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Patterns of Firm Participation in the Small Business Innovation Research Program in Southwestern and Mountain States

Reid Cramer

University of Texas at Austin

EXECUTIVE SUMMARY

The conclusions of this paper are derived from interviews with firms that have received Small Business Innovation Research (SBIR) contracts in the southwestern and mountain regions. The firms selected in this set of case studies are diverse in terms of their technological expertise, but they are more fundamentally differentiated from each other by organizational characteristics. Primary among these characteristics are the firm’s size, relationship to capital, and business development strategy. Depending upon these characteristics, firms are classified by the author in one of three categories: contractor, technologist, or scientific.

The SBIR program fills a different role for each type of firm. Furthermore, features of the Fast Track program make it more or less appealing for a firm depending upon its organizational characteristics. Where a firm is located in its own developmental cycle appears to be a major factor in how it will structure its participation in the SBIR program. An SBIR grant can be invaluable to a young start-up company, but less essential after that same firm has attracted significant outside resources.

Firms in all three categories are enthusiastic about the SBIR program and identify a range of positive impacts that the program has had on their work. The program provides resources to allow firms to conduct expensive research and development activities, and to expand their firms through the acquisition of capital equipment, facility maintenance, and the addition of staff. The SBIR program is valuable in that it provides an accessible revenue stream. It provides research support to move technology into core commercial directions. SBIR benefits are not always expressed in commercial sales, but are related to expanding basic



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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE Patterns of Firm Participation in the Small Business Innovation Research Program in Southwestern and Mountain States Reid Cramer University of Texas at Austin EXECUTIVE SUMMARY The conclusions of this paper are derived from interviews with firms that have received Small Business Innovation Research (SBIR) contracts in the southwestern and mountain regions. The firms selected in this set of case studies are diverse in terms of their technological expertise, but they are more fundamentally differentiated from each other by organizational characteristics. Primary among these characteristics are the firm’s size, relationship to capital, and business development strategy. Depending upon these characteristics, firms are classified by the author in one of three categories: contractor, technologist, or scientific. The SBIR program fills a different role for each type of firm. Furthermore, features of the Fast Track program make it more or less appealing for a firm depending upon its organizational characteristics. Where a firm is located in its own developmental cycle appears to be a major factor in how it will structure its participation in the SBIR program. An SBIR grant can be invaluable to a young start-up company, but less essential after that same firm has attracted significant outside resources. Firms in all three categories are enthusiastic about the SBIR program and identify a range of positive impacts that the program has had on their work. The program provides resources to allow firms to conduct expensive research and development activities, and to expand their firms through the acquisition of capital equipment, facility maintenance, and the addition of staff. The SBIR program is valuable in that it provides an accessible revenue stream. It provides research support to move technology into core commercial directions. SBIR benefits are not always expressed in commercial sales, but are related to expanding basic

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE research, responding to government needs, and developing applications for technology. The Fast Track program offers a valuable tool to firms looking to attract investors because it allows the firms to offer prospective investors a means to leverage their investment. The Fast Track program does give an advantage to firms with a higher potential for commercialization and an interest in producing for the market. Firms that are interested in commercialization prior to their application for an SBIR award appear most likely to succeed as Fast Track firms. This may be because these firms are more likely to have their sights set on pursuing technological innovations that will attract market attention.

