Click for next page ( 63


The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement



Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.

OCR for page 62
Pane! Case Studies INTRODUCTION Dorothy Robyn White House National Economic Council Speaking as the National Economic Council official whose portfolio includes small business and technology issues, Dr. Robyn noted that the Clinton adminis- tration has been very supportive of the SBIR program. She recalled that President Clinton and Vice President Gore campaigned in 1992 in support of legislation doubling SBIR funding, and she said that the administration has consistently backed the program's extension. She nonetheless recognizes that "there is an increasing level of concern, resistance, [and] hostility in some of the agencies toward SBIR." Traditionally, she pointed out, SBIR has been viewed within some executive branch agencies as a tax on the R&D budget; over the past few years, as the SBIR set-aside has grown but R&D budgets have not, some agency officials who had been content to overlook the program's impact on their resources have become increasingly concerned "about the size of the pie that [SBIR] is taking." Dr. Robyn expressed her own view that this development is an opportunity rather than a problem. DoD has transformed its SBIR program, which had had the reputation of being weak, under the leadership of Dr. Flamm, Jon Baron, and Mr. Neal; some other agencies are moving in the same direction. When Phillip Lader was head of the Small Business Administration and Mary Good was under secretary of Commerce for technology, the Clinton administration started an inter- agency effort aimed at propelling internal reform of SBIR that would "make it 62

OCR for page 62
PANEL III 63 more driven by agency missions" and, consequently, help achieve greater buy- in on the part of the agency officials who run it. This effort has lapsed, but Dr. Robyn saw the current symposium as a chance to review some of the ideas that were the basis of SBIR reform early in the Clinton administration. Cautioning against a "SBIR love-in," she called on the symposium's participants to offer constructive criticism as the only way to ensure progress. RELATIONAL TECHNOLOGIES Gary Morgenthaler General Partner Morgenthaler Ventures Dr. Morgenthaler introduced himself as a past recipient of SBIR grants and the founder of a software company spun out of University of California at Berkeley that was formed in 1980, taken public in 1988, and sold in 1990. For the past eight years he has been general partner of a private equity venture-capital firm in California that mainly funds high-technology ventures. With a new $200 million fund now in formation, the firm will manage $500 million in capital. The fund has financed about 150 companies, most of them in the fields of information technology and health care; 34 of the last 62 firms the fund has invested in are today public companies. "We are early-stage investors," Dr. Morgenthaler said, "but we fund high-growth companies and we build companies that target public markets." Personal Lessons from SBIR Ingres, a pioneering relational database management systems software com- pany founded by Dr. Morgenthaler nearly two decades ago, received SBIR grants totaling $650,000 in 1984, 1985, and 1986. It grew to 1,300 employees "from a raw start-up" and posted $160 million in revenues before being sold; today, as a division of a larger company, it has revenues in the range of $200 million. The company has generally been viewed as a success, having achieved 100 times return on initial capital and ten times overall capital invested. It has produced three spin-out firms whose combined market capitalization has climbed above $1 billion. Boeing was a partner in implementation, and its AWACS (airborne warn- ing and control system) program used the technology in the Gulf War, evidencing that the technology delivered "lots of social returns as well as economic returns." Among the lessons his company learned through its involvement with the SBIR program, Dr. Morgenthaler includes the importance of grantsmanship: the art of figuring out which grants will be awarded and which will not. But, he stressed, his experience taught him that "if you delivered on your promises, the

