, 74 5.2.2 SBIR as a Tax, 74 5.2.3 Administrative Burdens, 74 5.3 Changing Perceptions of SBIR, 75 5.3.1 Supporting Program Missions, 75 5.3.2 Providing Research Quality, 75 5.3.3 Research Impact, 76 5.3.4 Comparative Research Value, 77 5.3.5 Project Ownership, 77

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xi CONTENTS 5.4 Capitalizing on Program Flexibility, 78 5.4.1 Balancing Commercialization and Mission Orientation, 78 5.4.2 Internal Reallocation of Topics Among Programs, 79 6 WOMAN- AND MINORITY-OWNED BuSINESSES 80 6.1 Woman-owned Businesses, 80 6.2 Minority-owned Businesses, 81 6.3 Success Rates for the Different Groups, 82 7 KNOWLEDGE EFFECTS 85 7.1 Publications and Intellectual Property, 85 7.2 Stimulating New Research, 86 7.3 Building Partnerships and Enhancing Networks, 87 7.4 SBIR and the Universities, 88 8 PROGRAM MANAGEMENT 90 8.1 SBIR in the Department of Energy, 90 8.2 Resources for Program Administration, 93 8.3 Topic Generation, 94 8.4 Award Selection, 95 8.4.1 First-step Technical Review, 95 8.4.2 Initial Review Approaches, 96 8.4.3 1995 Process Revisions, 97 8.4.4 Fairness of Competition, 97 8.5 Outreach, 98 8.6 The Application and Award Process: Awardee Comments, 98 8.7 Managing Information on Awards, 99 8.7.1 Reporting Requirements, 99 8.7.2 Freedom of Information Act, 99 8.8 Program Structure, 100 8.8.1 Differences Between Agencies, 100 8.8.2 Award Limits, 100 8.8.3 Time Frames, 100 8.8.4 Gaps between SBIR Phase I and Phase II Funding, 101 8.9 Participation of DoE National Laboratories in SBIR, 101 8.9.1 Overview of DoE National Laboratories, 101 8.9.2 Why SBIR Collaborations Are Not More Frequent, 102 8.10 Developments in Program Administration Since 2003, 103 8.10.1 Online Capabilities and Plans, 103 8.10.2 Program Manager Given More Control, 104 8.10.3 Phase II Supplemental Awards, 104

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xii CONTENTS 8.11 Actions Taken by DoE SBIR Program to Encourage Commercialization, 105 8.11.1 Evidence of Commercialization Included in Phase II Criteria, 105 8.11.2 Commercialization Assistance Services for SBIR Awardees, 105 8.11.3 Collecting Phase III Data, 108 8.11.4 Recognizing Success, 110 APPENDIXES A DOE SBIR PROGRAM DATA 113 B NRC PHASE II SuRVEY 135 C NRC PHASE I SuRVEY 155 D CASE STuDIES 165 Airak, Inc., 165 Atlantia Offshore Limited, 170 Creare, Inc., 176 Diversified Technologies, Inc., 185 Eltron Research, Inc., 193 IPIX, Inc., 199 NanoSonic, Inc., 204 NexTech Materials, Inc., 209 Princeton Polymer Laboratories, Inc., 216 Thunderhead Engineering, 221 E BIBLIOGRAPHY 227

