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Pane! ~ History and Current Legislative Perspective on the SBIR Program INTRODUCTION Robert Neal Office of Small and Disadvantaged Business Utilization U.S. Department of Defense Introducing the day's first panel on the origins and history of SBIR, Mr. Neal stated that the office he directs spends a great deal of time supporting the program and derives considerable benefit from it. He recognized the panel's main pre- senter, Roland Tibbetts, as being able to speak from a position of long and exten- sive experience with the program. ORIGINS OF AND COMMON MYTHS ABOUT THE SBIR PROGRAM Roland Tibbetts National Science Foundation (ret.) A Perspective on SBIR's Evolution Declaring his delight that the SBIR program is "on the radar screen of new public policy," Mr. Tibbetts expressed the hope that those in attendance would take an active part in enhancing its role and visibility. He recalled that, when he was a director of administration for NSF's former Research Addressing National Needs program in the Nixon administration, the small-business community approached the Congress out of dissatisfaction over the fact that, despite numer 41

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42 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM ous requests, the level of federal R&D money it received had been stuck at 3.5 percent for at least 15 years. Congress then directed NSF, over the agency's opposition, to place 7.5 percent of the RANN program's funds for 1976 with small business firms. Because of the sensitivities occasioned by the Golden Fleece Awards that Senator William Proxmire (D-Wis.) was giving out at the time to stigmatize wasteful government spending, Mr. Tibbetts was asked to come up with a pro- gram that would ensure that the proposals submitted by the small firms would be of high quality. A Changing R&D Landscape The U.S. R&D landscape was very different 20-25 years ago: Small, high- technology firms had been concentrating in Silicon Valley and around Boston's Rt. 128 for some 20 years, but, although these areas were active then, they were "nothing like they are today." Detroit, meanwhile, was having problems with inflation, and unemployment in the auto industry was high. Even at that time, Congress understood "that small firms were good at tech- nological innovation, and that technological innovation was important to eco- nomic growth." Commissions formed as long ago as the mid-1960s to look at the importance of small, high-technology firms that had repeatedly issued reports and recommendations highly favorable to small business. Still, very few of those recommendations were acted upon, because, Mr. Tibbetts recalled, "they were opposed by other recipients of federal R&D" funding. Today's landscape provides a sharp contrast: The eastern half of Massachusetts and in the area south of Sacramento, . . California are "alive with small, high-tech firms." Venture-capital investments reached new highs in 1996 and 1997, rising 20 percent in 1996.i Initial public offerings of stock were at record levels in 1996 and fell just short of a new record in 1997. Small Business Investment Corporations are currently at record levels of investment. Of those scientists and engineers primarily engaged in federal R&D, the number working for firms with 500 or fewer employees exceeds the num- ber at universities. The number of scientists and engineers employed by small firms is approximately one-fifth of all scientists and engineers. The importance of high-technology firms is generally recognized by the ~ For a brief review of venture captial in the U.S., see the paper by Harvard Business School's Joshua Lerner in the Annex.

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PANEL I 43 public but, even including the awards that SBIR distributes, small firms continue to receive only about 5 percent of federal R&D funding. SBIR's Early Years Mr. Tibbetts cited numerous reasons for his interest in small, high-tech firms beyond his desire to increase their participation in government R&D. As vice president of two such firms for about 12 years and as founder and director of Allied Capital in Washington, he had observed that the cohort of executives of such firms was "possibly the best" that he had ever seen: "You are smart if you are in high technology; you are extremely courageous; you are extremely hard working; you are willing to risk a great deal including your job, because you are confident you can get another one; [and] you are willing to tackle in fact, you want to tackle breakthrough ideas, which are tremendously important to the future of the country." But despite the great and growing importance of small, high-tech firms to the economy, "they still have a distinct problem" in winning recognition in the sphere of R&D policy. Efforts by Senator Edward Kennedy (D-Mass.) in 1976 helped raise small firms' share of NSF's R&D funds from 7.5 to 10 percent, and the following year an SBIR program came on stream at NSF. NSF made 42 Phase I awards in the program's first year, and about the same number of awards in each of the two subsequent years. Enthused by the program, small firms approached other fed- eral agencies to propose that they follow NSF's lead; after meeting with a cool reception in most cases, the firms went to Congress and the Small Business Administration, with the result that legislation was passed in 1982 creating a new program, which started up in 1983. To date, the SBIR program has made 40,000 awards worth $7 billion to 9,000 firms. When the program began, Mr. Tibbetts recalled, "it was almost impossible, with a high-risk idea, to get funding, and almost equally difficult to get an accep- tance from a venture-capital firm" or from the individual "angel" investors that could then be found. Additionally, he was "appalled" to find that "there was no interest in the government in maximizing return on investment," and that using the term "com- mercial potential" in a proposal was likely to do more harm than good. He hoped that changes could be brought about leading to the recognition of small, high-tech firms' importance in converting government R&D into public benefit through technological innovation and commercial applications and in stimulating eco- nomic growth. SBIR Program Design Once recognition had been attained, Mr. Tibbetts asserted, the "trick" was to design a program that would effectively take advantage of what small firms had

