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The Small Business Innovation Research Program: CHALLENGES AND OPPORTUNITIES CHARLES W. WESSNER, Editor NATIONAL ACADEMY PRESS WaShingtOn, D.C.

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NATIONAL ACADEMY PRESS 2101 Constitution Ave., N.W. Washington, D.C. 20418 The National Academy of Sciences is a private, nonprofit 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 Congress in 1863, the Academy has a mandate that requires it to advise the federal government on science and technical matters. Dr. Bruce Alberts 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. William A. Wulf 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 examination 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. Kenneth I. Shine 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 pur- poses of furthering knowledge and advising the federal government. Functioning in accor- dance 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 engi- neering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce Alberts and Dr. William A. Wulf are chairman and vice chairman, respectively, of the National Research Council. 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 provide support for the project. Limited copies are available from: Board on Science, Technology, and Economic Policy National Research Council 1055 Thomas Jefferson, N.W. Washington, D.C. 20007 202-334-2200 International Standard Book Number 0-309-06198-9 Copyright 1999 by the National Academy of Sciences All rights reserved Printed in the United States of America Additional copies are available for sale from: National Academy Press Box 285 2101 Constitution Ave., N.W. Washington, D.C. 20055 800-624-6242 202-334-3313 (in the Washington Metropolitan Area)

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For the National Research Council, this project was overseen by the Board on Science, Technology and Economic Policy (STEP), a standing board of the NRC established by the National Academies of Sciences and Engineering and the Institute of Medicine in 1991. The mandate of the STEP Board is to integrate understanding of scientific, technological, and economic elements in the formulation of national policies to promote the economic well-being of the United States. A distinctive characteristic of STEP's approach is its frequent interac- tions with public and private sector decisionmakers. STEP bridges the disciplines of business management, engineering, economics, and the social sciences to bring diverse expertise to bear on pressing public policy questions. The members of the STEP Board* and the NRC staff are listed below: Dale Jorgenson, Chair Frederic Eaton Abbe Professor of Economics Harvard University Cambridge, Massachusetts M. Kathy Behrens Managing Partner BancBoston Robertson Stephens San Francisco, California James F. Gibbons Professor of Engineering Stanford University Stanford, California George N. Hatsopoulos President, Chief Executive Officer Thermo Electron Corporation Waltham, Massachusetts Ralph Landau Consulting Professor of Economics Stanford University Stanford, California James T. Lynn Adviser Lazard Freres Bethesda, Maryland Burton John McMurtry General Partner Technology Venture Investors Menlo Park, California *Membership as of February 1998. . . . William J. Spencer, Vice-Chair Chairman SEMATECH Austin, Texas Ruben Mettler Chairman and Chief Executive Officer (ret.) TRW, Inc. Los Angeles, California Mark B. Myers Senior Vice President Xerox Corporation Stamford, Connecticut James M. Poterba Professor of Economics Massachusetts Institute of Technology Cambridge, Massachusetts A. Michael Spence Dean, Graduate School of Business Stanford University Stanford, California Joseph E. Stiglitz Senior Vice-President for Development Economics The World Bank Washington, D.C. Alan Wm. Wolff Managing Partner Dewey Ballantine Washington, D.C.

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Staff Stephen A. Merrill Executive Director John B. Horrigan Consultant Craig M. Schultz Program Associate Laura T. Holliday Program Associate TV Charles W. Wessner Program Director John Oldfield Program Associate Ryan L. Catteau Program Associate

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STEERING COMMITTEE FOR GOVERNMENT-INDUSTRY PARTNERSHIPS FOR THE DEVELOPMENT OF NEW TECHNOLOGIES Gordon Moore, Chair Chairman Emeritus Intel Corporation M. Kathy Behrens Managing Partner BancBoston Robertson Stephens and STEP Board Gordon Binder Chief Executive Officer Amgen, Inc. Michael Borrus Co-Director Berkeley Roundtable on International Economics University of California Iain Cockburn Professor of Commerce and Business Administration University of British Columbia Kenneth Flamm Dean Rusk Chair in International Affairs LBJ School of Public Affairs University of Texas at Austin James F. Gibbons Professor of Engineering Stanford University and STEP Board Charles W. Wessner Study Director John B. Horrigan Consultant John Oldfield Program Associate William J. Spencer, Vice-Chair Chairman, SEMATECH and STEP Board W. Clark McFadden Partner Dewey Ballantine Mark B. Myers Senior Vice President Xerox Corporation and STEP Board Richard Nelson George Blumnethal Professor of International and Public Affairs Columbia University Charles Trimble Vice Chairman Trimble Navigation John P. Walker Chairman and Chief Executive Officer Axys Pharmaceuticals, Inc. Patrick Windham Adjunct Professor Stanford University Consultant Science and Technology Policy Project Staff v Craig Schultz Administrative Assistant Ryan Catteau Program Associate Laura T. Holliday Program Associate