OCR for page 62
64 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM SBIR was fairly benevolent and provided support to the companies that really took the program seriously." The Role of the Venture Capital Industry Dr. Morgenthaler noted that the venture-capital sector boasts 600 firms with 2,500 partners in North America and that its market has grown from about $4.5 billion 18 months ago to a projected $9 billion for 1998. Because "angel" inves- tors fund ten times what venture-capital firms fund, the venture-capital sector may in fact be viewed as the tip of the investment iceberg. Still, between 20 and 30 percent of initial public offerings (IPOs) are venture-capital backed, and the U.S. venture-capital industry is "the envy of most countries of the world" because of its success in creating both jobs and wealth. The Silicon Valley model is being emulated not only in Boston, New York City, Seattle, Austin, and northern Virginia, but in the United Kingdom, Sweden, Israel, Taiwan, and Singapore. Citing a recent study by Coopers & Lybrand, Dr. Morgenthaler noted that venture-backed companies displayed annual sales growth of 38 percent as com- pared with 3.5 percent for Fortune 500 companies. Similarly, job creation was 33 percent annually in venture-backed industry versus -3.6 percent for Fortune 500 companies; venture capitalists supported firms that had four times as many engi- neers and scientists in management as the U.S. average. Compared with the national average, venture-backed firms have three times the R&D intensity, four times the R&D dollars per employee, and 2.5 times the R&D dollars per dollar of equity. About 81 percent of the venture-capital industry's dollars go to informa- tion technology and to health care, including biomedical devices and biotechnol- ogy. In Dr. Morgenthaler's opinion, venture-capital firms are investing in the types of firms and helping to create the types of jobs that will be necessary to U.S. economic competitiveness in the coming century. Explaining that the venture-capital industry cycles in the way other financial services sectors do, he said that its current position at 2.5 times the peak of the earlier cycle and seven times what the periodic low was as late as 1991 constitutes a boom. Returns have been exceptional: Venture capitalists have delivered to the market about 1,250 IPOs during the current decade, including 20 percent of all IPOs in 1995 and 31 percent of all IPOs in 1996, even though the venture-capital sector represents only about 10 percent of overall private equity investment in the U.S. economy. Economic Returns to SBIR Focusing his comments on the area of economic rather than social returns, Dr. Morgenthaler said that, although the SBIR funds many worthwhile programs, "like all government programs [it] is subject to distortions and even to abuse."

OCR for page 62
PANEL III 65 He referred to the "SBIR mills" that have received between 50 and 300 awards, calling the figure "slightly mind-boggling" and saying that, in such cases, "tax- payer value tends to get obscured." He then proposed that closer collaboration between the venture-capital industry and the SBIR might benefit the program, arguing that the venture-capital community's objectives and those of the SBIR program overlap directly. "My proposal is that good science may be a necessary [criterion] but is not a sufficient criterion for evaluating SBIR grants," Dr. Morgenthaler stated. "Growth companies need investor capital, but growth companies also need man- agement, and if you evaluate your grants solely on the basis of good science, you will find that these are companies that do not build viable commercial entities and take that science to the marketplace." Venture capital, in contrast, is instrumental in building companies: "Venture capitalists recruit senior management, includ- ing CEOs, for these companies; they help set market strategy; they syndicate financings; they broker corporate partnerships; and they oversee the daily hard work of corporate governance." But although venture capital funds development, it funds very little research, even though many of the companies it supports are capable of doing first-class research. SBIR plays the role of enabling small companies, including venture- backed companies, to undertake high-risk research projects. "By placing its grants alongside those grants from the private equity industry," Dr. Morgenthaler stated, SBIR "maximizes the chance that excellent research will be coupled with effec- tive management and adequate financing." Areas for Improvement in SBIR He then named several key issues he believes SBIR needs to address: . Timing. The 18 months that can pass from an initial proposal to a Phase II grant is, in today's context, "an eternity," during which an idea can lose its competitive value as the market moves on. Social returns. Although critical, this issue is one about which the venture- capital industry has little to say. Peer review. Dr. Morgenthaler suggested that SBIR look to the venture- capital industry in evaluating proposals that are not of overwhelming social value but might still be worth supporting in and after Phase II.