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44 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM to offer: The creation of a three-phase format has been SBIR's answer to that challenge. The intention behind Phase I, which originally provided $25,000 over six months, was to "use the least amount of money for the shortest period of time" so that the largest possible number of ideas could be funded "to see whether they had promise." Intended to fund high-risk projects from idea to prototype, SBIR designed Phase I so that money would be saved for larger investments in Phase II; this allowed the program to "provide what amounted to preventure capital" to help a firm to lower its risk and put itself in a position to obtain private financing. "Most breakthrough ideas" Mr. Tibbetts told the audience, "are simply too high risk even for risk-taking venture investors. Consequently, if government, which has a great deal of investment in cutting-edge research, could allow small, high- tech firms to participate in government research, we would possibly lower the risk with successful research in areas that were acceptable to private investors. And I think this has happened." The evaluation process under Phase I, whose base has risen to $100,000 today, has successfully allowed program managers to establish the validity of firms' ideas. At the same time, it has provided proposers the "enormous opportu- nity" of having perhaps six to ten engineers who are versed in the field evaluate their submissions. Economic Impact of SBIR Before leaving NSF, Mr. Tibbetts reviewed 50 awards granted between 1977 and 1992. The awards selected for review were those whose winners attributed at least $2 million in sales to the award; overall, the 50 firms pointed to $9.1 billion in direct and indirect sales they believed would not have accrued if the program had not existed. The $9.1 billion figure is 30 times NSF's total investment in SBIR from the beginning of the program; the associated private investment was $963 million, three times the total cost of NSF's program. Falling outside the realm of Mr. Tibbetts' review were many other awards that resulted in commer- cialization.2 Job Creation: Although acknowledging the difficulty of pinning down the number of new jobs resulting from the SBIR awards, "because people work on many different projects," Mr. Tibbetts noted that the 50 companies totaled 1,254 employees and average of 25 employees per firm at time of award, and that they created a total of 10,267 new jobs in the 15-year period on which the review was based. Patents and Collaboration: The firms received a total of 1,109 patents in that period; they formed 394 research collaborations with universities, 404 with 2 This paper, which was distributed at the meeting, is included in the Annex.

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PANEL I 45 industrial companies, 111 with national laboratories, and 50 with other organiza- tions. Funds for New Ideas: All 50 firms said the major benefit of the SBIR pro- gram was that it was willing to fund ideas that they were unable to get funded before, and 45 of the 50 said that SBIR was critical to their growth, to start up, or to survival. Indirect Benefits: The indirect benefits of the program, the firms said, were the ability to hire high-quality people, plus the credibility, which they would not have had without the program, that allowed them to attract better consultants, university collaborations, venture capitalists, and customers. Mr. Tibbetts observed that SBIR was initially accused by "some groups, societies, and associations" of funding commercial research with public money. "An economist at NSF at the beginning of the program said, 'If you do one thing, make sure you do not substitute public funds for private funds.' And we did not. All SBIR funding is to pursue R&D on government agency needs. We did add something important, though: In Phase III we would pursue commercial applica- tions to increase the return on investment from government R&D." DISCUSSANTS Patricia R. Forbes Senate Committee on Small Business Political Climate for SBIR Ms. Forbes began by pointing to the popularity that the SBIR program enjoys among Democrats on the Senate Small Business Committee the committee's ranking minority member Sen. John Kerry (D-Mass.), is a strong supporter and by expressing her belief that Republicans on the panel back it as well. Calling the SBIR program "easy to like," she noted that since its inception it has extended more than 41,000 contracts and grants, representing more than $6.5 billion in research opportunities overall, to small, high-technology companies throughout the United States. Agencies that participate in the projects and small firms alike have shared Congress' enthusiasm for the program; since 1989 the SBIR program has received eight favorable evaluations from the U.S. General Accounting Office (GAO) and others. She praised the program for serving "an invaluable function": fostering small businesses' participation in meeting federal R&D needs and helping draw private capital investment to their innovative work. Without the program, many techno- logical innovations would not have been developed; there would have been no

