The Small Business Innovation Research Program An Assessment of the Department of Defense Fast Track Initiative (2000) / Chapter Skim
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An Assessment of the Small Business Innovation Research rogram in New England: Fast Track Compared with Non-Fast Track Projects
An Assessment of the Small Business Innovation Research rogram in New England: Fast Track Compared with Non-Fast Track Projects
Pages 104-140
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From page 104... ...
. The collection of 14 New England SBIR projects studied here exhibited, at the outset of Phase I, high risk both technical and market risk, high capital costs, and often expectation of a long-time before commercialization of the resulting technology.
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From page 105... ...
With the SBIR program providing funds, the expected private return relative to just the private portion of the total project costs is sufficient to move the private rate of return above the hurdle rate, and then the socially valuable research investment is undertaken. · Taken as a group, the Fast Track projects show higher prospective lowerbound social rates of return a measure that is based upon expected profits to the innovator and other producers benefiting from the innovation.
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From page 106... ...
All of the SBIR projects studied were awarded both Phase I and Phase II funding. The goal of the study is to describe the SBIR projects and compare the Fast Track projects with the non-Fast Track projects, determining the effect that Fast Track has had on SBIR performance and firm behavior.
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From page 107... ...
Fast Track and non-Fast Track projects alike have lower-bound social rates of return exceeding the private rates of return in the absence of SBIR funding. Each of the studied projects is the type of research project in which the market would fail to invest in a socially valuable innovation in the absence of SBIR or similar public funding.
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From page 108... ...
Furthermore, the acquisition plans of DoD are not typically firm at the outset of the research, and although the potential for spillovers to the nonmilitary commercial sector is present, many uncertainties remain about the form of the nonmilitary applications and about the market success of those applications. Table 3 lists the companies along with the titles of the SBIR projects studied in this paper and their Fast Track status.
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From page 109... ...
Numerous SBIR projects have contributed to that strategy, although the company gets only about 20 to 25 percent of its revenues from the SBIR awards. Hyperion Catalysis International.
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From page 110... ...
Lithium Energy Associates, Inc. Lithium Copper Chloride Inorganic Electrolyte Battery for More Electric Aircraft Systems.
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From page 111... ...
Commercial potential extends beyond the protection from vibration of components in space launch vehicles. The commercial potential comes from using area average sensors with flexible circuitry, and Mide has four commercial products using that technology.
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From page 112... ...
The technology is dual use. For example, the basic transmitter unit in the laser radar has applications for heating, cutting, and trimming, for example, in conjunction with one of the lasers used in eye surgery that was developed initially in another DoD SBIR project trying to track objects at great distance.
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From page 113... ...
The laser paint technology is used for identification or authentication, for example, via a label on a fabric or in a document. The second core technology came from Phase I of this SBIR award.
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From page 114... ...
COMPANIES' EXPECTATIONS FOR SBIR PROJECTS AND REASONS THAT SBIR SUPPORT WAS NEEDED As Table 4 shows, the SBIR awards made possible research that otherwise would not have been undertaken or would have been done on a smaller
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From page 115... ...
But at the outset, the SBIR award is the lifeblood of new entrepreneurial ventures when new technology is to be advanced. We came up with something worthwhile for DoD, but we also advanced our own technology to another level without going crazy looking for outside investors.
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From page 116... ...
A1though of course the SBIR program is not expected to change the technical risk or opportunistic behavior, as explained later, it does increase the private expected rate of return above the private hurdle rate. With public funding, despite the risks, the firm will undertake the research.
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From page 117... ...
Opportunistic behavior 2 11 Non-Fast Track Companies 1. High technical risk 3 23 2.
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From page 118... ...
The second comment reflects the fact that because the SBIR projects are high-risk projects, outside investors demand very high expected rates of return. Many comments like the second comment were made when the interviews turned explicitly to discussion of outside finance, and those comments are reported later.
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From page 119... ...
While coming up with something worthwhile for DoD, we also advance our own nonmilitary commercial technology to a higher level without going crazy looking for outside investors. The lessons learned in these SBIR projects provide the data base that allows us to extrapolate intelligently.
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From page 120... ...
Yes. The SBIR program is the way to get funds for truly innovative high-risk small business projects that cannot effectively be financed by outside private funds, given the opportunistic behavior by companies or lack of understanding of the technology by venture capitalists.
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From page 121... ...
On the other hand, given that the SBIR project has proven the commercial potential for what was an extraordinarily risky project at the start of Phase I, the firms often report that with the commercial potential now established, the commercialization plans look very much as they would for any project that had reached the stage of making prototypes and gearing up for production. Nonetheless, it is also true that in many cases the respondents are in the position of needing a "Phase III" to provide the bridge from highly promising technology with great commercial potential to successful development of the manufacturing technology and the final product for the market.
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From page 122... ...
COMPANIES' PERCEPTIONS OF THE RELATIONSHIP BETWEEN THE SBIR AWARD AND PRIVATE THIRD-PARTY FINANCING Table 8 shows that the Fast Track program does address what most respondents see as a difficult period for SBIR projects namely, the gap between Phase I and Phase II funding. Both Fast Track and non-Fast Track respondents emphasize the difficulties created by the gap: Employees must be paid and the project
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From page 123... ...