OCR for page 62
66 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM DIGITAL SYSTEM RESOURCES Rich Carroll President The Need for Innovation at DoD Mr. Carroll began by declaring his support for leaving the SBIR program unchanged, explaining that his firm, which developed new SONAR for the U.S. submarine fleet, has been successful under the program in its current form. He then proposed to speak, from this admittedly "biased" position, about his per- sonal experiences with SBIR in order to contribute one answer to the question, "What is the story behind the story of each [SBIR] success?" Referring to a copy of the DoD budget, Mr. Carroll pointed out that, although the department's R&D allocation is down 14 percent this year, the Pentagon still has around $36 billion to spend on R&D annually half of the federal government's total expenditure on R&D and one-quarter of the nation's. In light of this, he argued, no one should be shocked to learn that a DoD contractor like his firm is a recipient of SBIR awards. "It' s very important to get innovation into the DoD," he stated. "I think that the DoD needs innovation to protect our nation more than our commercial sector needs innovation to improve the quality of life in our nation." Commercialization at DoD The commercialization focus of the SBIR program is one area in which Mr. Carroll's company has experienced some difficulties: It has had submissions turned down in both Phase I and Phase II because it attempts to commercialize only within DoD. According to proposal evaluations received from the depart- ment, he said, his company has been deemed ineffective in commercializing its products despite the fact that it has sold products to the DoD for $50 million per year that were developed with the aid of the SBIR program, and despite the fact that 50 percent of the Phase I and Phase II awards it has won have resulted in sales. He attributed this negative judgment to a perception within the program that "commercialization" refers only to sales to the private sector, and he recom- mended guarding against the spread of this attitude throughout the SBIR program. Strategies for SBIR Proposals Mr. Carroll outlined how he goes about submitting a SBIR proposal and attempting to commercialize it within the DoD. First, he holds "innovation focus groups" about every two months in which "innovative people" among the company's 200 employees come together. "We say: 'What can we do to be

OCR for page 62
PANEL III 67 innovative, [to] come up with new ideas and more affordable ways of addressing the needs of the DoD?"' Each idea is written up just as it would be in an SBIR proposal and handed out to as many people as possible who might be interested in pursuing it as a topic under SBIR. "Innovation," he explained, "really starts at the topic." Besides working with SBIR officials, Mr. Carroll works with participants in other programs, noting that it is in weapons acquisition that most of the DoD money is spent. He tries to find out who is running such programs as the F-18 jet, the new attack submarine, and other programs that have billions of dollars invested in them; he also tries to find out what their problems are and how tech- nology could help solve the programs. He then attempts to interest the acquisi- tion managers in those technologies because he knows that, "in the long run, they are going to be the customer." Second, Mr. Carroll bids on the topics that come out, with the firm spending a great deal more money bidding Phase I topics than it receives in Phase I awards. Immediately after winning a Phase I award, he tries to determine what the com- pany should do in Phases I and II to support the acquisition managers. "I pretty much ignore the SBIR topic for now," he stated. "It was one paragraph. It was a good idea, and people are interested in it but, again, I'm interested in helping the acquisition managers build these weapons systems in the most cost-effective and affordable way." Thus, when submitting a Phase II proposal, Mr. Carroll already knows that there will be a client for the technology if it is developed. In the event that he has not been able to find anyone who is interested in the technology and willing to put money up to back it, he will not bid in Phase II: In such a case, he does not think he will win and does not want to spend any more time on it. In some case, he has identified a weapons acquisition manager who is interested in buying his technol- ogy but he can not get a Phase II award because he fails to meet "some other criteria in the program." Expressing frustration over such experiences, he called for improvement in this aspect of the process. In Phase III, he said, it is important that his company continue to access R&D through the DoD component interested in the technology. Summarizing, Mr. Carroll underscored three features of DoD's SBIR pro- gram as being particularly important. The first is that it gives small businesses an avenue for doing business with the agency. He said that his firm's sale of SONAR technology to the Navy would never have occurred without the SBIR program because no procurement has ever come out for that type of item. The second important feature is that the program provides small firms a customer right from the start. The third is that it gives the firm the data rights necessary to carrying a technology forward and getting the DoD to continue to do business with the firm.

