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An Assessment of the SBIR Program at the Department of Defense (2009)

Chapter: Appendix D: Case Studies

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Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Appendix D
Case Studies

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

3e Technologies International (formerly known as AEPTEC)

Zoltan Acs

University of Baltimore

FIRM OVERVIEW

3e Technologies International (3eTI), formerly known as AEPTEC, specializes in secure wireless network applications and wireless condition-based maintenance solutions. Condition-based maintenance refers to the use of advanced technologies to determine equipment condition, and potentially predict failure. The company’s main service is providing wireless infrastructure and specialized applications of wireless technologies.

Steven Chen founded 3eTI in 1996. Chen originally sought to develop hard disk drives, but shifted the company’s focus to secure wireless technology and condition-based maintenance because of product development opportunities made available through the SBIR program.

As a more flexible small business, 3eTI is able to economically customize solutions for the government market, gaining an advantage over larger companies that are focused primarily on mass market products. 3eTI specializes in customized, high-tech total solutions designed to meet a customer’s specification, while still destined for a future in applications for the commercial market. For example, the company’s wireless access point products (devices that connect computing platforms together to form a wireless network) compete with products from vendors such as Cisco and Motorola. 3eTI’s customized solutions capabilities were demonstrated in a prior contract, where the company developed a robust one-box wireless sensor networking product, which compares to four-box solutions from competitors such as Cisco.

3eTI/AEPTEC was named the 5th fastest growing company in the Washington, DC metropolitan area in 2003. The company has also received the Navy SBIR Success Story Award, the Tibbetts award in 2002, and was #62 on the list of top Department of Defense contractors in 2003.

THE ROLE OF SBIR

3eTI has been the recipient of 28 Phase I and 10 Phase II awards. Approximately eight percent of the company’s revenue comes from SBIR Phase I and II awards.

The SBIR awards have been integral to the firm’s current position. They allowed the company to keep its technology fresh and on the leading edge, which

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

is imperative for a small company. 3eTI considers SBIR as a leading source of funding and the company anticipates applying for further SBIR awards.

3eTI has continued with its focus—determined mostly by early SBIR awards—on wireless technologies. Within that area, the company explored various possibilities and partnerships. For example, while the majority of the company’s work has been geared towards U.S. Navy ships, 3eTI has expanded into wireless technologies that provide for antiterrorism and force protection at military bases and other government facilities.

The majority of the firm’s commercialization activities are due to SBIR. Phase III awards have allowed the company to commercialize their technology by providing seed funding. It allowed 3eTI to build a reputation and further develop its products, leading to 3eTI’s acquisition by EFJ, Inc.—a leading wireless telecommunications solutions company—in 2006.

3eTI has used SBIR’s sole source justification to gain a competitive advantage over large systems integrators, like Lockheed Martin, in federal procurement. Under this provision, the procurement advantage remains even if the small business enters a partnership with, or is bought out by, a large publicly traded company.

SBIR also informs small firms about the technical direction federal agencies are taking, and allows them to provide input for those technical solutions. SBIR affords small companies like 3eTI an opportunity to understand what direction federal agencies are heading and what their expectations are in terms of technology and product development. It would be difficult for a small company to get that kind of information outside the program.

In 1998, when the company first started receiving SBIR awards, it had less than 20 employees. Currently, 3eTI has approximately 95 employees. 3eTI has a ratio of four research personnel to one manufacturing personnel. This ratio is due to the fact that the company has historically manufactured only prototypes or small orders of units, and outsourced larger volume manufacturing of finished products.

The firm has sold products resulting from the SBIR projects to both the federal and private sector. 3eTI has also filed several patents and has published several scientific papers. 3eTI trademarks include AirGuard, InfoMatics, and Virtual Perimeter Monitoring System (VPMS).

IMPROVING SBIR
Surviving Funding Gaps

Concern has been expressed regarding the delay between Phase I and Phase II awards. Funding gaps may be fatal to commercialization opportunities for small companies. When a company is counting on an award that is being dragged out, it may lose an important window of opportunity and customers that have their

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

own timelines to follow. If a commercialization opportunity is lost, companies often have to start the award process all over with a new project. Unfortunately, agency contract officers often do not consider the real-world limitations their awardees face.

Such delays may occur because contracts must pass through several levels of bureaucracy, and delays accumulate at each level. The preferred solution to this problem includes establishing a timeline for the government to follow in administering awards, and requiring the agency to advance the company a small portion of the award after making the Phase II decision, but before the contract is finalized.

3eTI has survived such delays (sometimes as long as one year) only because the company was fortunate enough to receive overlapping SBIR awards and conducted successful commercialization activities. Although to some extent delay is built into the budget and manpower process, it cannot be sustained without winning multiple awards. In fact, the company very rarely stops work when waiting for the funding to arrive. While it has encountered delays in receiving Phase II money, it knew the award was approved. Nevertheless, such delays are hurdles for both the firm and the customer.

Commercialization Programs

The company has participated in meetings organized by the SBIR, including meetings where various federal agencies participated as commercialization customers. 3eTI finds these events very helpful.

Award Size

The amount of the Phase I award is seen as being adequate, considering an award period of six months. Phase I awards can be utilized well by companies that have a good idea formulated, giving the company an opportunity to make its plan and state its case. However, 3eTI believes that the size of Phase II awards should be increased. The standard award, approximately $750,000, is small considering today’s market standards, and it has not changed in the past 5 years. The price of doing business increases as the project grows and diversifies. The ideal award would be a minimum of $1,000,000, with another $250,000+ available for Phase II Options. Also, companies need additional funding because it takes a long time to get Phase II awards to commercialization and transform them into finished products.

Procurement

Individuals charged with procurement require extensive training. They must understand their legal responsibilities in the procurement process. According to

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

the law, products developed under SBIR should receive priority consideration in purchase decisions. Sometimes procurement specialists fail to provide that consideration. In such instances, 3eTI has protested and educated those involved.

A lack of knowledge about the procurement process may inhibit a firm’s participation in SBIR. When companies begin writing proposals, without understanding exactly the customer’s needs, they invest valuable time and resources in a process doomed to failure.

Venture Capital Participation

Small publicly traded companies should be allowed to participate in the SBIR program, even if they have access to private sources of funding, because the SBIR’s objective is to promote innovation. Additionally, if small publicly traded companies are excluded from the program, the government will have to pay a higher price for their product by acquiring it commercially.

Enlarging SBIR

The SBIR program should be larger and invest in its administration and customer service. The government benefits greatly from the program, because for $750,000, it gets a better and more cost-efficient product compared to the commercial sector alternative. Large commercial companies can have greater expenses, compared to small companies, and may reflect that in their prices.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

Advanced Ceramics Research1

Irwin Feller

American Association for the Advancement of Science


Advanced Ceramics Research (ACR) was originally incorporated as a startup, self-financed firm in 1989 by Anthony Mulligan who had recently graduated in mechanical engineering from the University of Arizona, and Mark Angier who was still a student in mechanical engineering, also at the University of Arizona. Shortly after they were joined by Dr. Donald Uhlmann, a professor at the University of Arizona, and Kevin Stuffle, a chemical engineer previously employed at Ceramatec Corporation, Salt Lake City, Utah. In late 1996 Dr. Daniel Albrecht, retired CEO of Buehler Corporation, joined as a shareholder and officer until 2000. Since 2000, Angier and Mulligan have remained as the only shareholders and are active in the management of the company.

From its inception, ACR sought to become a product development company, capable of manufacturing products for a diverse set of industries based on its technological developments. Although its competitive advantage has been in its advanced technology, it has sought to avoid being limited to being a contract R&D house. Over its history, the relative emphasis on R&D, product development, and manufacturing has varied, being primarily shaped by market demand conditions for its end-user products. The firm has both an extended set of collaborative, network relationships with university researchers, who conduct basic research on materials, and “downstream” customers for its products.

Also, from its early inception, the firm knew about the SBIR program, but viewed its profit ceiling margins, placed at 5–7 percent, as too low to warrant much attention. Only commercial products were seen as yielding an adequate profit margin. Over time though, it has participated in the SBIR program of several federal agencies, including DoD, NASA, Department of Energy, and the National Science Foundation.

ACR’s initial 2 products were PVA-SIC grinding stones and Polyurethane friction drive belts for the aluminum memory disk manufacturing industry. These two products were a direct result of a NASA Phase I SBIR program entitled “Laser Induced Thermal Micro-cracking for Ductile Regime Grinding of Large Optical Surfaces.” While the program did not go on to Phase II, the commercial sales generated from the first two products was significant for the growth of the company.

The firm also saw market potential in developing products from advanced ceramics. The attractiveness of the SBIR program was that it would underwrite concept development. Firm representatives had several discussions with DoD

1

Draft based on interview with Dr. Ranji Vaidyanthan, May 3, 2005, at the Navy Opportunity Forum and publicly available information.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

ADVANCED CERAMICS RESEARCH : COMPANY FACTS AT A GLANCE


Address: 3292 E. Hemisphere Loop, Tucson, AZ 85706

Phone: 520-573-6300; <http://www.acrtucson.com>

Year Started: 1989


Ownership: Private


Annual Sales:

FY2002: $5 million

FY2003: $8.3 million

FY2004: $11.5 million

FY2005: $20+ million


Number of Employees: 83


3-Year Sales Growth Rate: 250 percent

4-Year Sales Growth Rate: 400 percent


SIC:


Technology Focus: Advanced composite materials; rapid prototyping, UAV’s, sensors


Number of SBIR Awards—Phase I

(DoD Phase I): 75

Number of SBIR Awards—Phase II

(DoD Phase II): 18

Awards: 2002 R&D 100 Awards (Fibrous monolith wear-resistant components that increased the wear life of mining drill bits), 2001 R&D 100 Award for water-soluble composite tooling material, 2000 R&D 100 Award for water-soluble rapid prototyping support material

officials about the SBIR program, but the catalytic event was a meeting with a DARPA program officer, Bill Coblenz. Coblenz already held a patent (issued in 1988) on ceramic materials. He was interested in supporting “far out” ideas related to the development of low-cost production processes on advanced ceramics, based on the technique of rapid prototyping. DARPA already was supporting research at the University of Michigan.

ACR was encouraged to begin work on low-cost production techniques. It did this under a series of DARPA awards and SBIR awards, although never concentrating on SBIR. Drawing in part on the advanced research being done at the

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

University of Michigan and drawing on its expertise in both advanced ceramics and manufacturing, ACR developed a general purpose technology of being able to convert autoCAD drawings into machine readable code, then to direct generation of ceramic, composite, and metal parts.

Initially SBIR awards accounted for nearly all of ACR’s revenues. By 1993 the firm had transitioned to nearly 50 percent of its revenues from the commercial sector and about 25 percent of its revenues from non-SBIR government R&D funding, with the remaining 25 percent as SBIR revenues. For 2005 the company projects about $20 million in sales with about 15-20 percent of the revenues coming from STTR/SBIR Phase I and Phase II programs. The firm’s R&D also has been underwritten by revenues generated by its manufacturing operations. Its primary use of SBIR awards was to develop specific application technologies based about its core technology.

One market that it saw as having considerable potential was that of developing and manufacturing “flexible carriers for hard-disk drives” for the electronics industry. After aggressively “knocking on doors” to gain customers, it soon became a major supplier to firms such as SpeedFam Corporation, Komag, Seagate, and IBM. ACR’s competitive advantage rested in its ability to make prototypes accurately, quickly, and at competitive prices. Demand for this product line grew rapidly, enabling the firm to go to a 3-shift 7-day-a-week operation. In addition, ACR developed ancillary products related to testing and quality control tied to this product line.

The firm financed its expansion through a combination of retained earnings and license revenues, primarily from Smith Tools International, an oil and rock drilling company, and Kyocera, a Japanese based firm, which specialized in ceramics for communications applications, which licensed its Fibrous Monolith technology. ACR also reports receiving approximately $100,000 in the form of a bridge loan between a Phase I and Phase II award from a short-lived Arizona’s state economic development program, funded from state lottery revenues. It reports no venture capital financing. It remains a privately held firm.

Demand for ACR’s electronic products seemed to be on an upward trajectory through the 1990s. In response to demands from its primary customers for an increase in output from 5,000 to 60,000 units monthly, ACR built a new 30,000 square foot plant. The electronics market for ACR’s products however declined abruptly in 1997, when 2 of its major customers—Seagate and Komag, two of the largest producers of hard disk drives, shifted production to Asia. This move represented both the shift from 8 inch to 5 inch and then 3.5 inch disks, and lower production costs, which drove down the price of the carrier components they produced from $16 to $1.50 per unit. The loss of its carrier business was a major reversal for the firm. Heavy layoff resulted, with employment declining to low of about 28 employees in 1998.

1998–1999 are described as years of reinvention for survival for ACR. The firm’s R&D division, which formerly had been losing money, was now seen as

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

having to become its primary source of revenue. The explicit policy was to undertake only that R&D which had discernible profit margins and the opportunity for near term commercialization. Previously, ACR had conducted a small number of Phase I SBIR awards, but had not actively pursued Phase II awards unless it could readily see the commercial product that was likely to flow from this research or it had a commercial partner.

ACR reports several outcomes from its participation in the SBIR program. As of 2005, it has received 75 Phase I and 21 Phase II awards. The larger number of awards have been from DoD, followed by NASA, with a few from the other agencies such as NSF and DoE. Products based on SBIR awards received from DARPA and NASA have had commercial sales of approximately $14 million.