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THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM 46 other way for small companies to finance the research or attract private capital at later stages of development. A demanding competitive awards process ensures SBIR's rigor, but the pro- gram is nonetheless flexible, Ms. Forbes observed. Noting that coming up with a viable product or process may require numerous tries, and that lessons learned from several research products may only later result in marketable products, she labeled the program's ability to accommodate the innovation process "a strength, not a weakness." SBIR's program design, which permits agencies to decide whether their mission needs are best met by contracts or grants, has yielded high- quality products and processes that have been useful to the agencies, have often resulted in private-sector sales, and have bolstered international competitiveness of the United States. Although she highlighted the commercial success of a SBIR award-winning firm from Massachusetts, Ms. Forbes stressed that cases of companies "located in recognized high-tech states . . . are not the whole SBIR program." Often over- looked have been the achievements of SBIR winners in parts of the country "not known for being technological or innovative centers." She underlined the cumu- lative economic and technological effect of such SBIR-winning firms. Prior to the run-up to the legislative reauthorization of the SBIR program in 2000, the Senate Committee on Small Business will be looking for ways to sup- port and strengthen the program. Ms. Forbes said that she planned to report the views and concerns of symposium participants to Senator Kerry and other Demo- crats on the committee. DISCUSSANT Paul Cooksey Senate Committee on Small Business Personal Perspectives on SBIR Remarking on the presence at the symposium of people associated with the early years of SBIR, including Lee Mercer, a former aide to Senator Warren Rudman (R-N.H.) and now head of the National Association of Small Business Investment Companies, Mr. Cooksey regretted the absence of Tom Powers of the House Committee on Small Business, who had played a very influential role in developing the program. Mr. Cooksey was introduced to the SBIR program not long after his arrival at the Small Business Administration (SBA) in 1991. At a meeting called to plan the agenda for a management retreat, Mr. Cooksey facetiously suggested having the head of the SBIR program at the agency speak so that he himself could learn about the program. "I looked around the room, there were the top 40 people at SEA, and none of them knew what the program was about either," he recalled.

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PANEL I 47 Mr. Cooksey has since concluded that SBIR is "an exceptional program to target a very small amount of money from our government to some exceptionally fine and very effective, small, high-tech firms." Stressing how low the program's funding level of $1.1 billion per year is in the context of the overall federal budget, he contrasted it with the contribution that small business has made to job creation in recent years and commented that "the SBIR program creates the type of energy and innovation that is so essential in a small business community." The Current Legislative Climate With the SBIR program set to expire on October 1, 2000, the Senate Com- mittee on Small Business is beginning to examine it, because both the committee's chairman, Senator Christopher Bond (R-Mo.) and Senator Kerry are extremely interested in its future. Last year, Senator Bond requested that GAO make a study of the program "so that he could have a full picture about the success of the program and where it needs to go after the year 2000." At a briefing the week before the symposium, GAO "clearly indicated" to Mr. Cooksey that the report would be favorable. There is nonetheless a need for improvement. For example, one question is whether more than 2.5 percent of the R&D budgets of the partici- pating agencies should be set aside for SBIR. Noting that proposals to expand the set-aside might provoke controversy, Mr. Cooksey said that all 18 members of the Senate Committee on Small Business believe in the program and predicted that not a single member of the Senate would oppose renewing it. DISCUSSANT James Turner Minority Counsel House Committee on Science Mr. Turner pointed out that he was attending the symposium with his Repub- lican counterpart on the House Committee on Science, Scott Geesey. Stressing that he was not speaking on behalf of any particular member of the committee, Mr. Turner said that, contrary to some perceptions, he does not believe that the House is out to terminate the SBIR program. He said that the House Committee on Science and the Senate Committee on Small Business do differ in their defini- tions of the SBIR program and the ways in which it should be improved. He expressed the hope that the two Congressional committees would "proceed in good faith to try to work out any differences in a friendly way." Focus on SBIR Results Mr. Turner stated that the Government Performance and Results Act (GPRA)