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Preface Today’s knowledge economy is driven in large part by the nation’s capacity to innovate. One of the defining features of the U.S. economy is a high level of entrepreneurial activity. Entrepreneurs in the United States see 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 largest examples of U.S. public-private partnerships. Founded in 1982, SBIR was designed to encourage small business to develop new processes and products and to provide quality research in support of the many missions of the U.S. govern- ment. By including qualified small businesses in the nation’s R&D effort, SBIR grants are intended to stimulate innovative new technologies to help agencies meet the specific research and development needs of the nation in many areas, including health, the environment, and national defense. 1See Lewis M. Branscomb, Kenneth P. Morse, Michael J. Roberts, and Darin Boville, Managing Technical Risk: Understanding Priate Sector Decision Making on Early-Stage Technology Based Projects, Washington, D.C.: National Institute of Standards and Technology, 2000. 2For 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, D.C.: 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 make rec- ommendations on still further improvements to the program.3 To guide this study, the National Research Council 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 Steering Committee in turn drew on a distinguished team of researchers to, among other tasks, administer surveys and case studies, and to develop statistical information about the program. The membership of this research team is also listed in the front matter to this volume. This report is one of a series published by the National Academies in response to the congressional request. The series includes reports on the Small Business Innovation Research Program at the Department of Defense (DoD), the Department of Energy (DoE), the National Aeronautics and Space Administra- tion (NASA), the National Institutes of Health (NIH), and the National Science Foundation (NSF)—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, based on the assess- ments of the SBIR program at each of the five agencies. Other reports in the series include a summary of the 2002 conference that launched the study, and a summary of the 2005 conference on SBIR and the Phase III Challenge of Com- mercialization that focused on the Department of Defense and NASA. PROJECT ANTECEDENTS The current assessment of the SBIR program follows directly from an earlier analysis of public-private partnerships by the National Research Council’s Board on Science, Technology, and Economic Policy (STEP). Under the direction of Gordon Moore, Chairman Emeritus of Intel, the NRC Committee on Government Industry Partnerships prepared eleven volumes reviewing the drivers of coop- eration among industry, universities, and government; operational assessments of current programs; emerging needs at the intersection of biotechnology and information technology; the current experience of foreign government partner- ships and opportunities for international cooperation; and the changing roles of government laboratories, universities, and other research organizations in the national innovation system.4 3See SBIR Reauthorization Act of 2000 (H.R. 5667—Section 108). 4For 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 Tech- nologies: Summary Report, op. cit.

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x PREFACE This analysis of public-private partnerships included two published studies 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 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 Innoa- tion Research Program: An Assessment of the Department of Defense Fast Track Initiatie, was the first comprehensive, external assessment of the Department 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 com- mercialization 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 HR 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 over- all economic and noneconomic benefits. It also called for additional analysis as required to support specific recommendations on areas such as measuring outcomes for agency strategy and performance, increasing federal procurement 5See National Research Council, The Small Business Innoation Research Program: Challenges and Opportunities, Charles W. Wessner, ed., Washington, D.C.: National Academy Press, 1999. 6See 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, D.C.: 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 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 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 agencies. Among the many who provided assistance to this complex study, for this volume, we are especially in debt to Larry James of the Department of Energy and Robert Berger, formerly of the Department of Energy. The Committee’s research team deserves recognition for their instrumental role in the preparation and many revisions of this report. In that regard, special thanks are due to Philip Auerswald of George Mason University, Nicholas Vonortas of George Washington University, Grant Black of Georgia State Uni- versity, and for the report’s completion, Robin Gaster of North Atlantic Research Inc. Without their collective efforts, amidst many other competing priorities, it would not have been possible to prepare this report. Among the many contribut- ing Committee members, special thanks are due to Charles Kolb of Aerodyne Research. NATIONAL RESEARCH COuNCIL REVIEW This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the National Academies’ Report Review Committee. The purpose of 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: David Bodde, Clemson University; George Eads, CRA International; Maxine Savitz (Retired), Honeywell, Inc.; and Roland Tibbets, SEARCH Corporation. Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the conclusions or 7Chapter 3 of the Committee’s Methodology Report describes how this legislative guidance was drawn out in operational terms. National Research Council, An Assessment of the Small Business Innoation Research Program—Project Methodology, Washington, D.C.: The National Academies Press, 2004. Access this report at .

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xii PREFACE recommendations, 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 Academies, they were responsible for making certain that an independent examination of this report was carried out in accordance with institutional pro- cedures 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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