ACR is now actively engaged in development and marketing of Silver Fox, a small unmanned aerial vehicle (UAV). R&D for the Silver Fox has been supported by awards under DoD’s STTR program, and involves collaboration between ACR and researchers at the University of Arizona, University of California-Berkeley, the University of California-Los Angeles, and MIT.

The genesis of the project highlights the multiple uses of technological innovations. In 2000, while in DC to discuss projects with Office of Naval Research (ONR) program managers, ACR representatives also had a chance meeting with program manager for the Navy interested in small SWARM unmanned air vehicles (UAVs). At the time, ONR expressed and interest and eventually provided funding for developing a new low-cost small UAV as a means to engage in whale watching around Hawaii, with the objective of avoiding damage to the Navy’s underwater sonic activities. Once developed however, the UAV’s value as a more general purpose battlefield surveillance technology soon became apparent and ONR provided additional funding to further refine the UAV for warfighter use in Operation Iraqi Freedom.

ACR has a bonus compensation plan that rewards employees for invention disclosures, patents, licenses, and presentations at professional meetings. These incentives are seen as fostering outcome from SBIR awards (as with all other company activities).

ACR owns a 49 percent stake in a joint venture manufacturing company called Advanced Ceramics Manufacturing, LLC, which is located on the Tohono O’Odham Reservation south of Tucson, Arizona. Fifty-one percent is owned by Tribal Land Alotees. The company, which employs about 10 people who manufacture ceramic products in a multimillion dollar facility (15,000 square feet), is expected to do about $2.5 million in sales revenues over the next 12 months.

ACR also has also recently opened 2,500 square feet of laboratory and office space in Arlington, VA, where it is basing its new Sensors Division and providing customer support to its military customers with an initial staff of 8 persons.

Funding delays between Phase I and Phase II awards have been handled primarily through a process of shared decision making, leading to consensus-based reallocations of firm resources and staff assignments. ACR typically has

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

several R&D projects occurring simultaneously. When delays occur, researchers are assembled to determine whether the firm’s internal funds, including its IR&D funds, will be used to continue a specific project.

DoD’s SBIR review and award procedures are seen as fair and timely. The dollar amounts of Phase I and Phase II awards and SBIR “paperwork” requirements likewise are seen as reasonable.

The Navy is seen as especially good in the speed with which it handles the selection process. It has reduced the length of time to make awards from 3 to 4 months to 2 months; NSF, by way of contrast, takes 6 months.

The length of the selection process across federal agencies does influence ACR’s decisions. It is more likely to pursue Phase I awards from agencies such as DoD that have short selection cycles than those with long(er) ones.

The company has seen great benefit in accelerating commercialization of its SBIR/STTR programs through participation of the Navy’s Technology Assistance Program (TAP). ACR first participated in the TAP program for its Water Soluble Tooling Technology, its Fibrous Monolith Technology, and its UAV technology. ACR’s diligent following to what it learned in the Navy’s TAP program has assisted it in receiving 3 separate Indefinite Deliverables, Indefinite Quantities (ID/IQ) Phase III contracts totaling $75 million. Each of the three technologies has received a $25 million ID/IQ contract to facilitate continued government use of the technology.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

Applied Signal Technology

Irwin Feller

American Association for the Advancement of Science


Applied Signal Technology (AST) was founded in 1984 by Gary Yancey, John Trieichler, Jim Collins, and Jane Sanchez. The four founders had been employed by Argo Systems, a California-based defense contractor, specializing in signal technology related to strategic intelligence, but left to start their own firm. Each of them invested their own funds and deferred their salaries for a year to provide the firm’s initial working capital. The firm subsequently received several rounds of private financing prior to going public. AST went public in 1993, and is currently listed on the NASDAQ as ASPG.

The firm’s initial revenues were derived largely from a 1-year consulting contract with Lockheed, augmented by smaller size contracts from DoD. The firm grew steadily throughout much of the 1990s, reaching a peak level of employment (650) and revenues ($115 million) in about 1999. The fall of the Berlin Wall, and the subsequent large reductions in expenditures by U.S. intelligence agencies led

APPLIED SIGNAL TECHNOLOGY: COMPANY FACTS AT A GLANCE


Address: 400 West California Avenue

Sunnyvale, CA 94086

Phone: 408-749-1888

Year Started: 1984


Ownership: Publicly traded equity; NASDAQ


Annual Sales (FY2004) $142 million


Number of employees: 500


Sales Growth Rate: Doubling between 2002–2004


SIC Code: 3669


Technology Focus: Advanced digital signal processing products, systems, and services; signal intelligence


Number of SBIR Awards—Phase I: 3

Number of SBIR Awards—Phase II: 1

Number of Patents: 4

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

to a sharp fall in revenues and employment. The upsurge in national expenditures for intelligence following 9/11 however has led to the firm’s renewed growth; firm revenues increased from $76 million to $143 million between 2002 and 2004. Current employment levels now hover about 640 (110 new employees were added with the acquisition of Dynamic Technologies, on July 1, 2005); the firm is no longer eligible for the SBIR program.

AST located in Sunnyvale in part because the founders lived in the Bay Area, but also because at the time of its founding, Silicon Valley was the place to be for cutting-edge technologies, especially those related to miniaturization, a key factor in expanding the use of digital signal processing to the needs of signal intelligence organizations.

From its inception, reflecting the expertise and orientation of its 3 founders, AST has sought to integrate R&D and manufacturing. Its activities thus extended from the design of digital microwave receivers to the manufacture of the relevant hardware.

AST’s initial customers were U.S. intelligence agencies. Beginning about 1994, its line of business began to extend to DoD. In the interim period, the firm had tried unsuccessfully to develop product lines, such as in HDTV receivers, for the civilian market. Although its products were regarded as technical successes, the firm was not able to produce these products in an economically profitable manner. (It notes that the fundamental economics of producing for the DoD and intelligence customers is different from that of the domestic sector. For the former, engineering hours are a source of income; for the latter, they are a cost, with income not being generated until downstream sales of the final product occur.)

AST’s involvement with the DoD SBIR program stems from a purposeful search by the firm to diversify its customer base. It systematically scanned the DoD Web site for topics that matched its technical capabilities, and soon found one that provided a “glove fit.” It describes its initial interaction with the cognate DoD technical program officer as providing DoD with a “surprising” opportunity for a quantum leap in technology. AST eventually submitted 6 Phase I proposals, of which 3 were funded; 1 of which eventually led to a Phase II award.

AST’s work on the SBIR project increased its opportunities to work with DoD program managers about the generation of future solicitation topics. This interaction however proved a mixed blessing. In one case, a topic generated by discussions with one program manager was, in the firm’s view, redirected to benefit another firm; subsequently, performance on the award proved technically unsuccessful.

The DoD SBIR awards are described as also having yielded significant benefits to the firm. The Phase II award led to a “foundation product” for one of AST’s division. SBIR also served to “validate” AST’s marketing efforts in becoming a new, credible supplier to DoD Services. Successful performance of an SBIR award is seen as providing proof to DoD program managers that AST

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

was capable of producing technically valuable products under given contract terms. Had it not been for SBIR, AST’s business with the Special Operations Command would not have developed; Special Operations likely would have stayed with their pre-existing sources of supply. Program managers are described as being too busy with multiple contracts to search out or to respond attentively to new sources of technology. Their orientation is to hire a contractor to solve problems, not to necessarily seek out the most competitive performer. SBIR, by way of contrast, requires that they become involved with small firms, to look at technical options, and to allow for increased competition in the selection of R&D performers. It allows and encourages program managers to scan, and expand, the contractor base.

AST has received four patents over the course of its history.2 Overall, firm strategy is not to actively pursue patents, relying instead on trade secrets and know-how to protect its intellectual property. In part, it follows this strategy because patents provide little net economic benefit. Its dominant customer is the U.S. government, which, under government contracts is entitled to royalty-free use. Also, by not patenting, the firm avoids the costs of patenting and the associated public disclosure of technological knowledge. Its patents relate to its earlier efforts to enter domestic commercial markets.

AST did not submit proposals under DoD’s 2004 SBIR solicitation because it had 485 employees as of August, 2004, and projected that its employment level would exceed 500 at the time it might receive an award. The uncertainties of the Defense market however induce a margin of error to such estimates, especially for firms close to the ceiling level of eligibility. Thus, it recommends that eligibility for SBIR be based on a firm’s employment level at the time it submits a proposal rather than this level at the time of an award.

AST experienced no difficulties with the gap in funding between its Phase I and Phase II award. Indeed, it completed its Phase I award early, (an outcome that its DoD program manager said had not happened before), and received accelerated funding to begin its Phase II work. The problem it encountered with SBIR processes related primarily to the slow pace of the initial review process. This process was described as having taken 4–6 months, which makes it exceedingly difficult for the firm to maintain the core staff that is expected to work on the project. An increase in the dollar amount of Phase I awards to the range of $150,000–$200,000 is recommended.

2

One patent was sold.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Bihrle Applied Research

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Bihrle Applied Research was started in 1973, as a 1-person engineering consulting operation by William Bihrle, an aeronautical engineer, formerly with Grumman Aircraft, which had major facilities on Long Island, New York. Billy Barnhart, also a former Grumman aeronautical engineer, joined Bihrle in 1976 when the firm was preparing for its first NASA contract. Bihrle and Barnhart were each seeking to do more exciting research than they found possible while working with Grumman. The firm’s operations were self-financed, with its very

BIHRLE APPLIED RESEARCH: COMPANY FACTS AT A GLANCE


400 Jericho Turnpike

Jericho, NY 11753

Phone: 757-766-2416


Year Started: 1973

Ownership: Private

Annual Sales (FY2004/2005): $3,492,554

Number of Employees: 18

3-Year Sales Growth Rate: 47 percent

SIC: 8748

Technology Focus: Aeronautical engineering; software development; simulation and testing

Number of SBIR Awards

Phase I: 12

(DoD Phase I Awards): 10

Number of SBIR Awards

Phase II: 9

(DoD Phase II Awards): 8

Number of Patents: 0

Number of Publications: 20

Number of Presentations: 33

Awards: 4

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

early years described as being essentially focused on survival. Bihrle remains a privately owned firm. It has not sought venture capital.

Reflecting its initial formation, Bihrle has continued to locate its headquarters in Long Island. The firm’s first major contract was with NASA’s Langley Research Center, and involved work on the stall and spin properties of general aviation aircraft. NASA was a major customer for the firm for many years. Consequently, Bihrle has located the bulk of its engineering operations in Hampton, Virginia, near the NASA Langley Research Center.

The firm started to add employees by the late 1970s, as it secured new contracts from NASA and the Navy. Bihrle’s work consists primarily of aeronautical research, specialized wind tunnel testing, and development of simulation techniques related to aeronautics, including the development of specialized software. Its primary customers are DoD, NASA, and airframe manufacturers.

EXPERIENCES UNDER SBIR

Bihrle received its first SBIR award in 1986 from the Air Force. The firm had read and heard about the program, and as an ongoing performer of DoD research perceived that its technical competencies could be applied to topics identified in DoD’s SBIR solicitations. Bihrle discovered that program managers, both in DoD and NASA, found the firm’s research to be useful in achieving mission objectives, but at times could not justify funding it under existing program constraints, even those of a 6.2 (applied research) character. SBIR thus gave agency program managers greater flexibility to support relevant “general purpose” technologies that otherwise could not be supported under targeted R&D programs. SBIR was described as a “gold mine” to DoD program managers. Bihrle also found it useful to meet with DoD officials about mutually interesting areas of research, with a view toward having these interests reflected in the development of solicitation topics.

Bihrle’s work under SBIR awards has centered mostly about the development of new testing techniques for wind tunnel testing and the development of new simulation techniques. These new technologies are broadly applicable across several DoD programs, including the joint strike fighter and the Navy’s V-22 program, as well as for NASA. The firm also credits SBIR awards as having contributed significantly to its current portfolio of tools and methods.

The importance of SBIR as a source of the firm’s revenue has varied over the years, but in several years has been a significant portion of total revenues, approaching 25–30 percent. Bihrle’s ability to compete however for SBIR awards also has varied. In some years, it might be able to identify three–four topics in DoD’s solicitations to which it could respond by submitting a proposal; in other years, there would be no topic that matched the firm’s competencies.

DoD’s administration of the SBIR program is credited with proceeding as advertised. Awards are made on a timely basis. Birhle also reports good suc-

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

cess—approximately 75 percent—in competing for Phase II awards, based on its Phase I work. The impact on the firm of gaps in funding between the two awards varies widely depending on its overall pace of activity. On some occasions, the firm will use internal funds to keep a project moving; on other occasions, it will let the project sit until an award is made.

PARTICIPATION IN STATE GOVERNMENT PROGRAMS

On one occasion, Bihrle was able to obtain interim funding from a New York state program that was designed to provide gap funding. The state program though was described as “strange,” in that the firm had to add something “extra” to its pending proposal in order to qualify for funding.

RECOMMENDATIONS ON SBIR PROGRAM

The firm views the current size of Phase I and Phase II awards as reasonable. It notes though that supporting a Phase II proposal with a budget below the maximum amount appears to appeal to program managers. Proposals with below-ceiling budgets thus seem to have a competitive advantage.