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE INTRODUCTION The Department of Defense (DoD) has requested that the National Research Council conduct an evaluation of the Small Business Innovation Research Program (SBIR). The conclusions of this paper are derived from interviews with 12 firms that have received SBIR contracts in the southwestern and mountain region, with particular attention given to the experience of firms participating in the SBIR program according to their Fast Track status. Although the firms selected in this set of case studies are diverse in terms of their technological expertise, common experiences are apparent. This paper summarizes some of the distinct patterns among firms participating in the SBIR program. A list of selected firms and their SBIR Phase II projects appears in Appendix A. Approximately 30 Phase II SBIR projects from the southwestern and mountain region were included in a representative data set developed by BRTRC for the National Research Council’s evaluation. Individual firms could be represented on this list more than once if they had received multiple contracts. Four projects were identified as participating in the Fast Track program, and all were selected for case studies. Additionally, geography was taken into account as a selection criterion, and firms that were located in the Austin-San Antonio, Boulder-Denver, and Albuquerque metropolitan areas were contacted to learn about their SBIR experience. Interviews were designed to elicit information about how each firm was affected by the SBIR program, with a focus on a particular Phase II award. In this manner, information was gathered at the firm and the project levels. The case studies are organized following the template agreed upon by the Board on Science, Technology, and Economic Policy of the National Research Council and its team of SBIR researchers. This template is organized into sections, corresponding to a description of the firm, a summary of the SBIR project, an analysis of the impact of the SBIR award, and a critique of SBIR program administration. Cross-cutting questions that were designed to focus the analysis on the broader experience of the SBIR program were also considered. The survey template appears in Appendix B. DESCRIPTION OF THE FIRMS The firms described in the SBIR case studies have diverse areas of expertise, but they are more fundamentally differentiated from each other by organizational characteristics. Primary among these characteristics are the firm’s size, relationship to capital, and business development strategy. With the combination of these characteristics, firms typically can be classified in one of three categories of firm type. The first category comprises firms that are committed to the business of research and development (R&D). Companies in this category can be called contractor firms. For this group, the SBIR program represents a source of contract

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE revenue. The performance of research is a major business activity, and the SBIR program supports this work. The SBIR solicitation topics are interpreted as the articulated research needs of various government agencies. When a firm has the capabilities to respond to these topics through existing staff and resources, it generally will apply for an SBIR award. These firms generally are well-established and support larger staff than many SBIR participant firms. Typically, they have over 50 employees, and perhaps as many as 300 to 400, on their payrolls. These firms are multiple recipients of SBIR awards and the SBIR program represents a significant portion of the firm’s annual revenue. Other sources of revenue are pursued, such as marketing commercial products, signing licensing agreements, or forging partnerships with larger firms, building upon intellectual property rights and research activities. A second category is exemplified by firms focusing on the development of a specific product or promising enabling technology. These companies can be labeled as technologist firms. They may have applied for an SBIR award early in their history when the product or technology was at an early stage in the innovation cycle. For these firms, the SBIR program represented a means to develop technology and demonstrate its viability to the market. If the product is attractive to investors—either venture capitalist or angel investors —these firms can be transformed quite dramatically. The infusion of capital allows them to expand their staff, purchase capital equipment, and attract senior management. These firms are oriented toward the market and their growth decreases the relative importance of the SBIR program as an ongoing revenue source. The SBIR program represents an invaluable building block for these companies even as work on the SBIR contract loses importance relative to the goal of marketing a product. A third category is represented by firms interested in pursuing basic research outside of a university setting, and thus may be labeled as scientific firms. These firms are generally small and were founded by scientists to explore whether a particular research area can generate ideas or products that might attract interest. The SBIR program enables these firms to work on specific projects whose outcomes are unclear. They may have the chance to develop a commercial product, but they are not currently attracting interest from outside investors. For firms in this category, the SBIR contract represents a significant portion of revenue, and the size of a Phase II award provides enough resources to acquire equipment and people to perform the work. The firms in this category provide a vehicle for scientists to pursue a focused research agenda. TABLE 1 Typology of SBIR Firms by Organizational Characteristics Type of Firm Primary Activity Firm Size Relationship to Capital Business Strategy Scientific Basic research Small (0-15) Distant Pursue research Technologist Applied research Small but growing (0-30) Seeking investors Commercialize Contractor R&D contracts Larger (30-350) Partnerships and contracts Develop expertise