OCR for page 62
68 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM QUANTUM ENERGY TECHNOLOGIES John Preston President and CEO Rather than presenting a case study of one of the SBIR award-winning com- panies he has started, Mr. Preston said that he was addressing the symposium in the capacity of senior lecturer and co-director of MIT' s Entrepreneurship Center. He expressed his desire at the outset to endorse as "absolutely right on target" the results of the paper outlined by Dr. Lerner during the second panel. He added that Dr. Lerner's conclusions have been corroborated by research done at MIT on SBIR awards and on job and wealth creation in the United States. Why SBIR is Needed Asking "Why do we need the SBIR program?," Mr. Preston reminded the audience that, although incremental innovation occurs in the nation's large com- panies, radical innovation does not. A study by MIT's Professor Utterback of 150 radical innovations dating from the past 100 years failed to come up with a single case in which the radical innovation had been pioneered by a market leader. Mr. Preston recalled Western Union's decision in the 1880s to decline Alexander Graham Bell's offer of an exclusive license to the telephone on the grounds that the technology lacked commercial viability, as well as similar cases in which established firms responded to the arrival of a new technology as a threat rather than an opportunity. "If you look at the 'bang for the buck' that the U.S. government is getting for the dollars that it's spending," Mr. Preston argued, "I would say that basic research and SBIR are way, way at the top." One reason for this, which was established in a study by David Birch that Mr. Preston described as having flaws but that was basically accurate in its conclusions, is that 70 percent of the net new jobs in the United States are being created by only 4 percent of the nation's com- panies. The overlap between the characteristics of the companies that have created the jobs and those of the companies that the SBIR program tries to finance is extremely high. SBIR and Time to Market SBIR has also helped catalyze improvements that have allowed products to get to market faster. To illustrate the importance of this, Mr. Preston turned to the issue of innovation cycles, noting that when a radical innovation is made, it goes through a period of rapid change that is then followed by a period of incremental improvement. The United States is particularly good at the creative end of that spectrum; in industries such as software that are driven by creativity, the United

OCR for page 62
PANEL III 69 States does extremely well. However, in industries like consumer electronics that are driven more by incremental improvement, Japan is a very strong competitor. Over the past ten years, however, U.S. companies have recaptured 20 percent of the global semiconductor industry "totally at the expense of the Japanese." The reason this has occurred, Mr. Preston argued, is that as product half-lives have shortened and the speed at which products must be brought to market has increased, the creative component of a product in the case of integrated circuits, for example, the microcode used to design the chip has become more important as a function of time. He reported being told by the outgoing head of technology for Hewlett-Packard, Joel Birnbaum, that getting to the market one month earlier is worth more than all the engineering and development costs of a typical Hewlett- Packard product, whereas six months changes the lifetime profitability of a prod- uct by 33 percent. Addressing the Technology "Funding Gap" Mr. Preston argued that SBIR, by boosting spending at the base, may increase the probability of technologies making it through the "funding gap" that exists in many U.S. industries, particularly those connected with the physical sciences. While in the United States the government spends on basic research and industry spends on commercialization, very little investment is made on the first economic proof of concept. Acknowledging that many would contend that this funding gap is not real because the free market evens it out, Mr. Preston cited the export of U.S. technology its loss of inventions made in its own laboratories to foreign competitors and insisted that other countries are better at commercialization. One example among many is the hard-disk drive, a product that was invented in this country; Singapore now accounts for 70 percent of global disk drive pro- duction. Commenting on the national technology plan of Singapore, on whose National Science and Technology Board he has served, Mr. Preston said that Singapore and other countries are "picking winners very openly" and investing very heavily in the funding gap. Meanwhile, the emphasis of U.S. venture funds has, over the past ten years, shifted to the later stages of investment. Calling the SBIR program and the Commerce Department's Advanced Technology Program early-stage investors, he praised them for "attacking a need at the earliest, where it's really the deepest in the trough." Suggestions for Changes to SBIR One potential improvement in the SBIR program suggested by Mr. Preston is increasing the number of Phase II awards at the expense of Phase I awards. In attempting to finance an innovative technology, a company can either inject a small amount of money over a long period of time or be more aggressive and investing that money in a shorter period of time. He supported his proposal to