SBIR is seen as an important program both for DoD and the firm. It should be continued.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Brimrose

Zoltan Acs

University of Baltimore

FIRM OVERVIEW

Brimrose is a high-tech R&D company that uses SBIR awards to develop and commercialize new a technology development vehicle. The company manufactures, markets, and services optical process control spectrometer systems for the pharmaceutical, refinery, and chemical industries. These near infrared optical spectrometers operate in the harshest of environments around the world, from the arctic to equatorial climates, to the severest of vibration in the most dusty, abrasive, and dirtiest of the chemical plants.

SBIR is credited with providing tremendous growth opportunities for research and development of the company. Brimrose has progressed from a small, unknown company to a respectable high-tech company known for providing innovative technological solutions. Currently Brimrose is one of the world leaders in process control equipment. It is also known to various government and research laboratories for providing them with innovative photonic components and technical assistance.

A UNIVERSITY START-UP—THE ROLE OF SBIR

The firm was founded in 1979 by Dr. Ronald G. Rosemeier. After receiving his Ph.D. in Materials Science from the Johns Hopkins University, he began working as a post-doctoral student at the University of Maryland. There, he started writing proposals for SBIR awards, finding eventual success with four Phase I awards. Based on this funding, which approximated $200,000, he founded his firm and started hiring his first employees. He also applied for commercial bank loans, but found that banks were not willing to give him loans backed by the SBIR awards. As a result, Dr. Rosemeier collected over $100,000 in credit card debt. Six months later, he wrote Phase II proposals and received 3 awards, approximating $1,500,000—which meant real money. He hired additional employees. At that time 10 percent of the business was commercial (selling X-ray imaging at tradeshows) and 90 percent SBIR. As the company started commercializing new products, however, this percentage shifted to 80 percent commercial revenue and 20 percent SBIR revenue.

Over its history, Brimrose has garnered 65 Phase I and 28 Phase II SBIR awards. A few of the SBIR awards have directly resulted into commercial products. However, most awards have helped improve the company’s products through development of new technical concepts and improved manufacturing techniques.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Brimrose began operations with 6 employees and today averages approximately 60 employees. Most of the Research & Development team and few of the support staff were hired under SBIR-related activities.

COMMERCIAL APPLICATIONS

The firm’s commercialization strategy came out of, and has been greatly enhanced through, its participation in SBIR. The Phase I and Phase II SBIR funding has allowed the company to determine the feasibility of new technology and develop it to the point of prototype development without allocation of significant internal resources. Following prototype development, Brimrose uses internal funds from previous commercial sales to bring the technology to the point of commercial availability. Thus, the SBIR funds lower the company’s financial burden by decreasing the risks associated with new technology development. As a small company, this help is vital to its commercialization strategy.

While the company conducts applied research in areas such as industrial process control spectroscopy in the pharmaceutical and petrochemical industries, nondestructive testing and evaluation and novel opto-electronics devices, the focus of the company is on products that can be commercialized.

For example, Brimrose has developed a near infrared optical process control spectrometer that is operating in Germany at the OMV Refinery. This instrument performs the final quality control inspection of aviation jet fuel that is directly dispensed into commercial aircraft at the Munich International Airport. With built-in online modem support and on-board Brimrose sensor technology, this system has operated 24 hours a day for more than 5 years without a single failure.

Its optical spectrometers are also used in drug manufacturing. Having passed GMP (Good Manufacturing Practices) requirements for hardware and software, the product has been certified by the FDA for drug manufacturing. AstraZeneca has chosen Brimrose systems exclusively for all their plants world-wide as the only process control spectrometer that will be used for manufacturing of their pharmaceutical drugs.

The company commercially also manufactures components such as fiber optic coupled diode pumped solid-state green lasers for the biological instrumentation market, fiber optic collimators and focusers, fiber optic coupled modulators and tunable IR filters, and frequency shifters for the telecom industry. In all of its fiber optic coupled products, the assembly and alignment fixturing is critical to the product specification requirements. Brimrose also has extensive experience in packaging design, which includes epoxy-free optical path configurations and hermetically seam-welded designs.

The company also sells products to the agencies that made the SBIR awards. About 15 percent of its outcomes go back to the agencies. Additionally they provide technology and support to non-SBIR government programs. Their government contracts presently deal with the development of extremely fast optical

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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radar receivers, ultra-high precision, interferometer-less profilers/distance gauges for IC fabrication applications, room temperature solid state mid IR lasers for counter measures applications, manufacturing and development of hydrogen plasma assisted MOCVD reactors for laser wafer, diamond film, gallium nitride and silicon carbide film materials development. It has developed space-qualified components for optical spectrometer based on acousto-optic tunable filters.

A the projected market size for Brimrose’ acousto-optics device-based technology product is $5,000,000. Its major competitors are Foss and Brucker. In the area of vibrometer and displacement measurement devices using Laser Doppler Velocimeter, the company’s main competitors are MetroLasers in the United States and Poly-Tec, in Europe.

KNOWLEDGE GENERATION

The company is a 1982 recipient of the IR 100 Award. In addition, the company has published over 150 scientific papers. Brimrose has also filed two patents, with four U.S. patents pending:

  • System for visualization of solid-liquid interface during crystal growth U.S. Patent Number 5037621, August 6, 1991.

  • “Device and method for optical path length measurement,” Chen-Chia Wang, S. Trivedi, and J. Khurgin, U.S. Patent Number 6,600,564.

  • “Apparatus for optical difference frequency measurement using pulsed light sources and an optical frequency sensor,” Chen-Chia Wang, Sudhir Trivedi, Feng Jin, Ponciano Rodriguez, and Serguei Stepanov, U.S. Patent Pending.

  • “Bi-Wavelength Optical Intensity Modulators using Materials with Saturable Absorptions,” Chen-Chia Wang and Sudhir Trivedi, U.S. Patent Pending.

  • “Multi-junction solar cell with improved conversion efficiency,” G.V. Jagannathan, Feng Jin, and Sudhir B. Trivedi. U.S. Patent Pending.

  • “High speed optical gain flattener,” Jolanta I. Rosemeier, Ronald G. Rosemeier, and Feng Jin. U.S. Patent Pending.

IMPROVING SBIR
Surviving Funding Gaps

Brimrose notes that it is extremely committed to the development of its technology. During the gap between the Phase I and Phase II funding, it uses internal resources to continue technology development. By doing this, the company believes that it is even more prepared to continue with the second phase of the work, which benefits both the government agency that is supporting the work as well as Brimrose. By continuing technology development during the Phase I

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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to Phase II gap, Brimrose is also better placed to procure other forms of funding should Phase II SBIR funding fail to materialize.

While commercial products have always been the main objective of Brimrose, these funding gaps nonetheless hurt the company’s ability to function seamlessly.

Award Size

Flexibility is important as the cost of developing new technologies varies from topic to topic. For some technologies, $100,000 is enough. A laser generation system itself costs $300,000.

Award Selection

While Brimrose views the award selection process as being, overall, fair, it finds that the proposal process is very different from agency to agency. For instance, submitting proposals to the DoD is relatively straightforward and simple. However, other agencies such as NSF are quite the opposite.

Submission of the proposals is very complicated and time consuming, which just adds to the stress of whole proposal writing process. NSF also uses its own format for the commercialization report. Therefore, a great deal of effort goes into reformatting the information. The paperwork involved is found to the relatively the same for each agency, though the level of this paperwork has decreased as reporting becomes increasingly electronic.

Also, agencies focus the proposals on different areas. For instance, NSF puts a great deal of emphasis on the commercial aspects of the technology. Brimrose has put more effort into preparing the commercialization plan for an NSF proposal than it put into the technical parts of many proposals combined. As a small company, Brimrose found this to be a major diversion of its resources. The commercialization report can be used as an indication of its abilities to commercialize products.

Brimrose believes that there should be a standardized proposal submission process, proposal acceptance process and reporting process for all of the agencies. There should be awards or matching funds available for Phase III projects. Phase II programs should be open, not by invitation only (as it has been in the last three years). All Phase I awardees should have the opportunity to submit a Phase II proposal especially in the instance where the technical monitor has not been involved in the Phase I research effort. Finally, Brimrose recommends that the duration of the Phase I and Phase II efforts should be extended to 9–12 months and 30 months respectively.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Agency Interaction

Some agencies provide personal technical monitoring where there is a great deal of interaction between the firm’s principal investigators and the funding agency. This scenario usually leads to a far more productive program. Some agencies, on the other hand, use one technical monitor for dozens of Phase I programs. In this case, there is little personal interaction and it is very hard for the technical monitor to understand the full benefits of the innovative technology that the company is able to provide.

SBIR program management is not funded in some agencies, which results in poor follow-up and communication with the companies. In some cases, program managers are not conscientious about their responsibilities and are unresponsive to attempts to communicate with them. Finally, program administration is not transparent enough to monitor accountability.

These suggestions for improvement notwithstanding, Brimrose believes that the SBIR program has inherent strengths.

  • The SBIR program gives financial resources to companies that may otherwise not be able to pursue their high-tech research.

  • The SBIR award greatly improves the research capabilities of a firm. The award provides the financial resources to conduct a feasibility study and then to develop a prototype.

  • SBIR awards provide funding to more high-risk technology than most other sources of funding.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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CFD Research Corporation

Zoltan Acs

University of Baltimore

FIRM OVERVIEW

CFD Research Corporation (CFDRC) specializes in engineering simulations and innovative designs. CFDRC’s software and expertise allow coupled multiscale, multiphysics simulations of fluid, thermal, chemical, biological, electrical, and mechanical phenomena for real-world applications from aerospace, biomedical, defense, materials, energy, and other industries. Such simulations provide clearer insights into complex systems and thus enable Better Decisions and facilitate Better Products with lower risk, reduced cost, and less time.

CFDRC has developed state-of-the-art simulation methodologies under SBIR awards from several agencies. The resulting software has been adapted and applied to a wide range of problems, mostly during commercialization phases. Using its software and experimental facilities, CFDRC develops new hardware concepts, innovative designs, and prototypes. CFDRC is a two-time (1996 and 2006) winner of the prestigious Tibbetts Award for innovation. CFDRC is rated by DoD in the top 10 percent of small business for technology commercialization, nationwide.

About half of CFD Research Corporation’s work is research and development, the other half focused on application and transfer of developed technologies. Computational Fluid Dynamics (CFD) enables computer simulations of fluid flow, heat transfer and chemical reaction processes. The simulations (virtual prototyping) facilitate engineering design and reduce time-to-market for new advanced programs. Some examples include:

  • Biomedical studies for natural and prosthetic heart valves; vestibular (inner ear) mechanics; and ultrasound blood flow meter.

  • Design of low NOx combustors and fuel nozzles for aircraft engines.

  • Optimization of diesel fuel injectors and climate control systems for automotive companies and Chemical Vapor Deposition(CVD) reactors for semiconductor manufacturers.

  • Analysis of pilot ejection seats, Space Shuttle Main Engine, and Air Turbo Rocket (ATR) propulsion system components.

COMPANY HISTORY

Founded in 1987 by Dr. Ashok K. Singhal, CFDRC has developed simulation software for submarine applications, and aircraft escape systems for the U.S.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Navy. CFDRC was also invited to be part of the redesign teams after the accidents of the shuttle Challenger, in 1986, and Columbia in 2002. In parallel, CFDRC has also worked with private companies like Motorola, Applied materials, Samsung, GE, P&W, RR, Baxter, J&J, P&G, Chrysler, and Caterpillar.

During the slow down of the aerospace markets, the company diversified heavily into electronics and expanded its services to the global market. In 1992, CFDRC embraced the idea of commercializing simulation software. The company created a product development department that focused on customer friendly interfaces, support, and marketing.

The company’s commercial division expanded in parallel with its R&D activities. CFD Research Corporation became a well known leader in the domain of multiphysics and multidisciplinary simulations. The domain of multiphysics includes fluid flow, heat transfer, chemical reactions, biochemistry, electrical phenomena, optics, photonics, etc. The simulation software allowed customers to conduct numerical experiments in conjunction with very complex geometries. CFDRC services were used in conjunction with a variety of products in the field of mechanical engineering: aircrafts, cars, moving body problems, etc. In human physiology area, the developed technology can work at the tissue level, bacteria level, or drug development and delivery devises.

Refocusing its operations on advanced developments for aerospace and R&D in emerging areas such as renewable energy sources , nanotechnology and biotechnology, CFDRC sold its commercial software products division in 2004. After downsizing and refocusing the company, CFDRC began a new growth strategy that is focussed on application-specific software and hardware developments. This is also more aligned with the missions of the DoD and federal agencies. This approach has already resulted in faster growth over last 3 years. Presently, CFDRC has three business units: (1) Aerospace & Defense, (2) Biomedical & life Sciences, and (3) Nano Materials & Processes. The company’s projects address challenging problems of National importance including: Chem-Bio Protection, Traumatic Brain Injury (TBI), Alternative Energy Sources, Low Emissions, Space Launch Systems and Missile Propulsion.

THE ROLE OF SBIR

Since its founding, the company received approximately 125 Phase I awards and about 70 Phase II awards, garnering its first SBIR Phase I award in 1987. The first Phase II was received in 1988. Over the years, the average SBIR funding has been 30–40 percent of total revenue, with additional funding obtained through commercial contracts and Broad Agency Announcements. Currently CFDRC is the recipient of more than 10 Phase I awards from a variety of agencies, including NIH, NSF, and DARPA.

SBIR has helped CFDRC to recruit world class talent. Most employees are recruited from universities in the Northeast and California. CFDRC grew from 5

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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to over 125 employees by 2003. In January of 2004, the company peaked at 135 employees. Of these about 70 were Ph.D.s.