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE TABLE 2 Characteristics of Case Study Firms Firm State Founded Employees Phase IIs SBIR Project Firm Type AvPro OK 1990 10 2 Fast Track Technologist Bolder Technologies CO 1991 100 1 SBIR Technologist Chorum Technologies TX 1996 60 2 Fast Track Technologist Coherent Technologies CO 1984 90 27 SBIR Contractor Lipitek International TX 1988 15 1 SBIR Scientific Mission Research NM 1970 350 45 SBIR Contractor Picolight CO 1995 26 5 Fast Track/BMDO Technologist Radiant Research TX 1994 12 8 BMDO Co Scientific SPEC TX 1986 60 25+ BMDO Co Contractor TRAC CO 1991 4 1 Fast Track Scientific TPL, Inc. NM 1990 90 12 BMDO Co Contractor These three categories represent types of firms distinguished by their organizational characteristics. Firms develop these characteristics across time in response to evolving conditions. As these characteristics change over time, a particular firm may need to be reclassified in this typology or may exhibit characteristics of more than one firm type. Still, it is instructive to use this classification scheme to distinguish the firms in this analysis according to their own organizational characteristics. The SBIR program fills a different role for each type of firm. Furthermore, features of the Fast Track program make it more or less appealing for a firm depending upon its organizational characteristics. Additionally, where a firm is located in its own developmental cycle appears to be a major factor in how it will structure its participation in the SBIR program. Thus, a firm’s relationship to the program will not be static. An SBIR grant can be invaluable to a young start-up company, but less essential after that same firm has attracted significant outside resources. TABLE 3 Classification of Case Study Firms by Type Scientific Firms Technologist Firms Contractor Firms Lipitek International AvPro Coherent Technologies Radiant Research Bolder Technologies Mission Research Corp. TRAC Chorum Technologies Picolight SPECTPL, Inc.

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE IMPACT OF THE SBIR PROGRAM Firms in all three categories are enthusiastic about the SBIR program and identify a range of positive impacts that the program has had on their work. The program provides resources to allow firms to conduct expensive R&D activities, and promote growth of their firms through the acquisition of capital equipment, facility maintenance, and staff expansion. The SBIR program is valuable in that it provides an accessible revenue stream. It provides research support to move technology into core commercial directions. From several perspectives, the SBIR program is lauded as providing numerous opportunities for young and less-established firms. First, it offers a means to expand a firm’s technical understanding of its research areas. Second, it encourages the firm to develop commercially viable applications of its research. Third, it fills a funding gap difficult to bridge with conventional private investment. In several cases, the SBIR program provided the direct impetus for the founding of a company. There are a host of indirect but beneficial spillover effects related to the SBIR program. The SBIR experience creates relationships that continue to benefit participating firms. These include contacts with suppliers, manufacturers, and potential partners. The SBIR program is used by many companies as a marketing tool. Receiving an award can illustrate a potential application for a technology, and provide the means to attract a partner. The SBIR award does not in and of itself certify the technology or the company on its own, but it gives the firm an advantage as it competes for the attraction of investors. Private investors are not attracted to the firm solely because of its SBIR award, but the SBIR award serves as an indication that the firm’s technology may be promising because it has been recognized by a government agency. Firms in all three categories appeared to use their SBIR awards as marketing tools, but in distinct ways. For the scientific firms, such as Lipitek and Radiant Research, the presence of an SBIR award confirms the importance of their research agendas. For the contractor firms, such as TPL Inc., Mission Research Corp., and SPEC, their ongoing participation in the program demonstrates that they can deliver projects and maintain the in-house expertise sought by government agencies. The technologist firms highlight their SBIR awards as indicative of innovation. Outside investors may still evaluate the technology of these firms on their own terms, but the award helps to distinguish their work from others competing for the interest of investors and venture capitalists. Many successful SBIR contracts do not result directly in a product, and thus appear to fail when judged according to a narrow return on investment criteria. Yet the SBIR program can still lead to success in the long run by expanding a firm’s understanding of its technology area, generating intellectual property rights, and supporting a young firm with promise. Often, commercial success is realized when a product is developed after a succession of SBIR awards. This has