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48 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM provides the current "context of improvement to programs" of the federal govern- ment and recalled that an amendment passed with the extension of the Small Business Technology Transfer program made the latter, like most other federal programs, subject to GPRA, obliging it to establish performance goals and to measure its results against those goals. "I think this is the least we can ask of any program," he said, indicating that a similar measure would be proposed in con- junction with the SBIR program's reauthorization. Program Scale SBIR is notable for its sheer size. Even though SBIR receives only 2.5 per- cent of agency R&D budgets, it may be the largest federal grants program that exists. Its annual funding (over $1.1 billion) probably exceeds the total expendi- ture on the Advanced Technology Program (ATP) since that controversial pro- gram started up in 1990, and it likely amounts to twice the overall funding of another program managed by the National Institute of Standards and Technology, the Manufacturing Extension Partnership. Although it may be "small by budget standards, it's not small by appropriations standards or authorization standards," Mr. Turner said. He advised those in attendance to "expect the level of scrutiny that a big program deserves." The Need for Evaluation In light of its size, SBIR is, in his view, "a stealth program in some ways." There has been far less formal evaluative work done on the SBIR program than on the much younger ATP, and far less effort has gone into employing expert advice to perfect the former program. Yet, since SBIR's start up in 1983, small business, collaborative research practices, the ratio of federal to private-sector investment in R&D, and technology itself have all changed significantly. Mr. Turner cited a recent study by the Berkeley Roundtable on the International Economy indicating that focusing on technology transfer may now be as impor- tant a role for the federal government as funding research. Potential for Program Improvements Although conceding that the base of the SBIR program is not likely to change dramatically, he said that attempts to improve it should focus on: whether the program has been a success and finding evidence "beyond anecdotes" to measure its success. What share of government contracts did small business hold when the program started, and what is its share now? If there have been gains, how many of the gains can be credited to the SBIR program?

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PANEL I . 49 whether innovation truly is concentrated in firms with 25 or fewer em- ployees. If so, should firms with up to 500 employees that may have subdivisions and joint ventures be considered small businesses? Is there a need for rethinking what type of company should be funded under SBIR? whether more extensive federal-private partnering might ensure and speed the commercial success of SBIR award winners. Should applicants be required to submit business plans from the beginning, as they are under ATP? Should agencies make their research capabilities available to their SBIR awarders? whether integrating SBIR into the technology transfer programs of its sponsoring federal agencies would help insulate technologies developed by SBIR winners from alleged cream-skimming on the part of foreign interests. whether a conscious effort should be made to tie SBIR into the large num- ber of state and local small business economic development programs that have come into existence since 1983. Conflicting Program Goals Mr. Turner then addressed what he called "the schizophrenic nature" of the SBIR program: Awards are required to support research that meets the needs of the awarding agencies, yet products developed under the program are expected to be successful in the commercial marketplace. Thus, there may be a conflict between the goals of procurement and innovation. He called for a broader exami- nation of the nature of government agency needs and a keener attempt to identify the end users of products developed with SBIR funding. If the client is going to be the federal government, "maybe what we need to do in terms of partnering and support is to make sure that those small businesses are getting into the supply chain and the programs for the federal government," he said. "Maybe, if there is going to be an increase in funding for small businesses, we need to be looking at the way that they get a bigger share of the pie." Although acknowledging that some agencies may already have undertaken such efforts, he proposed taking a more systematic approach. Similarly, attention should go to determining how firms whose products are destined for the commercial market can be linked into private-sector supply chains and to ensuring that large corporations take SBIR firms seriously. Recalling hearings that took place before the SBIR program's creation, Mr. Turner noted that the Big Three automakers indicated they "just would not touch" breakthrough ideas under development in small firms out of fear of patent problems: The larger corporations "did not want to listen to an inventor and then somehow be preju- diced if one of their people came up with the same idea." Programs like SBIR can prove valuable by facilitating mutually beneficial contact between the ulti