SBIR awards are also credited with playing a critical role in developing CFDRC’s hallmark technological innovations, long-term research, and advanced applications.

COMMERCIALIZATION

Based on its innovative technolgy, CFDRC won a Broad Agency Announcement against primes like Lockheed and Boeing in 1995. While the Air Force initially hesitated to award $1.5 million, 3-year contract to a company that never made an aircraft, they were nevertheless satisfied with the result. In 1999, after finishing the program sucessfully, the Air Force officials noted that large companies have not been able to provide the agency with such extensive development and services for such limited funds. It was a good confirmation of the value and ability of small businesses.

CFCRC is also building and marketing software capabilities in new areas, such as biotechnology and nanotechnology. In the past 10 years, the company increased investment in both, its engineering and bio labs. CFDRC’s commercial software products (CFD-ACE and CFD-Fastran) are licensed by over 600 organizations, worldwide. Customers include Fortune 100 companies, start-up companies, government labs, and universities. In 2004, CFDRC sold its software product division to an international software company.CFDRC, however, retains royalty-free use of this technology and continues to develop the base product.

KNOWLEDGE GENERATION

According to CFDRC, funding from SBIR has helped to pioneer the use of advanced CFD and multiphysics simulations in biotechnology and semiconductor equipment companies. It has also led to novel designs for lower emission fuel nozzles, and novel biochips for genomics and proteomics.

Licenses and Patents

Presently CFDRC has over 25 patents, awarded or pending in the areas of biotechnology, combustion, propulsion, and materials. While the company’s product division was a clean sale, CFDRC enjoys perpetual rights to customize the product for the purposes of customers like the DoD. However the company cannot sell the product in competition.

The company can now pursue patents even more aggressively, because after selling the product division there’s no need to invest effort in marketing of software.

CFDRC tries to licence its products to large global companies, to ensure

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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greater market coverage. Many designs and prototypes were not patented, however, CFDRC still has the data rights. Holding data rights and IP are important to the company. Patents are used as credentials in negotiations with larger companies.

Publications and Trademarks

CFCRC has published or presented over 500 papers in international journals and conferences. In addition, it held the trademarks for 7 software product names, which were transferred with the sale of software division.

IMPROVING SBIR
Surviving Funding Gaps

Although funding gaps cause great inconveniences, the company has been able to manage the delay between Phase I and II by diversifying its base, by investing internal funds to keep the momentum, and by temorarily diverting staff to other projects.

Award Size

CFCRC believes that Phase I awards in the $100,000–$125,000 range are more commensurate with current economy. The upper limit of the awards should be increased to primarily offset the cost of living. In 20 years there was only one increase from $50,000 to $75,000. In that spirit, the awards are due for one more adjustment. For Phase II awards, the award amounts should be in the $800,000–$1,200,000 range. Phase II awards size need be increased in order to produce more tangible developments. The 2-year time limit for Phase II awards is fine.

Project Selection

Most agencies aapear to have developed good project selection procedures. The selection process is, by and large, fair and timely. There were few situations when CFDRC was discouraged by agencies that applied certain unwritten rules to their processes.

For example, some large agencies followed the practice of not awarding more than two contracts per company each year. Such decisions should be based on merit and potential for innovation. Otherwise, they penalize more established companies with a greater number of ideas and capacity in favor of newly established start-up companies with fewer ideas and submissions. Some other organizations attempt to limit the number of allowed proposals. per company. Although agencies may have a good reason for implementing such measures, they tempt

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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companies to “play games” like dividing into 2–3 pieces, changing names, etc. Such practices interfere with overall innovation and commercialization goals.

Agencies should avoid limits on the number of awards or proposals and exceptions for VCs as this will hamper overall success of the SBIR program. Funding of venture-backed firms is fair only if a company has already proved success, has shown discipline in creating profit, developed some technological edges, or is ready to commercialize. For such companies, help from venture funds or large corporations will bring more regular management processes and financial due diligence to the table.

Commercialialization

Different agencies view “commercialization” differently, which is natural and expected. However all reviewers are not educated or coached properly about this process. NASA and DoD are more centralized, and agencies like NIH and NSF have their own peer-reviewed processes. The company feels that the original intent of SBIR was innovation and commercialization. Agencies sometimes append supplementary considerations to the award process. While these additions are well meant, they interfere with commercialization success.

Federal agencies such as DoD, DoE, and NASA should provide incentives for prime contractors to partner with small businesses. It is very beneficial for small companies to pursue SBIR awards in partnership with primes. Finally, it ultimately benefits the government to leave data rights with small businesses.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Ciencia

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Ciencia was started in 1989 by Dr. Salvador Fernandez as a firm specializing in contract R&D for the Strategic Defense Initiative. Its early emphasis was on multispectral imaging for remote sensing. As the U.S. geopolitical situation changed, with less interest on space-based interceptors, the firm has shifted its emphasis. Its core technology remains centered about the development and application of photonic sensors and instrumentation, and it continues to conduct R&D on defense-related topics. Increasingly though it has directed its efforts towards biotechnology, biomedicine, and environmental monitoring. Ciencia’s sales, as of 2005, were estimated at $2 million, distributed approximately equally between DoD and other federal government agents and sales to the private sector. In addition to DoD, it has conducted R&D for the Department of Energy and the National Institute of Mental Health.

Prior to founding Ciencia, Dr. Fernandez had worked for SRA, Glastonbury, CT, a defense-oriented R&D firm. Differences in the priority attached to Dr. Fernandez’s research interests led him to leave the firm and start his own. Also, Dr. Fernandez had previous experience in starting a firm, having earlier launched one, funded by external investors.

As it has begun to concentrate more on development of products for the

CIENCIA: COMPANY FACTS AT A GLANCE


111 Roberts Street

East Hartford, CT 06108

Phone: 860-528-9737

Fax: 860-528-5658

<http://www.ciencia.com>


Employment: 12

Revenues: $2 million

Number of SBIR Awards

Phase I: 38

Phase II: 22

Number of Patents: 3

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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commercial sector, Ciencia has begun to address the issue of how to couple its contract R&D orientation—essentially providing a service—with that necessary for a producer of products, or goods. At present, it has handled its moves towards more “downstream,” product orientation by partnering with Oriel Instruments, Inc., Stratford, CT. Under a license agreement with Ciencia, Oriel manufactures and markets a fluorescence lifetime measurement device technology based on Ciencia’s technology.

CAPITAL FORMATION

Ciencia is a privately held firm. Its initial capital came from several sources. The new firm was able to use the equipment infrastructure remaining from Dr. Fernandez’s previous firm. It also received funding from the Connecticut Innovation Fund. Some of its early DoD contracts permitted it to purchase specialized equipment. Retained earnings were the final source of internally generated growth.

INTELLECTUAL PROPERTY

Intellectual property protection is of increasing importance to the firm, especially as it shifts its emphasis to commercial markets. It has received 3 patents to date, and has several patents pending.

SBIR EXPERIENCES

Ciencia’s experiences with the SBIR program began early in the firm’s history. It received its first Phase I SBIR award in 1992 from the then Ballistic Missile Defense Organization to develop acousto-optic tunable filters for separating and resolving light into different colors. This award was followed by a Phase II award in 1993. The firm has successfully competed for 38 Phase I awards, primarily from DoD and NASA, followed by 22 Phase II awards.

SBIR projects have played a tactical role in the firm’s business strategy and development. Ciencia is market focused: Given its core technical expertise, it looks for market opportunities or, what it describes as, problems that need to be solved. It then looks to SBIR as a potential source of R&D funding to extend and adapt its technological competencies to address this need.

Despite its successes in these competitions, the firm is disappointed that its technical advances have not been more widely adopted by the sponsoring agencies. It notes that even as its work under the SBIR awards advance a technology, the stage of development at the end of a Phase II award may still not mean that a “practical” technology exists.

The process of technological innovation is seen as requiring additional time and support than is provided by Phase II awards. However, it has not succeeded

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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in attracting Phase III awards from DoD or NASA. Ciencia also notes that the SBIR programs of NIH and NSF, 2 other sources of SBIR funding for the firm, do not provide Phase III awards.

The disjuncture between the gestation requirements for new technologies and the SBIR funding practices of federal agencies is highlighted for Ciencia by its experiences with one of its NASA projects. In this case, a NASA program manager was interested in the embryonic technology being developed by Ciencia under a Phase II award, but lacked program funds for a Phase III award. To advance the technology further, additional work on the project was funded under a new cycle of Phase I and Phase II awards.

Ciencia sees the SBIR competitive selection process as fair. However, feedback from the review process is highly variable among agencies. NIH, which employs a peer review system in proposal selection, is described as offering the best review. NSF’s feedback procedures, which provide scientific comments, are also highly rated. By way of contrast, DoD’s and NASA’s procedures for providing feedback to firms are described as virtually useless. They are described as cursory, and as offering no information to a firm on why its proposals may have been funded or not.

RECOMMENDATIONS FOR SBIR

DoD needs to address the lack of adequate Phase III funding for technologies advancing through the Phase II process. In part, this lack of support follows from the way selected DoD units are seen as perceiving the SBIR program. According to Ciencia, some units see SBIR as a mandated set-aside: They want their funds to provide some tangible outcomes, but do not treat SBIR projects as a necessary part of their mainstream R&D programs or necessarily tied to “end user” needs. Thus although the technology developed under Phase II may work, it may not fit into any existing “socket.” Some topics may lead to Phase III awards; others not tied to mission needs, fall into a “nether world.”

SUMMARY

The SBIR program played an important role in the initial launching of Ciencia, and continues to be an important source of its new R&D funding as the firm has sought to widen the range of government and domestic markets to which its core technological expertise can be applied. Improvements in coupling the topic selection process with mission and end-user needs are seen as needed to increase and accelerate the transition of technologies emerging from Phase II projects into operational deployment.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Custom Manufacturing & Engineering

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Custom Manufacturing & Engineering (CME) was established in 1997 by Dr. Nancy Crews and 2 former co-workers as a spin-off from Lockheed Martin’s Specialty Component Division, Largo, Florida. The spin-off was the culmination of a series of events affecting operation of a Department of Energy nuclear weapons plant as a government-owned, contractor-operated facility. Between 1957 and 1992, the complex was managed by General Electric. In 1992, Martin-Marietta won the contract that then merged into Lockheed Martin in 1995. Following easing of cold war tensions, the facility was closed in 1997.

Under a Defense Conversion Initiative, Custom Manufacturing & Engineering was formed to continue engineering design and manufacturing work on selected aspects of the facility’s operations. The Defense Conversion effort allowed CME to purchase some of the equipment. Lockheed Martin Corporation novated some contracts, which provided an initial source of revenue. Dr. Crews had initially joined Lockheed Martin as senior manager of marketing and long-

CUSTOM MANUFACTURING & ENGINEERING: COMPANY FACTS AT A GLANCE


2904 44th Avenue North

St. Petersburg, FL 33714


Phone: 727-547-9799

Fax: 727-541-8822


Revenues: Proprietary information

Employment: 140


Number of SBIR Awards

Phase I: 9 (+3 STTR awards)

Phase II: 7 (+1 pending)

Phase III: 4

Number of Patents: 1 provisional; 2 pending


Awards: National Tibbetts Award

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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range planning. Previously, she had worked for Eastman Kodak as a Program Manager and a Marketing Director.

CME’s core technology centers about electrical power controls and integrated sensors. Its initial customers were DoD services and agencies, including the Army, Navy, and Air Force. Military sales continue to be the larger portion of the firm’s revenues. Its business strategy has been to expand to the commercial sector by developing intelligent power system management and control technologies. Its current customers include several major defense and aerospace firms, other federal agencies, and a diversified set of commercial markets.

CAPITAL FORMATION

CME started with a grant from Lockheed Martin Corporation and a personal investment by Dr. Crews. This capital infusion, coupled with acquisition of physical facilities and equipment from Lockheed Martin enabled CME to begin with an established physical plant and an ongoing contract. These arrangements enabled the firm to begin operations without recourse to external sources of capital. CME remains a privately held firm. It has not received funding from angel or venture capitalists.

EXPERIENCES UNDER SBIR

Starting operations with an existing contract, CME’s credits its growth during the first 5 years of operation to its success in winning SBIR contracts, primarily from DoD. These awards enabled CME to hire personnel with technological expertise that expanded its R&D capabilities, which in turn led to expanded applications of its core technologies, and its entry into new product markets and customers.

CME’s success in winning DoD Phase III contracts also are described as direct outcomes of the R&D performed under its earlier SBIR awards. However, its success in securing Phase III contracts has been less than warranted given its technological advances, according to the firm. The difficulties it has encountered in transitioning Phase I and Phase II awards into Phase III awards or subsequent acquisition contracts is seen by the firm as caused by the disconnect between DoD’s management of the SBIR program and its acquisition programs. The two are organizationally separate, with SBIR and acquisition programs in effect having different missions. SBIR seeks to generate new technologies, but acquisition programs are viewed as unresponsive to receiving new technologies.

SBIR’s procedures for reviewing proposals are seen as timely and fair. In general, debriefings are viewed as providing useful information. One source of concern to the firm is the lack of specificity about the criteria to be applied in specific competitions. In one recent case, when CME inquired about why its proposal had not been funded, it was informed that it was because the firm lacked

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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experience in manufacturing. Manufacturing experience, however, was not part of the stated criteria, according to CME.