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE been the case with several of the larger firms classified as contractor firms. In the case of TPL Inc., SPEC, and Coherent Technologies, commercial opportunities were identified after a series of contracts were executed. These firms and others classified as contractor firms appear to be committed to innovative R&D work, and have come to rely on the SBIR program for a large portion of their revenue. These firms believe that they are good at what they do and are using the SBIR program to respond to articulated government needs. These firms appear to be filling a niche market that consists of performing basic and applied research that responds to the need of sponsoring agencies. The basic research provides the building blocks for future product development, and thus is located earlier in the innovation and product cycle. The applied research often responds to the agenda of contracting agencies, and thus may be distinct from more commercial opportunities. The larger amount of work that these firms undertake means that there are some applications for which the private market is interested. All of the four firms classified as contractors (Coherent Technologies, Mission Research Corporation, SPEC, and TPL, Inc.) have explored commercial opportunities, often in partnership with much larger and more established firms. However, in each of these cases, government R&D contracts continue to represent a significantly higher portion of their annual revenues. Other firms are relying even more heavily on the SBIR program for operating revenue. These firms are often small firms concentrating on basic research. These cases describe two of the firms classified as scientific (Radiant Research and TRAC). Firms that appear interested in basic research are not as attractive to capital investors interested in a rate of return. Innovative research, by its nature, is the foundation upon which product development is based. Therefore, solid, innovative research is not readily commercializable. In this sense, the SBIR program’s more recent focus on commercialization undermines one of the program’s strengths: the SBIR program’s ability to support the innovative work of small or young companies. THE FAST TRACK PROGRAM The Fast Track program offers a valuable tool to firms looking to attract investors because they can offer prospective investors a means to leverage their investment. The Fast Track program does give an advantage to firms with a higher potential for commercialization and an interest in producing for the market. Firms that are interested in commercialization prior to their application for an SBIR award appear most likely to succeed as Fast Track firms. This may be because these firms are more likely to have their sights set on pursing technological innovations that will attract market attention. Thus, they will be closer to marketing their technology than firms that are focusing on more conventional R&D activities. Of the four Fast Track projects in this study, three were from firms classified

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE as technologists. Picolight, AvPro, and Chorum Technology have articulated business plans that address how their work will respond to unmet market needs. Each of these firms has identified not only its innovation, but the clients and firm clusters that their products will serve. Two of these firms, Picolight and Chorum Technologies, have generated additional investment that has far exceeded the SBIR contract amount and the third-party Fast track match. The fourth Fast Track firm, TRAC, has not had a successful Fast Track experience, and in fact lost its matching investment midway through the project. The TRAC case suggests that some scientific firms, being far away from commercialization, may not benefit—and may even be hurt—by a Fast Track designation. In TRAC’s case, its small staff, limited administrative capacity, and undefined sense of its target market created difficulties after it received its Fast Track award. Depending on the technology area, the time between developing a product for market and the basic R&D stage varies, making Fast Track firms not as viable for some firms. For example, TPL Inc. is primarily a materials company that projects a longer time horizon for product development than would a software or electronics firm. Even when they feel as though they have identified an important innovation, they recognize that it will take many years to develop a technology, streamline a manufacturing system, and market to other firms. Although they may be competitive in their field, this extended timetable may not be attractive to investors requiring a quicker return. The organizational characteristics of SBIR firms essentially determine whether a firm will be able to take advantage of the Fast Track program. Firms that are committed to applied research and developing products or applications for an identified market have a greater likelihood of attracting investment. The later stage of the product cycle is represented by several other characteristics, such as whether a prototype already exists, products are being tested, or production facilities are in place. These types of characteristics appear to be prerequisites for firms to succeed in SBIR’s Fast Track. The BMDO co-investment program appears to have a different pattern for firm participation. In the cases included in this study, firms with a range of organizational characteristics are more readily able to take advantage of this program for several reasons. First, project matching funds may be in-kind rather than exclusively cash. Second, larger firms that have received multiple SBIR awards have existing relationships with other firms that they can draw upon in executing a project. Third, BMDO has prioritized the co-investment system, and so, any firm that wishes to receive an SBIR award from BMDO must explore the co-investment option. TABLE 4 Fast Track and BMDO Co-Investment Projects by Firm Type Project Status Firm Firm Type Fast Track AvPro Technologist Fast Track Chorum Technologies Technologist Fast Track Picolight Technologist Fast Track TRAC Scientist BMDO Co-Investment TPL Inc. Contractor BMDO Co-Investment SPEC Contractor BMDO Co-Investment Radiant Research Scientist BMDO Co-Investment Picolight Technologist