OCR for page 62
70 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM consider shifting the relative weight of Phase I and Phase II investments with the contention that companies which do very few things very well and make a few aggressive investments outperform those which do many things in a mediocre way. Finally, Mr. Preston cautioned against distributing SBIR awards geographi- cally for political reasons; he said that the awards should go to areas where "clusters of excellence," as defined by the Harvard Business School's Michael Porter, are going to support the building of innovative companies. Taking an example from Dr. Porter's work, he pointed to the fact that Holland controls 70 percent of the cut flowers sold in Europe and ships flowers to Disney World in Florida on a daily basis. To grow flowers, Mr. Preston observed, "you need sun, rain, and land and Holland has only one out of three, rain. So why are the Dutch shipping flowers to Disney World?" The answer, he argued, is that the country has a cluster of companies, along with expertise which supports them, that enables it to be far more competitive globally than one would expect. DISCUSSANT Lance Davis Department of Defense Dr. Davis, deputy director of the DoD office that runs a part of the agency's SBIR program, opened his remarks by stating that he would outline some of the challenges inherent in the way SBIR tends to be perceived by participating agencies. Background on SBIR Program Changes Because DoD's budget for research, development, testing, and evaluation (RDT&E) is used as the basis for calculating its SBIR budget, in FY 1997 the agency's SBIR budget was $537 million, whereas its Small Business Technology Transfer (STTR) program budget totaled $30 million. Concurring in the widely expressed judgment that the department's SBIR program is much improved, Dr. Davis stated that improvement dates to the tenure of Anita Jones as director of Defense Research and Engineering, when the office decided to improve its interaction with small business by looking at small business as if the latter were a customer. Some current features of the program among them, the Fast Track pilot, the posting of topics on the World Wide Web, and the opportunity for a potential proposer to speak with the author of a topic prior to submitting a solici- tation had their beginnings in focus groups conducted with representatives of small business in different parts of the country. Although praising Mr. Baron, Mr. Neal, and Mr. Hill for contributing to the program's improvement, Dr. Davis stressed that there are in fact eight separate programs within the DoD' s decentral

OCR for page 62
PANEL III 71 ized SBIR framework and praised the program managers at the various services and agencies within the department for making the program work. DoD Selection Criteria Dr. Davis pointed to an emphasis within the department's SBIR programs on two selection criteria: (1) whether the technology has dual-use application, which is expected to maximize the possibility of commercialization in the long run; and (2) whether a company has a commercialization plan or there is at least an indication that the applicant can commercialize the technology, either for the defense or the private-sector market. "It's not that easy for all small businesses to make a living in the defense business, because the market is relatively small [and] the number of platforms we are building today is relatively small," he said, so "there' s some bias on our part to look at technologies that we think can also be commercialized in the private sector." If technology is not commercialized in the private sector, it is unlikely to remain available to the department, an eventuality that would call into question the value of developing it in the first place. Future Challenges Dr. Davis concluded his remarks by pointing to three problems: . . Program size. The SBIR "tax," as it is defined by DoD' s comptroller and thus perceived within the department, is 2.5 percent not only of the agency's science and technology activities but of the overall RDT&E budget. When program managers of weapons platforms, whose activities are far removed from research, discover that 2.5 percent of their budgets is going to SBIR, he said, "we have a tremendous amount of push-back from those program managers." Stating a personal view, he cautioned that any campaign to enlarge SBIR significantly would occasion vigorous resistance from the program managers "because they think the tax is becoming too big." Funding mechanism. Dr. Davis advocated finding another way to fund SBIR, even as he acknowledged the suggestion's limited practicality: If the program were supported by a yearly appropriation, the department itself would cut it. Noting that "constituencies on [Capitol] Hill have discovered that a taxed program is a marvelous stealth program because you do not have to justify it every year, you only have to renew it every four or five or ten years," he recounted that there was a call last year for a "tax" to support manufacturing technology and that there has been discus- sion of a similar scheme to fund dual-use technology within the depart- ment. "You are going to come to the ridiculous situation in which 130 percent of your science and technology budget is fixed for something and