CME has also encountered serious problems, what was described as a nightmare, with the delays between Phase I and Phase II awards. The delays have led to the loss of key personnel, necessitate the redeployment of staff from other projects to maintain work on a project, and require investments of internal funds without assurance about if or when Phase II funding will be awarded. In one recent experience with the Navy, the firm did not receive funding for an option year under its Phase I award, but then was asked to prepare a Phase II proposal, which, in effect, required it to continue work for almost 7 months without funding in order to keep the people employed and the subcontractors interested.

INTELLECTUAL PROPERTY

Intellectual property protection is an important part of the firm’s strategy, especially as a means of protecting its future. The SBIR program is of special value in following this strategy, as it helps underwrite the development of new technologies, which can then be patented. The costs of filing patents for a small firm however have limited the extent to which it can pursue patent protection on all its new technology.

INVOLVEMENT WITH STATE GOVERNMENT PROGRAMS

CME has received grants from two programs administered by Enterprise Florida, the state’s economic development program. One of these grants was intended to assist the firm commercialize a technology being developed under an SBIR award.

RECOMMENDATIONS

The SBIR program needs to improve coordination between its SBIR and acquisitions programs to facilitate the transition to Phase III awards, and more generally, to DoD’s acquisition programs. To accomplish this, acquisition program officers need to be involved in a systematic manner in the generation of SBIR topics. This participation would increase the likelihood that R&D conducted on SBIR awards addressed operational needs. Additionally, the specification of topics, whether oriented towards 6.1, 6.2, or 6.4, need to be better defined. Firms essentially are “blind” about the downstream, operational use of their R&D after they complete Phase II work.

The dollar ceilings on Phase I and Phase II awards also need to be increased. The current level of Phase I awards needs to be increased to the $100,000–$150,000 range; the current ceiling of $75,000 is too low to accomplish much.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Phase II awards should be increased up to $1 million (with an option to go above that amount) to permit firms to build hardware prototypes.

SUMMARY

Established about a cluster of technologies and customers connected to its origins as a firm created out of a closed division of a DoE nuclear weapons facility, Custom Manufacturing & Engineering employed SBIR awards to diversify its technology base, and thus to widen its set of products, markets, and customers. SBIR awards served as an important source of revenue during the firm’s first 5 years of operation, and as the basis for some of its recent Phase III awards from DoD. The firm’s strategy however is to avoid becoming dependent on defense-related R&D contracts, and is actively seeking to enter additional commercial markets.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Cybernet Systems Corporation

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Cybernet was established by Heidi Jacobus in 1988. The firm’s establishment is an outgrowth of her educational, professional, and family experiences, which Jacobus describes as a female version of a Horatio Alger story. Cybernet’s establishment also is a distinctive example of the contribution of the DoD SBIR program in launching a firm.

Jacobus is the first member of her extended family to graduate from high school, much less college. Her early education was distinguished by academic scholarships from community organizations that enabled her to attend private preparatory schools. She then had a wide-ranging undergraduate education at Trinity College, Connecticut, majoring in psychology but taking courses in several fields. Previously, while in a high-school level preparatory school, she had taken summer courses in a regional college, which enabled her to graduate in 3½ years.

In 1973, while considering her future plans and awaiting a Spring graduation, she sought employment by posting her availability in buildings at the nearby University of Connecticut’s Farmington campus. She was soon hired by the dean of the campus Medical School as a “girl Friday,” laboratory assistant. The dean was an early pioneer in efforts to employ computer-assisted instruction for medical students, using the PLATO system that had recently been developed

CYBERNET SYSTEMS CORPORATION: COMPANY FACTS AT A GLANCE


727 Airport Boulevard

Ann Arbor, MI 48108

Phone: 734-668-2567, Fax: 734-668-8780

<http://www.cybernet.com>


Annual Sales (2004): $5 million

Employment: 50

Number of SBIR Awards

Phase I: 89

Phase II: 44

Number of Patents: 25

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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at the University of Illinois. Jacobus describes her 1½-year experiences in this position as being in on the ground floor of the development of a new technology, and as focusing her broad based intellectual interests on human interfaces with computer technology.

Her work experiences also brought her into ongoing contact with faculty at the University of Illinois, which in turn led to an offer of a graduate teaching assistantship from the university’s computer science department. Jacobus had had no previous background in computer science, but by taking both undergraduate and graduate courses concurrently was able to earn an M.S. degree. She then advanced to Ph.D. level work, passing all courses and the Ph.D. prelims. However, in about 1978–1979, as she began to work on her dissertation, her dissertation advisor left for a 1-year sabbatical leave in Belgium. The then difficulties of communicating effectively and rapidly with an advisor located at such a distance would have caused a hiatus in Jacobus’s dissertation work. Adding to the complexity of her choice was that during this period, Jacobus had met her future husband, Dr. Charles Jacobus, a Ph.D. in electrical engineering, while working in the university’s computer laboratories. As her husband was completing his degree and about to enter the labor market, Jacobus had to decide between moving with her husband or waiting at the university until her advisor returned.

The decision was to move. She and her husband took positions with Texas Instruments, Dallas, Texas, where he worked on the design of semiconductors. He was also put on TI’s “fast track,” and was provided opportunities by the firm to obtain an Executive MBA from Southern Methodist University.

Jacobus worked in TI’s central research laboratories (where she was the only female engineer). TI’s research laboratory was described as the firm’s “pie-in-the-sky” operation; researchers were given broad flexibility to select their projects; Jacobus chose to extend the work she had been doing on her dissertation, which focused on the ergonomics of human-computer interaction. She stopped her career however to have children. (At this time, mid-1980s, the absence of corporate leave policies and paucity of a company-based infrastructure to support working parents, especially mothers, limited the possibilities of combining parenting and work.)

In the late 1980s, Jacobus’s husband was recruited by ITI, Ann Arbor, Michigan, which was in the midst of a major expansion. Ann Arbor was described as offering a quite different world from Dallas for an educated, career-oriented woman, especially a mother. Whereas in the Dallas area, Jacobus found her employment and career orientation an exception, in Ann Arbor, she found many peers who were actively also engaged outside of the home in careers or volunteer work. Her children now in nursery school, Jacobus joined the Junior League, where she worked with the area’s Children’s Science Museum, both as a docent and as the chair of a major fundraising drive.

This “reentry” into professional life led Jacobus to think afresh about completing her Ph.D. At the time, the 7-year deadline between passage of exams and

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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defense of a dissertation was nearing, but she requested and received an extension from the University of Illinois. (Had she received her degree, Jacobus would have been the 4th female graduate student to receive a Ph.D. in Computer Science from the University.) She was also permitted to have an advisor in absentia, and restarted work on her dissertation, again focusing on human-computer interaction, under the supervision of a University of Michigan faculty member in industrial engineering. However, she soon experienced difficulties with the advisor about the thesis proposal she submitted to him.

At the same time, Jacobus had been working on a part-time basis in the University of Michigan’s library on a project to develop an indexed reference book on the SBIR program. Contemporary practice then was for each federal agency to post its SBIR program and fundable topics of interest in separate documents and to gather them together in a single volume, but without a topical technology index. UM’s library had a contract to prepare such an index.

While working on the project, Jacobus became aware of the SBIR program. Soon after, she saw her thesis topic, which had become the source of disagreement between her advisor and her, listed as a DARPA topic of interest. She distilled her thesis proposal into an SBIR proposal, noting also that she did not then have a firm, but would start one if she received an award. Subsequent to the submission of the proposal, she received a telephone call from a DARPA official stating that her proposal was “best” he had ever read. The award was for making graphic displays on airplane consoles compatible with the ergonomics of human perception. (In the early period of technical advances in computer graphics, an unknown was the human factors of man-machine interaction, specifically the ability of humans to effectively process and react to varying combinations of color, motion, and shape.)

Coincidentally, her husband required major surgery and was seriously ill, and as a result became unemployed. The contrast between the difficulties she had been encountering with working with a faculty member about the suitability of her thesis proposal and the accolades she received from DARPA, and her husband’s illness required she become the primary family income earner, led her to say, “Good-bye University, hello DARPA.”

The feedback from DARPA was the motivating event that gave Jacobus the courage to found Cybernet. She submitted SBIR proposals to other agencies, receiving awards from NASA and the Army, followed by the award from DARPA that had catalyzed the firm’s founding. Cybernet was a bootstrap operation in every sense of the word; rather than a garage operation, it was literally a child’s bedroom operation, housed in her daughter’s bedroom. Jacobus had to learn the basics of government contract and accounting procedures, such as overhead rates, allowable expenditures, and related provisions. She managed this from reading manuals obtained at the regional SBA office; through purchasing technical assistance from local consultants, such as a retired, former DCAA contracting officer; and though assistance in understanding federal government contract procedures

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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provided by the regional Small Business Development Center, located in a community college in Livonia, Michigan. As described by Jacobus, one of the side benefits of the SBIR program is that it forces “business discipline” on technologists. Cybernet started with 3 people. It then moved to rented, shared space in a complex of small offices carved out of the nearby facilities of the former Bendix Aerospace Laboratory.

Cybernet’s growth initially was based on matching the technical competencies of a network of friends and colleagues with engineering backgrounds in the Ann Arbor region to lists of posted SBIR topics. Its core technology is the development and application of robotics technology solutions to human-machine interaction. Its expertise is centered about centered about distributed simulation and training, software intelligence, network connectivity, robotics, and man-machine interaction, which it seeks to apply to a diverse set of defense and nondefense industries. Cybernet thus describes itself as a “brain company with hands.”

Based on the serendipitous events shaping its founding, Cybernet sees limited value to the type of formal strategic planning customarily associated with the launch process of start-up firms: Who could have predicted that from part-time work in a library one would have built a firm with 50 employees and current annual revenues of $5 million. Instead, it has an orientation, or culture, of going for it, that is of pursuing opportunities as they arise.

Undergirding this approach has been the firm’s ability to integrate human factors expertise with the design and manufacture of functioning technologies. Here the firm has drawn upon the rich tradition and ready availability of robotics and related manufacturing expertise in the Ann Arbor region. As noted below, it has since expanded into several technological and market areas.

Cybernet’s current revenues are derived approximately 70 percent from the federal government and 30 percent from the civilian sector. The firm remains active in the SBIR programs of several agencies. Employees are encouraged to seek out SBIR topics congruent with the firm’s core technology, to form research teams, and to submit proposals. Employees receive monetary bonuses for successful proposals; so too do employees whose proposals are not funded.

LOCATION

Cybernet’s location in Ann Arbor offered both advantages and disadvantages for Cybernet. As noted, the firm was able to tap the region’s pool of consultants-especially in contracting and intellectual property law—to address core business needs. Especially helpful in the firm’s early days was that several of these consultants offered their services at below market rates, in effect taking Cybernet under their wing. The area’s pool of engineers and technologists also provided a supply of individuals interested in pursuing new research and career opportunities via the competitive proposal route. It also provided a skilled and/or readily trainable workforce, as the firm expanded into new technological areas. Finally,

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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the firm was able to draw upon the region’s existing industrial base for hardware components; this access has proven especially important as the firm has sought to respond to the rapidly changing and pressing needs of U.S. military forces currently located in Kuwait.

A major shortcoming of its location in Michigan however was the difficulty it encountered in obtaining short-term, working capital from the region’s banks. Even though it had an SBIR award, Cybernet initially encountered difficulty in obtaining a line of credit for $20,000 for payroll and related operating expenses. Regional banks did not consider an SBIR award as “bankable,” because U.S. government contracts do not allow for assignment of claims in case of a firm’s default. (According to the firm, it would have been easier to obtain the line of credit if their contract had been with K-Mart to produce T-shirts). Jacobus ended up having to sign a personal note, with her house as collateral, to obtain the loan.

Overall, a definite negative in obtaining bank credit is viewed as existing in the Midwest. Banks in other states, such as Virginia, Massachusetts, and California, are viewed as being far more understanding of and receptive to making loans on “intangible,” research-oriented enterprises.

CAPITAL FORMATION

The firm remains a privately held enterprise, although it has received selected infusions of investor capital, principally from a rippling process in which first firms and then members of the boards of these firms saw profit potential in Cybernet’s embryonic technologies. Cybernet approached 3 original equipment manufacturers to manufacture a prototype of a medical device it was developing. One firm, Sparton Corporation, a 100-year-old electronics firm that did mid-tech production became fascinated with Cybernet’s invention and decided to become an investor. A member of Sparton’s board of directors, a retired investment banker who ran a boutique investment firm, arranged for several of his investors to invest in Cybernet. Together these 2 corporate groups of investors plus Ampex Corporation have invested $5m in Cybernet for a 20 percent ownership stake.

Bringing in outside investors, however, required Cybernet to elect becoming a C Corporation, whereas formerly it had been an S Corporation. The shift was made to satisfy the needs of the external investors that they not be taxed personally on Cybernet’s profits. However, it resulted in Cybernet’s internal stockholders now being responsible for both corporate and personal taxes.

These investments permitted Cybernet to free itself from reliance on government contracts and the SBIR program. However, its ventures into the private sector market have been limited by high marketing costs. For example, it has been able to place its Linux server in Best Buy stores. It describes the process of selling high-tech consumer products through mass distributors as akin to selling groceries: Suppliers must compete for and pay for shelf space and accept returns as unsold inventory.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Cybernet has had periodic discussions with venture capital firms about going public, but to date with no agreement. The firm sees itself as falling into the gray size area of VC interest. At its current annual sales volume of $5 million, it is too large for a true zero stage launch and too small ($10 million–$15 million being seen as the next threshold level) to warrant a near-term major public offering. Aligned with the difficulty that it initially had in securing bank loans, Cybernet also notes that although there are some venture capital firms in Michigan, these firms tend to focus on biotech firms or to invest out of state. They are not seen as focused on firms working on high-tech defense technologies.