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE Benefits and Costs For firms participating in the Fast Track program, there is an advantage in making a quicker transition from Phase I to Phase II. This is especially important for young start-up or relatively small firms, which benefit from the short gap between award and arrival of the matching funds. Fast Track investment addresses one of the major obstacles of small businesses: cash flow. The infusion of capital that comes with a Fast Track award can help to alleviate many problems. However important addressing cash flow issues is, the overwhelming benefit to the Fast Track firm is the ability to use government funds to attract outside investment. Fast Track represents a means for research companies to offer third-party investors the opportunity to leverage their investment. This makes investing in a young start-up firm significantly more attractive. Picolight and Chorum Technologies specifically highlighted this phenomenon when discussing their participation in the Fast Track program. Fast Track participation also has some perils. The shortened timetable for submitting a Fast Track application can propel a project prematurely, limiting administrative oversight. In the one Fast Track case study with a poor outcome (TRAC), the principal assumed responsibility for this lack of diligence in project administration, but felt seduced by the prospect of matching funds. In this case, the structure of the Fast Track program gave the investor undue influence on the course of the project. There is some concern about the trade-offs that accompany the attraction of investors into a small firm. Primarily, firms are worried about losing control to outside forces. Still, most of the firms that have attracted substantial outside investment, either through Fast Track or other means, are pleased with the results. Venture capitalists do bring valuable experience. In most cases, their presence on the board of directors is a vehicle for structuring input rather than taking control. Picolight and the spinoff firm from SPEC both have appreciated the expertise that venture capitalists have brought to their firms, increasing the likelihood of market success. Success with the SBIR program can lead to choices that can affect the firm’s mission. When a firm grows with support of the program, the firm must determine what kind of company it wants to be. It must decide whether it should pursue investors, pursue acquisition, or take the company public. These are all measures that change a company ’s profile significantly. For example, Chorum

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE Technologies was adamant that it was not interested in being acquired by a larger company. As a result of this decision, they have decided that they need to develop the internal capabilities for large-volume manufacturing. A company may be willing to consider drastic measures because of the difficulties associated with commercialization. Most firms recognize that there is a major gap between completing a Phase II contract and successfully marketing a product. Although access to capital is a major component of this gap, money is not the only solution. More than a money gap, many companies experience a maturity gap. They can develop a product prototype but much more is required to successfully produce and distribute a product in the market. Often what is missing is an understanding of the markets. This is an expertise that a third-party investor may possess, and thus the Fast Track program provides a vehicle for firms to collaborate, each bringing its own expertise to a particular project. Factors that Inhibit Fast Track Participation The prime factor that inhibits a firm’s participation in the Fast Track program is difficulty in attracting investors to meet the matching requirements of the program. This is because SBIR proposals that address issues of basic research represent work that occurs early in the product cycle. Several firms that were multiple winners of SBIR awards, such as Mission Research Corp., Radiant Research, and TPL, Inc., noted that the matching requirements represented an obstacle to their participation in the Fast Track program. Instead of the four-to-one matching requirement imposed on first-time awardees, multiple recipients have to find a one-to-one match. However, the Fast Track program solves some problems for younger and smaller firms that do not afflict larger, better established firms. Two of the key advantages to Fast Track are the bridge financing and quicker timetable for funding. Contractor firms or those technologist firms that have attracted investment and expanded their activities do not have a financial need for financing between Phase I and Phase II projects; these firms already have access to external capital. Fast Track still offers a chance to leverage this external capital, which is of interest to firms of all sizes. PROGRAM ADMINISTRATION One central conclusion from this set of SBIR case studies is that the size of the firm affects the impact of the SBIR award. Larger firms with more staff resources have an easier time preparing applications, managing contracts, and performing the research. Firms with less staff cannot easily divide SBIR responsibilities. For example, the experience of being audited is particularly onerous for a small company with few staff resources. A small firm is also disadvantaged because administration of the contract takes time way from the people who would otherwise be “doing the science.”