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so THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM mate user of a product and its inventor, thus closing this gap in the innovation system. Summing up, Mr. Turner said that the House Committee on Science does not consider itself an enemy of the SBIR program. But unlike the Senate Committee on Small Business, which is the official advocate for small business, the Science Committee, as the official advocate for research and competitiveness, has a broad constituency that includes universities and larger companies as well as small busi- ness. "We do not think of small business as an island," he said, "but we would like to work with [the small business] community to find ways to create win-win situations for America and for its small businesses as well." DISCUSSION Opening the discussion period, Mr. Neal called on Robert Carr of the Sci- ence and Technology Policy Program at SRI International, who asked whether there is a significant number of firms that have won multiple SBIR awards and, if so, whether that is positive or negative for the program. In answer, Mr. Turner said that one company has won over 300 awards in the 1990s, that other compa- nies are close to that number, and that a sizable number of companies have won 50 or more awards over the life of the program; many more companies have won a single award or a few awards. Amendments addressing the case of repeat awards have been offered in the course of the program's last two reauthorizations, indicating that it is viewed by some as a problem, and Mr. Turner said that he would not be surprised to see such amendments in the upcoming reauthorization as well. The phenomenon is evi- dence of the program's schizophrenic nature, he argued, contending that many award winners are working as "government contractors rather than innovators," and stating, "You have to decide what your real purpose for the program is before you know whether it' s a problem or not." Agreeing with Mr. Turner, Mr. Cooksey said that the Senate Committee on Small Business expects information from GAO on the magnitude of the prob- lem if in fact a problem exists, or exists for agencies other than the DoD. The committee will also look at other questions, such as one raised three years ago by GAO: multiple payments to the same contractor for the same project. Ms. Forbes cautioned against doing anything that might change the competitive nature of the program, to which she attributed its success. Mr. Neal noted that the DoD SBIR program has recently instituted a Fast Track pilot program designed to address the problems raised by Mr. Turner and Mr. Carr with the ultimate goal of ensuring that products under SBIR become commercial. The desire to ensure greater success in commercializing products led to the institution of the Fast Track pilot, but it has been in place for only a short time and the results are still under examination. Defense Department offi

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PANEL I 51 cials are working with Congress to determine performance measures for the SBIR program. Martin Apple of the Council of Scientific Society Presidents expressed con- cern at "how Congress in particular, and the whole of Washington, D.C., attempts to manipulate the innovation systems of the country without understanding them." Calling the overall innovation system very delicate, he claimed that how such programs as SBIR and ATP fit into the system is not well understood, and he warned that attempting to improve the system without fully understanding it might do more harm than good. E. Martin Duggan of the Small Business Exporters Association asked whether any data exist that indicate SBIR participants' level of success in inter- national trade. Mr. Cooksey acknowledged that there is a lack of good data on this and said that his committee would bring up the matter with GAO. Address- ing the comments of both Dr. Apple and Mr. Duggan, Mr. Turner said that, with reauthorization of the SBIR program, he does "not think anyone believes that the program is not going to be renewed, and [has] not heard anyone who has said that the program can not be improved." Most valuable at this time would be sugges- tions as to which aspects of the program should be studied to help Congress, which he expected to "tinker at the edges [of SBIR] more than turn the program on its side." He encouraged those in attendance to pass along their ideas to him and his colleagues in the ensuing weeks. Mr. Tibbetts, referring to his review of 50 awards, said that 42 of the firms exported and that exports accounted for 34 percent of the $9.1 billion in direct and indirect sales attributed to the SBIR program. James Woo of the Small Business Technology Coalition praised Mr. Turner as a friend of the SBIR program for highlighting what he also sees as its "schizo- phrenic nature." That all agencies attempt to run the program using the same metrics constitutes a problem in light of the agencies' differing missions. Dr. Woo called putting an emphasis on commercialization at the DoD or NASA "just the wrong metrics," whereas fostering economic development is an important goal for NSF or the National Institutes of Health. He urged participants to reflect on how the program's structure might be changed so that each agency could employ . . . . . appropriate metrics In measuring its success.