In combination, the difficulties that it has experienced in securing venture capital while simultaneously developing new products for the DoD, as exemplified by its recent delivery of an automated tactical ammunition classification system in Kuwait for the Army, leads it to question the thrust of federal agency SBIR program managers to interpret the language in SBIR regulations on commercialization to mean venture capital investment whereas the appropriate interpretation would allow for non-SBIR government sales, such as the sale of their special purposed machinery for the Army in Kuwait.

Another source of capital for the firm’s expansion was partial liquidation of its equity holdings in a collaborative venture with Immersion, a San Jose, California-based firm. The collaboration was based on a pooling of the respective patents each firm held on robotic sticks, a key technology in the production and marketing of computer games. Each firm found itself in discussions with Microsoft about access to their respective patents, patents that had the potential to challenge a core technological component of Microsoft’s games. Immersion, unlike Cybernet, had easy access to venture capital, with investments from Intel, Apple, and other Silicon Valley sources, and was planning an IPO. (Immersion also was located nearby to these firms, facilitating both access to the venture capital and ongoing advice). Cybernet exchanged ownership of its patents for a 10 percent stake in Immersion. The public offering was highly successful, supported in part, by Microsoft’s licensing of the robotic stick technology. Immersion stock rise and fell in part with the dot-com phenomena and in part with Microsoft’s use of its technology. Partial liquidation of Cybernet’s holdings in Immersion, however, provided new capital.

INTELLECTUAL PROPERTY

As described above, intellectual property protection has been an important part of Cybernet’s strategy. The firm currently has 25 patents, primarily centered about the design and construction of robotic sticks. These sticks, in turn, are used in a wide variety of end uses, including computer games, training of astronauts, and manufacturing control processes.

Attention to IP protection began early in the firm’s history, in part precipitated by a negative experience in which it found that an employee at a federal

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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agency technology transfer center had claimed a technology that Cybernet had described in one of its proposals. The first that the firm learned of this was when it saw the technology described in a technology transfer packet offered to the public.

Patent protection serves to enhance Cybernet’s ability to market its technologies effectively as well as to generate revenues. More generally, protection of IP is seen as an important but demanding task for small high-tech firms. The challenge is seen as especially formidable for such firms under the SBIR program as their technologies course through Phase I and Phase II stages and begin to enter Phase III production. Large firms, including major DoD prime contractors, are seen as aggressive in seeking to trespass on the intellectual property of small firms. Large firms are viewed as treating small firms as “Kelly girls,” that is the provider of services, not as independent producers. Immersion, for example, has recently been involved in suits against Microsoft and Sony for infringing on the firm’s patents.

INVOLVEMENT WITH STATE GOVERNMENT PROGRAMS

Over a 15-year period, Cybernet was somewhat successful in several efforts to secure financial support from several of Michigan’s state technology developments, receiving several awards between $25,000 and $50,000. Michigan is seen as having an extensive array of technology development programs, but so weighted to supporting biotech start-ups that high-tech manufacturing firms receive limited attention. Last year, Michigan began to support SBIR companies’ projects in designated technology areas with commitments for supplemental funds. Jacobus applauds such a program because it enhances the value Michigan companies can provide to their federal customer.

EXPERIENCES WITH THE SBIR PROGRAM

The SBIR program is seen as one of the federal government’s most competitive and fairly run programs. New topics and topic authors appear in each new round of SBIR solicitations; the proposal review process involves changing sets of agency reviewers, and each new round of solicitations attracts new sets of competitors—a distinctive and desirable aspect of the program.

Winners are selected on the basis of technical merit, relative to the stated topic. Technical merit, in the firm’s view, should remain the primary criterion. One implication of adhering to this criterion is that there should be no quotas or ceilings established on the number of SBIR awards a single firm may receive, or exclusive focus on commercial product outcomes, as some have proposed. If a firm’s proposals have the highest technical merit, they should be funded. The primary measure of SBIR program success should be cost effective solutions to Government needs and requirements. Alternative, nontechnical measures of

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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success such as nongovernment sourced investment, “commercialization,” job growth, or other quotas, if used to measure success would lead to much lower success rates. For example, according to the firm, since approximately only 10 percent of venture funded companies become successful growth companies leading to IPO or buy-out—using these measures as performance measures would set a relatively low success rate towards which the SBIR program might aspire.

The timeliness of the DoD SBIR review process has improved considerably over the past 15 years, especially as it has shifted from hard copy submissions and processing to computerized systems.

Cybernet’s early experiences with SBIR included transition-funding gaps as long as 18 months. Improved processing of awards and increased attention to the difficulties faced by firms because of the gap has led DoD to act to shorten them considerably. In general, Cybernet handles gaps between the 2 phases by scraping together funds from different contracts to redeploy its personnel. It is able to do so because it has often had a portfolio of DoD SBIR awards from different Services, each of whom operates on a different time schedule in issuing solicitations and making awards. The gap between phases though is seen as a serious problem for small firms with few contracts. Not only does the gap create liquidity problems for the firm, but they also run the risk of losing their key technical personnel.

The firm though notes a downside to recent DoD efforts to shorten the transition gap. These efforts can lead agencies to ask Phase I awardees to submit Phase II proposals very early, as short as 4 months, in their Phase I work. This period of time can be too short for the firm to show results. Given that some DoD competitions now involve multiple Phase I awardees followed by down selection for Phase II awards, differences in the pace of work during a Phase I contract, not the realized outcomes at the end of the full award period, may lead to erroneous judgments about the technical importance of competitive projects. A gap of some duration may be a necessary part of a fully informed Phase II review.

Recent actions by DoD and other federal agencies, such as NIH, to permit increases in the size of Phase I awards to $75,000–$100,000 has been helpful since awards of this level are often necessary to demonstrate the feasibility of the technological approach being advanced in a proposal. From Cybernet’s perspective though, it is not clear whether these increases are in response to the stated needs of firms for larger initial awards or a proxy endeavor to adjust for inflation as it is an attempt by selected agencies to reduce the excessive workload on SBIR managers. DoD SBIR contract monitors are seen as now having to handle too large a number of proposals. An undesirable consequence of this workload is that it reduces the appeal to them of working with small firms.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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RECOMMENDATIONS

SBIR should institute debriefings for firms that received Phase I awards but which either are not asked to propose for Phase II competitions or propose and then are not selected. At present, firms that do not receive Phase II invitations to propose are, at best, simply notified of that outcome. Compounding the problem, some DoD services only provide debriefing invitations to invited companies, leaving those who are not notified to wonder whether their Phase II proposal is actually “disinvited” or if a letter is lost in the mail. By way of contrast, in accord with federal contracting requirements, debriefings are mandated following Phase I competitions. Phase II solicitations currently are seen as extensions of Phase I work; they thus are not treated as full and open competitions subject to debriefing requirements.

Debriefings, which at times can contain paraphrases of reviewer comments, can be of considerable value to the firm as they can contain information that can guide the modification or correction of proposals in subsequent solicitation rounds. (Not helpful though are debriefings that simply note that the proposal was not sufficiently innovative, or at the other extreme, overly ambitious).

Attention to DoD’s procedures of selecting Phase II awardees is needed. Some services are moving to issuing multiple Phase I awards on a topic and then down selecting for Phase II awards. However, rather than having more choices for the Phase II awards, some services have been pre-selecting invitees for the down selection stage. Issuing invitations benefits the service in reducing the number of proposals it needs to review, and indeed may be of some benefit to firms in saving them from expending effort on writing proposals that have little chance of winning. However, pre-selection is unfair to firms that continue to see their Phase I projects as competitive for Phase II awards.

Finally, many Phase I and Phase II proposal receive high technical ratings, but are not selected due to funding limitations. It would be helpful to provide an overall proposal ranking against those that were selected for each list that is funding limited. Many Phase I debriefings already provide this information (“xx proposals were received, yy were selected, your proposal was ranked zz of the xx received”).

DoD’s SBIR program needs to strengthen the relevance of its topic selection process to the “end users.” SBIR awardees tend to work only with their service’s technical monitor, who may provide no clue about the “bigger picture” of how a topic or technology fits into larger systems or how it will be used. This lack of information detracts from the utility of the SBIR project, and thus of the SBIR program.

Increased attention to building “hands across the water” between the SBIR program and DoD’s management of major weapons systems is needed. Prime contractors have little motivation or incentive to work with small firms or to incorporate technologies developed by small firms into the weapons systems they

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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are developing. Prime contractors would prefer to have add-on contracts to their work to develop the technologies listed in SBIR solicitations.

One recommended approach to improving links between the SBIR program and procurement and acquisitions programs would be to have SBIR program managers report directly to DoD major weapons/systems program managers. Another would be to route SBIR funding back through the program offices from which it is derived.

SUMMARY

Cybernet’s establishment was directly linked to these SBIR awards. Expressions of interest in Heidi Jacobus’s research by a DARPA program manager catalyzed her willingness to leave a Ph.D. program and launch a new firm. The firm describes itself as a “brain company with hands,” integrating emerging research findings on man-machine interactions with Michigan’s traditional manufacturing capabilities. Cybernet also is an example of how SBIR funding bridges a gap between projects focused on basic research at major universities and major commercial and/or weapons systems development work performed by prime or major corporations. Starting with contracts from NASA and DoD, the firm has developed a broadened, diverse set of technologies and markets, ranging, extending from federal agencies, including several DoD services, to the commercial sector. In its view, SBIR has proven itself to be a highly cost-effective means for maintaining and growing engineering expertise to maintain the U.S. defense and economic competitiveness.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Defense Research Technologies

Zoltan Acs

University of Baltimore

FIRM OVERVIEW

Defense Research Technologies, originally located in Rockville, Maryland, and currently (since 2006) in Lady Lake, Florida, specializes in sensor and control systems. The company’s nonelectrical sound-amplification system was first developed by DRT president Tadeusz Drzewiecki and others at the U.S. Army’s Harry Diamond Laboratories in the late 1960s and early 1970s, when they, too, faced a problem with sound and electricity causing sparking and fire hazards. Crew members on the decks of noisy aircraft carriers wanted a way of talking to each other, but they were afraid that sparks from traditional electric microphones would ignite the jet-fuel fumes that waft across the deck surfaces.

In response, the Army researchers came up with the principles for a system that Drzewiecki has patented as an “acousto-fluidic” technology. The system works on the principle that sound can travel farther if it is wind-borne and can be amplified by using it to deflect flowing jets of air. The fact that this system does not use electricity has found a special application for Orthodox Jews, who are forbidden from using electricity on the Sabbath or other holy days. Some rabbis have dubbed this kosher technology a “wind microphone.”

In addition to its use on aircraft carrier decks and synagogues, DRT’s sound-amplification technology is finding new uses, including listening for larvae in a granary, where electric amplification systems could generate sparks that in turn could trigger an explosion in the grain dust, which is highly combustible, but more importantly because acousto-fluidic technology is the most sensitive acoustic-sensing technology ever available. SBIR has played an important role in the company’s development of this as well as other innovative sensor technologies.

THE ROLE OF SBIR

As noted above, DRT’s firm’s founder, Dr. Ted Drzewiecki, had previously worked at the Army’s Harry Diamond Laboratories and then was briefly employed by System Planning Corporation (SPC)—a defense consulting company—where he worked primarily on DARPA programs. In 1982, Dr. Drzewiecki and three of his co-workers founded Science and Technology Associates, a company that could provide DARPA managers the same services as SPC but at a lower cost. While at Science and Technology Associates, he developed his own client base, and transitioned into his own company Defense Research Technologies, Inc., providing consulting services to the government.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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In 1984, Dr. Drzewiecki founded Defense Research Technologies (DRT), a defense-consulting firm specializing in Soviet weapons, advising the U.S. government on how to counter Soviet arms technology. He started bidding on SBIR projects in 1989 and won awards from the Army, DoE, DARPA, NASA, DOA, NIH, and SDIO.

With the end of the cold war, DRT began to lose its market niche in defense consulting and refocused its operations to pursue medical applications via NIH SBIR awards. As spin-off of DRT’s first SBIR award, the company developed a pneumatic sound amplification method that does not use electricity. DRT also developed a mud pulse telemetry system, based on supported by a DoE SBIR contract, and various other control systems and sensors.

The technology being developed with DRT’s recent NIH SBIR contract had a potential $3 billion–$4 billion annual market. The sensor technology for missile control and projectiles, if developed, could have been in the $10 million–$100 million range. The company’s main competitors are industries in the electronics field. Microfluidics technology is analogous to electronics, only it moves molecules instead of electrons. Since the electronics technology is much faster, competitors can easily mimic microfluidic devices. Nevertheless, the kosher sound system is a niche product that competitors would have difficulty marketing in an electronic version. Applications where survival in extreme environments is required, such as the control of propellant gases, are other niche areas.

In all, the company has received 13 Phase I awards and 6 Phase II awards. The company also received funding from DoD and NIH at the Phase III level. The DoD product was an active protection system for lightly armored vehicles that generated $17,000,000 in revenue. The NIH product raised $7,500,000 in venture capital. A third product, the Kosher Sound System, resulted in self-funded commercialization.