OCR for page 62
72 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM . you have no flexibility," he predicted. He added: "One of the things the Department wants to be able to do is to respond to technology challenges, and if we have too many things that box us in, it's going to be a problem." Administrative expenses. Citing the value to a SBIR awardee of being able to speak with the program manager overseeing its project and even to have the manager visit, Dr. Davis pointed out that, because SBIR funds are not allowed to go to administrative expenses, SBIR program activities must compete for overhead funds with all other research activities. "As a result," he said, "the amount of attention that a project director in a labo- ratory can spend with a SBIR contract awardee is not as great as it should be." If the SBIR program is to be expanded, it would be worth consider- ing returning to the previous practice of allowing some portion of admin- istrative expense to come from the SBIR budget. Simply increasing the tax would not do much to solve this problem, because "as gigantic as the DOD RDT&E budget is, every single dollar has a constituency; so if you take it from one place, it comes from another place, [and] it's just going to be a constant battle." DISCUSSANT Richard Russell House Committee on Science First Encounters with SBIR Mr. Russell suggested that recounting how he first came into contact with SBIR might illustrate how congressional staff can come to perceive a program. "Whenever we are trying to fund a program through an authorization, we obvi- ously have to calculate how much money is actually required to fund whatever R&D project we are planning on doing," he said. "I was merrily jotting down some numbers for some legislation when someone informed me that I had to put aside a little extra. This additional program that I knew nothing about, SBIR, actually would strip out part of the money that was going to what at the time was a very valuable R&D program." Although this story is not meant to reflect on the value of either the SBIR program or the projects it funds, it does illustrate that SBIR is viewed as a tax by people who would otherwise get money that goes into it. This means that SBIR is competing with R&D in all the agencies that contribute to the program. Mr. Russell advised that it is important to keep both of these characteristics of SBIR in mind when discussing either how the program is to be judged or whether it makes sense to increase the rate at which it is funded from general R&D allot- ments.

OCR for page 62
PANEL III 73 Measuring SBIR Results Also to be kept in mind is that part of the difficulty in assessing SBIR or any other R&D program and a difficulty with which the Technology Subcommittee has been struggling a great deal recently is measuring results. Over the past 18 months, as the Government Performance and Results Act has taken hold, every R&D agency has told the panel that it can not possibly conform with the require- ments of the act as written because of R&D's long-term, speculative nature.) The committee, in discussion with the agencies, has found ways to try to measure what success really is in terms of R&D, although it is not yet certain whether they will work. Although SBIR is no different from any other R&D program in this regard, it is different in that it has a dual function, which makes measuring its success somewhat more complicated: SBIR looks at commercialization as an end while at the same time trying to provide benefit to the agencies that fund it by contributing to their own R&D missions. "Oftentimes, if you are talking about strict commercialization as a measure of success," he observed, "the individual agency that is engaged in funding that SBIR grant may not view that end success as being particularly relevant to its individual needs and its individual mission." Noting that the process of reauthorizing the SBIR program is in the initial planning stages, Mr. Russell told the audience that hearings on the subject are likely to be held toward the end of the present congressional session as a "warm up" for the reauthorization, which is to take place in the next Congress. Offering an indication of what may happen, he recalled that the STTR program was reau- thorized last year with minor changes and with no increase in the set-aside. "SBIR is a much bigger program," he noted, "and will probably have a lot more interest associated with it just because of the dollar value. But at a billion dollars, that's a significant chunk of R&D funding, and coming from the committee that's charged with overseeing at least all the civilian R&D funding for the federal government, it's a responsibility that I know all our members are going to take very, very seriously. The R&D pot, if you look at both defense and civilian, is just not growing that quickly, and so we have to make sure that we are spending the R&D money as well as possible." DISCUSSION Mr. Baron of the DoD asked the panelists to elaborate on the possible mechanics of increased cooperation between the venture-capital community and the SBIR program. Mr. Preston responded that the peer-review system SBIR that the uses in evaluating technology may be superior to the evaluation practices of ~ Committee on Science, Engineering, and Public Policy, 1995, Evaluating Federal Research Pro grams: Research and the Government Performance and Results Act. Washington, D.C.: National Academy Press.