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NATIONAL RESEARCH COUNCIL BOARD ON SCIENCE, TECHNOLOGY, AND ECONOMIC POLICY Sponsors The National Research Council gratefully acknowledges the support of the following sponsors: U.S. Department of Defense U.S. Department of Energy National Cancer Institute National Science Foundation National Institute of Standards and Technology National Aeronautics and Space Administration Sandia National Laboratories Electric Power Research Institute Advanced Micro Devices Merck and Company Milliken Industries Motorola Nortel Procter and Gamble Silicon Valley Group Incorporated Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the views of the project sponsors. vim

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Contents I. Preface II. Introduction III. Proceedings Welcome Charles W. Wessner, National Research Council Symposium Intoduction Mark Myers, Xerox Corporation .1 .13 1 34 Opening Remarks Duncan Moore, Office of Science and Technology Policy 37 Panel I: History and Current Legislative Perspective on the SBIR Program........................................................................................ Moderator: Robert Neal, Director, Office of Small and Disadvantaged Business Utilization, Department of Defense . . vat 41

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. . . vile CONTENTS Origins of and Common Myths About the SBIR Program Roland Tibbetts, National Science Foundation (Ret.) Discussants: Patricia Forbes, Senate Committee on Small Business Paul Cooksey, Senate Committee on Small Business James Turner, House Committee on Science Discussion .. ..... 41 50 Panel II: Research Perspectives on the SBIR 52 Moderator: Zoltan Acs, University of Maryland The Government As Venture Capitalist: An Analysis of the SBIR 53 Joshua Lerner, Harvard Business School Discussant: Kenneth Flamm, The Brookings Institution Discussion 60 Panel III: Case Studies 62 Moderator: Dorothy Robyn, White House National Economic Council Relational Technologies 63 Gary Morgenthaler, General Partner, Morgenthaler Ventures Digital System Resources 66 Rich Carroll, President Quantum Energy Technologies 68 John Preston, President and CEO Discussants: Lance Davis, Department of Defense Richard Russell, House Committee on Science Discussion Luncheon Address: Congressman Tom Davis 73 76

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CONTENTS MIX Panel IV: Program Challenges Operational Views 80 Moderator: Dan Hill, Assistant Administrator for Technology, Small Business Administration Carl Nelson, SBIR Program Manager (ret.), Ballistic Missile Defense Organization David O'Hara, President, Parallax Research, Inc. Gene Banucci, President, Advanced Technology Materials, Inc. Gary Young, Vice-President, Sales, American Xtal Technology Discussion 90 Panel V: Improving Assessment and Selection 93 Moderator: Daniel Roos, Massachusetts Institute of Technology Lessons from the Advanced Technology Program Maryellen Kelley, National Institute of Standards and Technology 93 The SBIR Experience at NIH 96 Herbert Kreitman, National Institutes of Health The Fast Track Pilot Jon Baron, Department of Defense Discussant: Charles Rowe, House Committee on Small Business Discussion .......................... Panel VI: Observations and Policy Issues: Agency Perspectives 103 Roundtable of SBIR Program Managers Moderator: Charles W. Wessner, National Research Council 01 Arlene de Blanc, U. S. Department of Energy Kenneth Gabriel, U.S. Army Robert Norwood, National Aeronautics and Space Administration Kesh Narayanan, National Science Foundation John Williams, U.S. Navy Discussion ....... 109 Conclusion 111 Mark Myers, Xerox Corporation and STEP Board

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x CONTENTS IV. Annexes A. "Public Venture Capital": Rationales and Evaluation 1 15 Joshua Lerner, Harvard Business School B. The Small Business Innovation Research Program and NSF SBIR Commercialization Results 129 Roland Tibbetts, NSF SBIR Program Manager (ret.) Participants List D. Bibliography 68 73