The company’s SBIR awards helped in attracting approximately $1 million-$1.5 million in VC funding for a medical gas analyzer—a project sponsored by NIH that was geared towards measuring the properties (density, viscosity, heat, etc.) of respiratory and anesthesia gasses. A spin-off from DoD and DoE has also funded research on battlefield gas sensing. Further NIH SBIR awards helped the company demonstrate the measurement of cardio-pulmonary functions using the gas analysis technology developed.

The company had 7-10 employees when it first started receiving SBIR awards. In the early 1990s, the company employed the maximum of 26 people. DRT’s current sales (of about half a million dollars) keep four employees on payroll. Dr. Drzewiecki claims that the decline in the overall number of employees is not correlated with the SBIR program; however, SBIR did not facilitate retention in his company.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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COMMERCIAL OUTCOMES

As noted earlier, the company’s kosher sound system has been successfully commercialized.

DRT has also developed a gas analyzer that provided consumes less than 50 ml/min side stream flow at the time when the standard was an inefficient 200–300 ml/min. The gas analysis technology—which introduced competition where there was no competition before and pioneered new techniques and approaches in the field—has been licensed to a spin-off company.

The company’ s mud pulse telemetry system has been licensed to a Canadian company.

DRT’s active protection system has introduced new technical developments in the area of guiding projectiles. DRT’s work on the DARPA/Army SLID active protection system was entirely government funded. DRT teamed with AlliedSignal (now Honeywell) for the development phase, but was down selected due to perceived risk in further development after the optical fibers used for command guidance were found to be inadequate. Six companies originally competed. The DRT/Honeywell team survived for three years before being down selected. A note in passing, the remaining two competitors, Rockwell and Raytheon, did no better, neither being able to fly their systems successfully, and the program was terminated two years later in 1997.

KNOWLEDGE GENERATION

Of the 41 total of patents held by Dr. Drzewiecki, 10 are SBIR related: 7 patents on the gas analyzer, 1 patent on the Mud Pulser, 1 on an oxygen sensor for molten steel, and 1 on a coal water slurry fuel injection system.

Dr. Drzewiecki also published 1 peer-reviewed paper with the Acoustical Society of America on sound systems, 3 papers (one which was peer reviewed) on the development of control systems for nuclear reactors, 10 papers on the gas analyzer (four peer reviewed), 1 peer-reviewed paper on the active protection systems, 1 peer-reviewed paper on space-based interceptors, one peer reviewed article on the USDA insect detection system, and 1 peer-reviewed paper on the Mud Pulser.

Dr. Drzewiecki’s received the Instrument Society of America Gilmer Thomason Fowler Award for the best paper on the NIH-sponsored gas analyzer presented at the ISA Analysis Division 2000 Symposium.

IMPROVING SBIR
Surviving Funding Gaps

DRT has had to cope with funding gaps, using its own money to bridge this gap during work on the Mud Pulser, the company used. DRT has diverted staff

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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into other projects between 1987 and 1994, when three-fourths of his funding was derived from the SBIR program. In one instance, the company had to lay off employees during a 9-month gap between Phase I and Phase II funding. Later DRT found venture capital and partnered with a company established in North Carolina.

Defense Research Technologies suggests that DoD should allow recompetes or resubmissions. Such flexibility across Phase I, II, and III is seen as essential for small companies. Big companies are more likely to be able to withstand the gap between funding.

Award Size

In today’s market, a Phase I award is just enough to write a Phase II proposal. The size of the companies receiving awards is essential in determining the size of the awards. Start-up companies thrive on half a million dollars in funding, larger companies cannot survive on one award. There are firms that receive 15–20 SBIR awards in a year, and the SBIR program is their sole source of revenue.

Additionally, companies with significant human resources have the advantage of specialized internal infrastructures in writing proposals. Small companies, where only one individual writes proposals, have difficulty competing in this environment.

Paperwork and Bureaucracy

The paperwork involved in applying for SBIR awards is relatively little. Nevertheless, a small company invests a sizeable resource when its principal dedicates two weeks of full-time work to writing a Phase I proposal.

DRT’s experience with SBIR differs widely. The Department of Agriculture is worst. They offered the smallest award, about $45,000, and sustained a heavy bureaucracy.

The DoE and NIH have great programs that promote companies and help them with commercialization. The NIH model, although a true peer-review process, is the most generous and allows for recompetes and resubmission three times each year.

DoD lacks commitment to the program and provides little technical assistance to companies. The Department of Defense has very specific guidelines and uses the program in its procurement process. Resubmissions with the DoD would have been helpful when DRT proposed its microfluidic gas analyzer. Because the current systems are electronic, fuel vapors in empty tanks may cause aircraft explosions. DRT lost that particular award because the company did not have a chance to clarify particular aspects of the system in response to the AF reviewers’ comments.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Award Selection and Funding

DRT finds that the award selection process tends to be arbitrary and relative. Companies with already developed products are more likely to win awards. Respectively, companies that lack manufacturing experience are at a disadvantage, even if they develop better processes or technologies.

DRT also perceives two distinct paradigms in SBIR funding: The program at the Department of Defense is procurement based and the program managers don’t view it as a process of fostering new technologies. Although in the last few years DoD showed improvement in organizing technical topic areas, the agency still lacks technological focus. By contrast, the DoE and NIH SBIR topics are listed by technology areas and these awards are more like genuine seed funds.

For example, NIH will evaluate any technology that is related to a specific topic (i.e. gastrointestinal diseases). This approach allows companies to be more innovative and produce a product with good chances for commercialization. NIH is willing to fund three different approaches to one topic, while the DoD does not (with the exception of DARPA, a very flexible agency that uses the SBIR program to spread out its funding).

Additionally, NIH is more serious about and efficient in providing post-award technical assistance. For example, after winning a Phase I from NIH, in the first three months of receiving the award DRT was invited to present its work (even in an unfinished state) at a minimum of three colloquia. The company had a chance to network with other projects and was very satisfied with the agency’s efforts to promote their work.

NIH regards the SBIR program as a chance to innovate and diversify their technology. The DoD uses it merely to foster its own technologies and validate commenced work.

Commercialization

Current SBIR funding is enough for concept development, but insufficient to do product development for the commercial sector. The importance of commercialization within SBIR grows daily and companies are required to do market research on their own and get investors in Phase II. This is a very difficult task for most companies.

For instance, DRT had a provisional licensing agreement with a company called Vesuvius International, a huge international conglomerate that produces sensors for steel mills. DRT developed an oxygen sensor that functioned in the molten steel for 10 hours, while the competition had only disposable solutions. This technology could have revitalized the U.S. steel industry, because it was the lynch pin able to close the loop on automating the steel process, but the company could not secure enough funding in time.

While the SBIR program is very good in providing seed money and getting a concept developed, it has an inefficient and ineffective strategy for commer-

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

cialization. DRT licensed its mud pulse telemetry system to a Canadian company, but slow commercialization process allowed other technologies and suppliers to break into the market first.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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FIRST RF Corporation

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

FIRST RF Corporation was founded by Farzin Lalezari and Theresa Boone in 2003. The firm is privately held, with ownership distributed among Farzin Lalezari, Shirley Lalezari, his wife, and Theresa Boone, a former co-worker, at Ball Aerospace.

Lalezari was born in Iran, and emigrated to the United States in 1971, while a high school student, following the imposition of a death sentence on his father, Iran’s Minister of Education, by the Khomeini regime. Lalezari completed his B.S. and M.S. degrees at Brooklyn Polytechnic Institute, and then moved to Colorado for further graduate studies, before leaving to work for Ball Aerospace, a major aerospace prime contractor, also located in Boulder. At Ball, he advanced to position of chief scientist and director of research. At Ball, Lalezari produced 25 patents, all of which were assigned to the firm.

Lalezari describes the decision to form FIRST RF as reflecting disenchantment with the bureaucratization and technological stagnation of large firms, and the shift he experienced at Ball from the firm’s longstanding emphasis on quality design and engineering to short-term profit measures designed to meet the requirements of stock market analysts. To meet these financial performance measures, Ball, as well as other large U.S. aerospace firms, are described as having shifted away from a growth strategy based on technological innovation to

FIRST RF CORPORATION: COMPANY FACTS AT A GLANCE


4865 Sterling Drive

Suite 100

Boulder, CO 80301


Phone: 303-449-5211; Fax 303-449-5188


Revenues: $25 million

Employees: 30 full-time


Number of SBIR Awards: 24

Phase I: 15

Phase II: 9

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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one focused on mergers and acquisition. Sacrificed in this reoriented strategy was Ball’s former emphasis and reputation for being the fastest and the best in developing new technologies. The result was that the firm’s capacity for technological innovativeness began to atrophy. As it grew, Ball’s administrative infrastructure and overhead costs increased. Associated with this increase was increased pressure of operating units to meet specific, often short-term profit goals. During his last 4–5 years with the firm, Lalezari found himself spending approximately 50 percent of his time in weekly meetings with the firm’s financial personnel debating profit quotas.

Lalezari’s prior work with Ball provided him with contacts with DoD and U.S. intelligence agencies, but he left Ball with a clean slate, seeking to develop new technologies for new markets and new customers.

FIRST RF’s core technology focus is advanced antennas and RF systems. The area of research represented a new departure for Lalazeri, who had not worked on the topic while at Ball. Reflecting the motivation to “think” about new problems and new solutions, which led him to leave Ball and to found FIRST RF, Lalezari used the SBIR solicitation of topics to focus on a specific problem and possible solution. Indeed, one primary benefits of the SBIR program is that it is seen as forcing firms to “think out of the box,” while simultaneously providing innovators with access to users.

EXPERIENCES WITH SBIR

In the brief period since it founding, from approximately early 2003 through mid-2005, the firm has had considerable success in competing for SBIR awards. At its inception, FIRST RF viewed the SBIR program both as a major opportunity to conduct the technologically innovative work that led to its founding and as a source of needed revenue. Lalezari reports writing about 12 SBIR proposals during the firm’s first year of operation. It received awards on 7 of these proposals, a number described as a national record for a new start-up company. In the 2004 solicitation round, the firm received another 8 awards. To date, it has converted its 15 Phase I awards into 9 Phase II awards.

FIRST RF’s rapid growth is directly connected to its conduct of SBIR-related research. In late 2003, it submitted a Phase I proposal for an Army-generated topic related to the detection of improvised explosive devices. The topic was directed at generating a major jump in the state of the art. FIRST RF received a Phase I award; by the time its Phase I project was finished, the firm had delivered production prototypes for use by U.S. military forces in Iraq.

In 2004, the firm entered a structured competition against 27 other firms, including major defense contractors such as Raytheon and BAE for volume production of IED countermeasure devices. It won the competition, receiving an initial $21.5 million contract from the Army, with delivery scheduled for December 2005. This Army contract has been followed by several additional contracts

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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with DoD prime contractors in excess of $5 million. Throughout 2005, FIRST RF has been engaged in scaling up for volume production to fulfill this contract. It has selected a number of subcontractors, chosen for their reputation for quality products, for manufacturing components.

Even as it makes a rapid transition to a product-oriented, manufacturing and assembling firm, FIRST RF perceives itself to be an R&D firm. The firm describes itself as totally weaned off SBIR as a source of financial life, with its continued survival no longer dependent on the program. It still competes for SBIR funding, however, as it views the program’s identification of needed technologies and associated seed funding for R&D as a key to future technological developments. Lalezari reports spending approximately 50 percent of his time on R&D.

Almost all of FIRST RF’s SBIR awards have been with DoD agencies, although it has recently received a Phase II award from the National Oceanic and Atmospheric Agency. The firm also has begun to diversify its customer base. It now serves as a subcontractor to large DoD primes such as Raytheon and Northrop Grumman on large-scale systems related to electronic warfare.

The SBIR selection process is considered to be very fair. This fairness in turn is linked to the highly competitive nature of SBIR’s selection process. Indeed, FIRST RF expresses fascination at the number of what it considers to have been very good proposals for which it has not received awards. The inference it draws is that the ideas and approaches embedded in the proposals of other firms must have been better.

Both winning a Phase I award and even more so being invited to compete for a Phase II award is described as entailing an essentially Darwinian process. Firms must work their tails off to win SBIR competition. For many small, start-up firms, success in SBIR competitions can be a matter of survival. This process is seen as highly beneficial to the United States. It is a needed antidote to the innovative lethargy and atrophy that has beset large defense and aerospace contractors.

The SBIR program also has provided opportunities for FIRST RF to collaborate with researchers at the University of Colorado. These collaborative research projects also have yielded considerable educational benefits. Under its SBIR awards, FIRST RF has employed four M.S. level and one Ph.D. level student. It has augmented the funds available to pay wages to these students with tuition grants. It sees this added investment as serving to attract the university’s best students to its projects, and as the basis subsequently for attracting them to be interested in long-term employment.

CAPITAL FORMATION

FIRST RF’s initial capital came for personal loans obtained by Lalezari and Boone, using their homes as collateral. In the firm’s first 6 months of operation, when it had 4 employees, Lalezari and Boone drew no income. The firm’s recent growth has been based on revenues from its contracts and retained earnings. It has not had occasion to secure external capital.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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INTELLECTUAL PROPERTY PROTECTION

FIRST RF has filed for 1 patent. The technology covered by the patent is described by Lalezari, who, as noted above, holds 25 patents, as the toughest he’s developed. The technology in effect is basically the technical objective described in his initial SBIR proposal.