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE Small firms are particularly concerned when a cost-plus-fixed-fee system is employed in the disbursement of funds. Many firms, both small and large, spoke against this method of structuring SBIR contracts. Firms would rather be paid upon completion of work or the submission of results. Many costs that a firm might submit are ineligible under government regulations, but the firm does not know what these costs are and feels as though a big staff would be required to successfully understand all of the government regulations and nuances of the SBIR program. There is the sense that contracts are written to make management easiest on the program officer rather than considering the needs of the recipient firm. Some technology companies also have a unique problem. Many technological advances are incremental; others represent breakthrough innovations that create products or processes that do things that have never been done before. Thus, firms must look for a home for the technology that is not readily apparent if it is a breakthrough. This is the reverse of the process that most commercial companies pursue, where they know the market and compete with products that cost less or outperform existing products. Technology products can do new things, and markets are less defined. This is an issue for companies such as Coherent Technologies, which produce innovative laser products with detection capabilities that far exceed today’s industry standards. The challenge for the firm is not only to develop the technology but also to nurture and educate the market to increase the likelihood of adoption. In this sense, the SBIR program’s emphasis on commercialization may benefit from finding ways to support companies as they pursue commercialization and increase their understanding of markets where they can compete. For example, Coherent Technologies may need support to think more clearly about the needs of potential clients and their own strategic advantage. Many firms described how they would like to see additional support for Phase III of the SBIR program, where commercialization is emphasized. The development of a marketable technology does not lead easily to commercialization; there are many additional steps that must be taken for a firm to succeed. If DoD wants firms to achieve commercialization, perhaps more thought should go into what can be done in a supportive manner to get firms to this point. The requirement of matching funds for the Fast Track and BMDO co-investment programs have motivated firms to more explicitly explore commercial opportunities created by R&D activities. In one strategy, a spinoff company is created. This facilitates the investment of outside capital, which can target its investment to a specific project or product. Although this might be viewed favorably by DoD, it creates additional administrative difficulties. There is increased work required to create the new company, including complicated legal and accounting services. Second, once the companies have been distinguished from each other, it has been difficult to get DoD to recognize the new firm and transfer the Phase II contracts accordingly. This was one of the main criticisms of the program from one of the spinoff firms. Even though the principals believed that they were

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE doing what DoD wanted, they did not believe that the administrative procedures were in place to facilitate meeting these objectives logistically. Also, the spinoff is treated as a multiple SBIR recipient and thus cannot take advantage of the most favorable matching requirements. The Fast Track program is a good idea in that it ensures cash and moves a project along a quicker timetable. In many technology areas, time is an important factor because long delays can have major market consequences. Accordingly, the speed with which programs are evaluated by DoD agencies is a major characteristic that sets them apart from other agencies. Small companies, in particular, may find it less desirable to work with agencies that have longer delays in evaluating proposals or transitioning a project from Phase I to Phase II. Additionally, DoD should recognize that developing commercial products takes different lengths of time, depending upon the technology area in question. The interviewed firms claim that there are two ways to execute a contract. The first is a firm-fixed-price model, where deliverables are presented to the agency in exchange for incremental payments. The second is a cost-plus-fixed-price model, where a firm is reimbursed for eligible costs in additional to a contract price. This latter method creates a higher scrutiny for audit, and thus is less preferable for smaller firms. However, the choice of how each contract is structured appears to depend on the DoD program officer and is outside the influence of the executing firm. Regardless of the form of the contract, it is a large document that take much of the firm’s time and energy to monitor. CONCLUSIONS The observations of this paper are based on a limited set of firms participating in the SBIR program. Yet this set appears to identify distinct patterns that may more broadly characterize the program. Firms that receive SBIR awards believe that they benefit greatly from their participation in the program. These benefits are not always expressed in commercial sales, but are related to expanding basic research, responding to government needs, and developing applications for technology. The Fast Track program helps to promote the commercial success of participating firms in several important respects. The program helps firms move toward commercialization by offering a tool to attract outside investors and a means to bridge the financing gap that some firms experience between Phase I and Phase II of the SBIR program. Unfortunately, the relative newness of the Fast Track program prevents a full assessment of its impact on commercialization at this time. Yet it appears likely that Fast Track firms will be able to demonstrate a significant degree of commercial success. The Fast Track program appears to work best for firms that are prepared to take a product or an innovation to market. It also appears likely that the Fast Track project may offer benefits to firms that are already well positioned to at-