With one exception, the non-Fast Track respondents did not find that the SBIR award helped them to secure outside funds. This reflects the difference in prospects for commercialization early in the SBIR-funded research of Fast Track projects as compared with non-Fast Track projects.
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From page 124... ...
COMPANIES' VIEWS ABOUT ADMINISTRATION OF THE SBIR PROGRAM The respondents report that they are highly satisfied with the SBIR program; they are overwhelmingly positive in their overall impressions of the program, as shown in Table 9. The responding companies believe that the SBIR program made it possible for them to do significant research that they otherwise would have been unable to do.
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From page 125... ...
The SBIR program could encourage small businesses to bring in outside expertise to ensure competence in business administration to go along with the competence in the scientific work. I want to promote the SBIR concept.
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From page 126... ...
But there is a problem here if worthwhile projects get low priority because they are either unlucky in seeking outside funding or because they entail research that is not at a stage allowing the small business to attract third-party funds. I like the SBIR program.
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From page 127... ...
The prospects for commercialization could be improved if the SBIR program provided funding for a Mentor/Consultant as a part of Phase II. The SBIR firm would identify in the Phase II proposal a large corporation or marketing consulting firm that would work with the SBIR firm during Phase II and provide expertise about commercializing the technology.
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From page 128... ...
The SBIR program could help to complete the process of commercialization. From a successful Phase II project, the SBIR project could go to a stage where the Phase II success is developed further.
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From page 129... ...
The expected rate of return required by the potential outside investor exceeds the rate that the small business is willing to promise for the project and, as a result, the small businesses in our samples would not have proceeded with their innovative investments without the support of the SBIR program. Regarding the difficulties of raising outside financial capital, the respondents made the following observations.
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From page 130... ...
Without the SBIR funding, socially valuable research would not be undertaken because the required rate of return for outside private investors could not be expected to be achieved, and the small business would not have been able to finance the research itself The calculation of the lower bound for the social rates of return uses the information summarized in Table 10; the information was developed from the interviews that were conducted with the SBIR award winners. Some of the information is also available in the DoD files; however, the information was verified with the respondents and updated to reflect any changes from the DoD files.
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From page 131... ...
Our estimates of the social rate of return are conservative because we do not attempt to estimate the value of consumer surplus generated by the SBIR projects. Second, some of the profits generated by the innovations will be captured by firms other than the innovators.
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From page 132... ...
It is a lower bound because consumer surplus has not been measured. The private expected rate of return without SBIR funding would be the solution to i in Eq.
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From page 133... ...
Although they begin with a Phase I where a small business needs outside support, they exhibit sufficient commercial potential to attract outside funding quickly, and as a result these are likely to be projects that, relative to nonFast Track projects, have higher lower bounds for social rates of return (recall that the social rates of return measure only producer, not consumer, surplus)
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From page 134... ...
bThis observation has a negative value because commercial returns started before the end of Phase II. CHalf of the respondents were uncomfortable estimating the private hurdle rate that outside financiers would apply to their projects at their outset.
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From page 135... ...
The funding from the SBIR program changes the ordering of rates of return anticipated at the outset of Phase I With the SBIR program providing funds, the expected private return relative to just the private portion of the total project costs is sufficient to move the private rate of return above the hurdle rate, and then the socially valuable research investment is undertaken.
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From page 136... ...
Furthermore, the average duration of additional development beyond Phase II is somewhat less for the Fast Track projects, suggesting that at least on average they are somewhat closer to commercialization at the end of Phase II than the non-Fast Track projects. The respondents and the rate-of-return calculations make clear that although the Fast Track program selects projects that are different from SBIR projects more generally, projects that do not qualify for the Fast Track designation are typically no less deserving of SBIR support, but rather are high-risk projects with potentially great social value that would go unfunded in the absence of the SBIR program.
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From page 137... ...
· The SBIR projects are socially valuable: The social rate of return is greater than the rate of return needed for a worthwhile project. Respondents in the New England comparison groups expressed concerns about and recommendations for improving the SBIR program.
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From page 138... ...
Some SBIR projects appear to be the sort of routine R&D and procurement that used to be done at large companies. Fast Track is a great innovation because it puts money into truly innovative small business projects with a high chance of commercialization.
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From page 139... ...
Further investigation, available on request from the author, showed that the qualitative differences among the projects remain the same when controls for technology categories are added in a regression model. The conclusion is that the SBIR program has funded innovative projects with high social rates of return that would not have been undertaken in the absence of the program.
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From page 140... ...
Bastien of Optiga~n, Inc.; Peter Chenausky of QSource, Inc.; David Miller, Larry Willner, and Gregory Lane of SEA CORP (Systems Engineenng Associates Corp.~; Timothy J Dnscoll of Spectra Science Corp.; Frank Folino of Synkinetics, Inc.; and Grant M
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