OCR for page 62
74 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM venture capitalists who tend to look at more than a half-dozen business plans each week. On the other hand, he asked, "What venture capitalist would ever, even in their wildest dreams, conceive of investing in a company without interviewing the CEO and the management team and looking at what their track record is, at what the probability of success of those people is in building the business?" Synergy is thus possible between the technological expertise of SBIR program managers and the strengths of venture capitalists, who "can be really good at assessing people and understanding their probability of success whereas the DoD, I think, is by definition almost unable to make those assessments." Reacting to the same question, Dr. Morgenthaler pointed out that certain R&D investments that offer social return, such as those in defense and pollution control, are not typically the targets of venture-capital investment. He suggested that greater collaboration might be possible in areas such as information technol- ogy and health care and that this collaboration could take several forms. The "simplest and most straightforward" would be in evaluating whether Phase II grants should be awarded based on some inquiry into the potential for commer- cial success of the awardee company. He agreed with Mr. Preston that it is important to establish whether the managers involved have a track record of devel- oping successful commercial enterprises and whether people involved with the company as directors or investors have experience in building successful compa- nies. He proposed these concerns, which are of importance to venture capitalists, as criteria upon which SBIR awards would in part be judged. Mr. Carroll commented that if he can not find either a partner outside the SBIR program or a potential customer for the technology to join his company in investing in Phase II of a SBIR award, his company generally does not make a Phase II bid because it views the prospects for commercialization as too uncertain. Dr. Wessner asked whether different criteria for success should be used in the different agencies that participate in the SBIR program, what an appropriate rate of success for the overall program would be, and whether the success rate should differ according to the agency. Mr. Preston observed that one criterion for success for the DoD is whether an award will allow purchase of systems at a lower price than if the systems had been custom-made. In general, however, the metrics for success are just now being developed for "SBIR-type" programs, with Dr. Lerner's paper being the first of any significance in analyzing the long-term economic benefits of SBIR. A second problem in answering the question, he added, is that "the economic benefit is longer than the election cycle for people in power in Washington." Looking at the long-term health of the economy would persuade the observer that SBIR offers a very productive investment, but comparing its productivity with that of other investments that the government might make is difficult. Because a key aspect of the program is that it is investing in technologies before industry is fully willing to jump in and after basic research funds would typically run out, Mr. Preston suggested that an indication of success might be whether the United

OCR for page 62
PANEL III 75 States is capturing more benefit from the technologies it develops internally and thus reducing its export of technologies. Tom Goldberg with GHO asked whether the panelists were suggesting that because investors can make money in electronics and biotechnology, the govern- ment should confine its support to environmental and defense technologies. He commented that the United States has invested heavily in environmental tech- nologies but, because we have no mechanism to certify their efficacy, we export those technologies to Europe and Asia, only to reimport them. Wondering whether that is "altogether bad," he asked whether U.S. investors should be placing money with those clients abroad that buy the technologies. Dr. Morgenthaler responded by stressing Dr. Lerner's point that the success of the SBIR program in promoting job and wealth creation has been "collocated with the centers of entrepreneurial activity" and by stating that a critical mass of entrepreneurial excellence and managerial talent is required for that success. "I view venture capital as a catalytic agent," he said, "and I think you should view the SBIR program in the same way: as a catalytic agent." He encouraged manag- ing programs that are focused on social return, such as those in defense technol- ogy or pollution control, under criteria different from those applied to programs that are more likely to draw private investment. For programs focused on eco- nomic returns, "by leveraging off of the dynamics of the private equity industry, the greatest social good will be achieved." Mr. Preston praised the question as recognizing that the funding gap does not apply to all industries but is more severe in the energy and environmental fields than in the information or biotechnology sectors where venture capitalists are investing very heavily. Because the SBIR distributed its funds generally, in all areas of interest to the government, it tends to capture more of the emerging industries rather than just reinforcing the industries that experience very little funding gap. David Speser of Foresight Science & Technology, Inc., asked Dr. Morgenthaler whether dual-use technologies, or technologies that are adaptable to several areas, might not be more appealing to venture capital because they enlarge beyond the government the sphere of clients for a product. Dr. Morgenthaler, answering in the affirmative, observed that the government is increasingly focused on dual use and that its procurement requirements are increasingly focused on commercial off-the-shelf products. Small companies are not ignoring the government market- place but can not really restrict themselves to it for a variety of reasons.