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE tract investment as a result of their technology and its position late in the product cycle. In some of these cases, the third-party investor benefits because their capital is leveraged with SBIR funds. This may be a concern if the third-party investment is not contingent on the SBIR award. However, the dynamics of leveraging capital works both ways because the public sector has its investment matched by the third party. Thus, the potential for positive spillovers and meeting government needs may justify the SBIR subsidy and the leveraging of capital that occurs. Even when firms have not been able to take advantage of the Fast Track program, there has been a recognition of DoD interest in commercialization and firms have wanted to appear to be responsive to this SBIR objective. However, there is a concern on the part of firms that are having difficulty in pursuing commercialization. An overemphasis on commercialization can take away from one of the SBIR program’s most beneficial qualities, which is the provision of an accessible revenue stream for firms engaged in basic research and innovative development activities. Balancing the importance of support for these firms and the goals of commercialization is a policy question that needs to be explicitly addressed. One finding of this research is that there is a role for non-Fast Track projects. Since commercialization is not the only objective of the SBIR program, DoD should continue to support non-Fast Track projects. This is because many SBIR projects focus on basic research and R&D activities that respond to the needs of contracting government agencies. These projects may be successful even if they do not lead to immediate commercial sales. The firm’s relationship to the product cycle is relevant to its commercial potential. The appropriateness of Fast Track seems questionable for products or technologies that are distant from actual markets. The technology may need further development or the market may need time to adapt to the product or innovation. The diverse objectives of the SBIR program appear to indicate that DoD should not exclusively pursue Fast Track projects because it would inhibit the involvement of several categories of firms that have successfully participated in the program in the past.

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE APPENDIX A Selected SBIR Phase II Projects in the Southwest and Mountain Region Company Description of SBIR Phase II Project AVPRO Inc. P.O. Box 1696 800 West Rock Creek Road, #109 Norman, OK 73070 (405) 360 4848 Low-Cost Curing and Repair Process for Composites Bolder Technologies 4403 Table Mountain Drive Golden, CO 80403 (303) 215-7200 Development of a 30Ah Thin Metal Film Lead Acid Cell for High-Power Electric or Hybrid Vehicles Chorum Technologies Inc. (Formerly Macro-Vision Communications, LLC) 1155 E. Collins Blvd., Suite 200 Richardson, TX 75081 (972) 238-1770 Self-Routing Wavelength Switch Coherent Technologies, Inc. 655 Aspen Ridge Drive Lafayette, CO 80026 (303) 604-2000 Tunable UV LIDAR for Water Vapor Profiling and Ozone Monitoring Lipitek International, Inc. Texas Research Park 14785 Omicron Dr San Antonio, TX 78245 (210) 677-6001 Innovative Design and Synthesis of Antiparasitic Agents Mission Research Corporation 1720 Randolph Road, SE Albuquerque, NM 87106-4245 (505) 768-7600 A Novel Field-Programmable Gate Array for Space Applications Picolight Incorporated 4665 Natilus Boulder, CO (303) 530-3189 Long-Wavelength Oxide Vertical-Cavity Surface Emitting Lasers Radiant Research, Inc. 3006 Longhorn Blvd., Suite 105 Austin, TX 78758-7631 (512) 339-0500 Planarized Optical Clock Signal Distribution on Si

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE Appendix A—continued Company Description of SBIR Phase II Project Systems and Processes Engineering Corporation 101 West 6th Street Austin, Texas, 78701 (512) 479-7732 Growth of SiC Using Seeded Supersonic Beams Technology and Resource Assessment Corporation (TRAC) 3800 Arapahoe Avenue, Suite 225 Boulder, CO 80303 (303) 443-3700 Array Beam Imaging for High Resolution Stand-Off Mine Detection TPL, Inc. 3921 Academy Parkway North NE Albuquerque, NM 89109-4416 (505) 344-6744 Ultra-High Dielectric Constant Dielectric Materials; Inorganic Conformal Coatings for SiC Packaging

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE APPENDIX B SBIR Program Case Study Survey Description of the Firm History of firm: founding date, founder, founder’s background. Product or service: description of the firm’s main good or service. Technology: description of technology produced. Projected market size and major competitors. What is the firm’s competitive advantage? Reasons for location of the firm (e.g., labor pool, nearby research facilities or science parks, markets, access to capital). SBIR Project Information SBIR technology: description of technology for which SBIR award was given and technology’s origin. Number of SBIR awards won. What is the relationship to the agency mission? Impact of SBIR SBIR & Firm Strategy Role of SBIR award in company strategy: How important was the award to the firm’s current position? What alternative sources of funding were considered and/or enhanced by the SBIR award? Do they anticipate applying for further SBIR awards? If the firm received earlier SBIR awards, how did these affect the current award? Was the SBIR and/or Fast Track award used as a marketing tool? That is, did the firm use the presence of the award as leverage to attract additional outside capital? Did the firm use the Fast Track policy —i.e., the opportu

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE nity for outside investors to obtain up to a 4:1 match on their investment —as leverage to attract outside capital? Commercialization Does a strategy exist for commercializing the product? For example, strategic alliances for production, such as a joint venture or licensing. If possible, please disclose names of firms. Has the SBIR-funded technology generated any patents? Is it expected to generate patents? Have any scientific papers resulted? 13a) How was the commercialization strategy affected by participation in SBIR? By participation in Fast Track? Has the firm sold a product resulting from the SBIR project? If not, when does it anticipate selling its first product? Does the firm have specific customers interested in the product? If so, who? Does the firm have anyone on its board of directors or in a management position that has built a successful company before and taken it public? Financing and external partners Does the SBIR awardee have external financing? If so, how much and will it identify the partner? Did the SBIR award play a role in the external partner’s decision to provide funding. Where is the partner located? How was the relationship with the partner developed? Did the SBIR award play a role in securing other external investment? Does the SBIR awardee have internal financing? If so, how much? Other Impacts Has participation in the SBIR program generated other types of impacts, relationships, or opportunities? SBIR Program Administration Did the requirements of SBIR in general and Fast Track in particular prove helpful or onerous in terms of delay or impact on external funding? For standard SBIR awards, did the delay between Phase I and Phase II increase time to market for the firm’s product? Did the Fast Track award improve time to market for the firm or allow the firm to maintain continuity of effort?

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE How could the SBIR and especially the Fast Track program be improved? How did the firm become aware of the SBIR program? Of the Fast Track element of SBIR? Did the firm experience difficulties in preparing the SBIR application? Perspectives of Third Party Investors (if relevant) How did the third-party investor become aware of the project being funded by SBIR? What prospects does the SBIR project hold for the third-party investor ’s organization? Did the SBIR award influence the third-party investor’s decision to invest in the project? Did the Fast Track policy (i.e., significantly higher chance of Phase II award for projects attracting outside investors) influence the decision by (a) enabling the third-party investor to leverage its investment in the company, (b) “certifying ” the promise of the technology (through a government review of and implicit approval of the technology)? Cross-Cutting Research Questions: Does the firm think that the DoD policy of giving a higher chance of Phase II award to companies that attract outside investors (per Fast Track) is (a) a useful way of focusing the SBIR program on companies with strong commercialization capabilities; (b) good public policy?) What factors influence a firm’s decision to participate in Fast Track? What factors inhibit a firm’s participation in Fast Track? What benefits do firms expect to gain from a Fast Track award not available through the regular Phase II process? Does the Fast Track award affect the performance of firms? How (e.g., in terms of research capabilities or commercialization prospects)? What specific effects does the presence of a third-party investor have on performance?

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The Small Business Innovation Research Program: AN ASSESSMENT OF THE DEPARTMENT OF DEFENSE FAST TRACK INITIATIVE Are differential impacts of Fast Track observed by region, DoD funding agency, or firm characteristics? What do participating firms see as strengths and weaknesses of the Fast Track program?