STATE GOVERNMENT INVOLVEMENT

FIRST RF has not participated in or received assistance from any state of Colorado high-tech or economic development program.

RECOMMENDATIONS

The most important role of the SBIR program is to start new products and technologies. SBIR is one of the few remaining paths for new technologies to enter the DoD system. DoD project offices and laboratories have no discretionary R&D funds. Unless already included within the “black box” of the R&D tied to large weapon systems, there are few paths or avenues for outsider firms with novel approaches to enter into the DoD technology development system. This role must be maintained.

The SBIR program strengthens the United State’s technological competitiveness. In the field of electronic warfare, FIRST RF’s areas of technological expertise, Lalezari sees the United States as facing international competition from a large number of countries, including Egypt, Iran, Pakistan, Canada, and France. Lalezari expresses concern though about incipient pressures to tie the generation and funding of SBIR topics away from the DoD laboratories which generally have served as lead authors to acquisition, “mother ship,” units.

The present dollar level of Phase I and Phase II awards is about right. The dollar and time ceilings do put pressure on firms, but the pressure is helpful in forcing firms to perform or get out of the way.

SUMMARY

SBIR program has achieved the dual objectives of generating a technology of high value to DoD’s mission needs and contributing to the fast start and rapid growth of a start-up firm. The DoD SBIR program has provided the U.S. Army with a new countermeasure technology to meet the threat that IED’s pose to U.S. military forces in Iraq. If not for the SBIR award, FIRST RF never would have had the resources to work on the technology. SBIR awards provided the revenue that made FIRST RF a viable firm during its first year of operations, and the procurement contracts that have followed upon the firm’s initial SBIR awards have led to the firm’s rapid growth.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Intelligent Automation, Inc.

Zoltan Acs

University of Baltimore

FIRM OVERVIEW

Intelligent Automation, Inc. (IAI), is a woman-owned R&D firm founded in 1987 by Drs. Leonard and Jacqueline Haynes. IAI conducts research on distributed intelligent systems, networks, signal processing, controls, robotics, artificial intelligence, and education technology.

Key application areas include defense, transportation, forensics, space, communication, and training. In addition to research and product development, IAI has also established service capabilities built around core technology areas in the development and application of artificial intelligence-based techniques.

IAI’s technologies in the marketplace today include three dimensional forensics imaging equipment used for matching bullets; platforms and tools for developing agent-based systems; high precision machine tools using a hexapod-configured device; tools for fault diagnosis and prognosis in complex systems; ad hoc mobile network protocols; and assistive learning devices for children with learning disabilities.

Since its founding, IAI has expanded to an organization of over 100 outstanding scientists and engineers (40 holding a Ph.D. degree) and anticipates an excess of $18 million in revenues in 2007. IAI is now located in a 20,000 sq. ft. facility in Rockville, Maryland, and is in the process of negotiating to add another 5,000 sq. ft. by December 2007.

The company’s success in the SBIR program was reflected in its 2000 selection to receive the prestigious Tibbetts Award from the Small Business Administration (SBA) for excellence in technology research.

ROLE OF SBIR
Founding the Company

The company grew from a $10,000 investment by its founders. As of December of 2004, IAI was granted 218 Phase I and 69 Phase II awards. The SBIR program facilitated a growth in the company’s employment from two people, at inception, to 87 employees.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Supporting Research

Historically, SBIR contracts and Broad Agency Announcements have founded much of IAI’s research. IAI’s participation in major government programs—the DoD programs such as the Army Future Combat System, NASA programs to develop the next generation air traffic control system, and Homeland Security programs for controlling movement through land border crossing—is also growing in momentum.

IAI has a great track record in turning Phase I projects into Phase II awards. Additionally, the number of Phase II projects have increased over time. This continuity suggests that the company is highly involved with its projects and highly concerned with the quality of its work. Previous experience with SBIR projects provides a competitive advantage when the company is evaluated and reviewed for receiving additional awards.

In 2004, approximately 52–54 percent of the company’s revenue was derived from SBIR. This percentage has been falling consistently over the years, making IAI less and less reliant on SBIR funds. Additional revenue is earned from product sales and service contracts. At this time, however, most non-SBIR revenue streams can be traced back to previous SBIR awards.

Employment Effects

As approximately 54 percent of IAI’s funding comes from SBIR, it is probable that the same percentage can be associated with the impact on employment at the company. Employees often share their time among several projects and a large part of Intelligent Automation, Inc.’s expenses are labor costs.

Networking Effects

The SBIR program changed the structure of contemporary research, and positioned small research companies as an essential part of the process. The program connects government agencies, big corporations, and small businesses. As corporations realize that the program is a great source for innovation, they became the drivers of the acquisition program. Many big companies refrain from developing technology themselves because they lack agility required in the innovation process and because most research is highly specialized. They reduce their risk by monitoring the market place and acquiring technologies that may influence their capabilities.

In addition, IAI’s management invests considerable time in trying to team with appropriate universities and win SBIR awards. The SBIR program provided IAI the opportunity to network and make connections that may ensure the company’s survival if SBIR funds were withdrawn. In that case, IAI would lose an essential part of its operations and grow at a considerably slower pace.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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A Tool for Staff Development

IAI has used the SBIR program to develop an innovative model of staff development. Young people who start with the company are given the chance to make a difference within the first year of working experience. At other firms, this probability is very slim. At Intelligent Automation, Inc., employees are free to apply for any SBIR grant, under any topic, without executive approval. In 2004, several IAI staff members won awards within their first year with the company.

COMMERCIALIZATION

Under IAI’s business model, commercial activity is derived from the research conducted for various federal agencies. In recent years, the company significantly expanded that base with important new contracts related to signal processing, sensors, fault diagnosis and prognosis, autonomous agents, robotics, educational technology, and forensics among other areas.

The company uses its SBIR track record as a marketing tool to attract contracts from commercial companies. IAI lists its past results on SBIR and STTR projects on its Web site and in its marketing material.

IAI believes that it has been very effective at developing technologies starting with the concept stage through design, building, and testing of a prototype system. Their basic approach to commercializing is to team with partners who have existing products, strong marketing position and capability, and a reputation as a producer of related products.

Partnering with Primes

In large-scale government efforts, IAI often partners with major corporations—such as AT&T, BAE Systems, CSC, Honeywell, Lockheed Martin, Motorola, Northrop Grumman, and Raytheon—and the company also evolved to become a developer of productized services and technology and an important R&D provider to such major first-tier integrators.

IAI often partners with big companies via subcontracts, consulting agreements, or teaming agreements. Details of such partnership are negotiated in terms of each party’s responsibilities and share of contract funds. Partnering is constrained by the SBIR program subcontracting limit of 33 percent for Phase I contracts and 50 percent for Phase II contracts.

IAI establishes such partnerships to take advantage of a big company’s specialized expertise or other resources that they can contribute to a project that was granted SBIR funding. Big corporations, like Lockheed Martin, are willing to work with small companies like IAI because of their past contracting experience. IAI staff, familiar with different divisions within particular big companies, have developed connections with their personnel, and may be subcontractors to them on other projects.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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In system diagnostics and prognostics IAI has subcontracted with Honeywell and Northrop Grumman. In forensics, IAI partnered with Forensic Technologies, Inc., and obtained sales commitments on its 3D ballistic identification tool. Additional partnerships have been established with Computer Science Corporation and Time Domain Corporation on perimeter security applications. In the area of educational technology and distance learning, IAI began work with Schepp-Turner Productions, executed an agreement with Market Visions, Inc., supported the educational surveys of Westsat, Inc., and provided technology to the University of Maryland Transportation Research Institute.

The company has also negotiated a paid licensing agreement with NASA on Cybele and Cybele Pro, its intelligent agent infrastructure.

KNOWLEDGE CREATION

The company obtained approximately nine patents and is waiting on other pending patent applications. In addition, Cybele, DIVA, GradAtions, SciClops, Rotoscan, and TalkTiles are trademarks of IAI.

IMPROVING SBIR
Surviving Funding Gaps

Intelligent Automation, Inc., manages the delay between Phase I and Phase II funding by managing several contracts at the same time.

Award Size

According to Intelligent Automation, Inc.’s management, the size of SBIR awards should be reconsidered. For example, NASA has not changed the amount of its awards for at least the past eight years. Accordingly, for the same amount of money, the company is able to finance less and less work. Inflation and overhead costs are taking their toll on IAI’s profitability at an increasing pace. Additionally, the timing of the SBIR awards is not conducive to commercialization because of delays in funding.

Award Criteria

With respect to its own proposals, IAI believes that SBIR awards have always been made fairly and that debriefings have been well thought out and constructive. There is always a conflict between funding high-risk-high-payoff research and funding research where specific plans for commercialization have been made. These two goals are often conflicting. Some agencies appear to be more interested in the former and others in the latter, but generally IAI believes

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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the SBIR program is moving more in the direction of favoring proposals that are closer to commercialization. This is not intended as a criticism—only as an observation.

An important issue for IAI relates to protection of IP. Proposals detail a company’s best ideas and present the essence of the concept as clearly as possible to convince the reviewers that the concept is feasible. For those agencies where proposals are reviewed by government employees or dedicated support contractors, a proposer can at least find out who might have reviewed the proposals. For those agencies where external reviewers are used, IAI recommends that proposers should be able to obtain a list of the reviewers in the reviewer pool. Currently it is our understanding that in the case of external reviewers of SBIR proposals, if a reviewer improperly exploited IP learned from being a reviewer, it would be essentially impossible for the proposing company to ever bring any action because they could not find out any information as to who was given access to their proposal.

Paperwork and Bureaucracy

The amount of paperwork involved in reporting on SBIR projects, relative to other federal technology and procurement programs, is average and in some cases a little more flexible. Nevertheless, some agencies require monthly reporting on six-month projects. In the company’s experience, scientific staff would prefer less frequent reporting, especially for Phase I contracts.

IAI recommends that all government agencies use the same Web portal for submitting proposals, reporting, and contracting. DoD’s and NASA’s electronic systems are more user friendly compared to other agencies’. It is suggested that government agencies be allocated funding to standardize and compile their reporting venues.

Commercialization

Regardless of the quality of the work performed, not all SBIRs are focused in an area that make a commercial product feasible. In addition to conventional products, IAI’s model of commercialization includes “productized services,” and the establishment of a working relationship with one of the big integrators leading to participation on large contracts such as the Army’s FCS. IAI has been very successful in all three of these types of commercialization.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Isothermal Systems Research

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Isothermal Systems Research was founded in June, 1988 by Don Tilton. At the time, Tilton was completing his doctorate in mechanical engineering at the University of Kentucky. His graduate fellowship included participation at research related to developing Star Wars technology being conducted at Wright Patterson Air Force Base, Dayton, Ohio. Tilton’s specific area of research related to spray cooling as a technique for reducing the temperatures in weapons systems, computers, and communications equipment. The research involved addressing fundamental questions about the properties of spray cooling as well as the design of equipment to transform the approach into a functional technology. The original projected end use for the technology was as part of the Star Wars system, although its prospective use in the supercomputer and power electronics industry also received early recognition. As the Star War’s project ended in 1992, technology development increasingly focused on these alternative markets.

ISOTHERMAL SYSTEMS RESEARCH: COMPANY FACTS AT A GLANCE


Address: 1300 N.E. Henely Ct.

Pullman, WA 99163

Phone: 509-366-78701

Year Started: 1988


Ownership: Private


Annual Sales: $45 million


Number of Employees: 275


SIC Code: 3679


Number of SBIR Awards—Phase I: 13

Number of SBIR Awards—Phase II: 3


Number of Patents: 28

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Tilton formed Isothermal Systems to be eligible to submit and then receive an SBIR proposal to the Air Force. The Phase I award was directed at experimental work related to the characteristics of sprayed liquids. Progress on the Phase I project led to Phase II awards, which were directed at developing essential components of an operational system, such as the power electronics and the atomizer. The firm received a series of Phase I and Phase II awards, mainly from the Navy and Air Force for designing and assessing the applicability of its spray cooling technology for a diverse set of weapons systems. Success in these Phase II projects led to Phase III funding from the Air Force and Navy. This process continued throughout much of the 1990s, with SBIR funding representing approximately 60 percent of the firm’s annual revenues throughout this period. In part, the dependence on SBIR funding represented the then as yet underdeveloped state of commercial sector demand for the technology.

The firm describes the gestation of its technology as requiring 15 years of technological development before it was ready to pursue commercial markets. The sequencing of this R&D development process is seen as having occurred in 3 stages: (1) from 1988 to 1992, work focused on understanding how spray cooling worked. Also requiring work in this period was development of components such as spray nozzles, since off-the-shelf nozzles then available were not suitable; (2) from 1992 to 1996, work focused on integrating all the now developed components into a functioning and reliable system; (3) from 1996 on into the present the firm began receiving contracts for testing, demonstration, and deployment. Throughout much of first and second R&D phases, the firm’s work was supported by a series of Phase II work, which, in turn led to follow-on Phase III contracts.

ISR is now more actively pursuing commercial markets, and has begun to hire marketing staff. In its entry into commercial markets, it is focusing primarily on data centers. In a sense, according to the firm, new demands for its technology have emerged that have made it more commercially valuable.

ISR’s relocation from Kentucky to Washington represented Tilton’s personal life style choice.

CAPITAL FORMATION

ISR is a self-financed start-up. The years during which it was working through development of its technology are described as a long and difficult bootstrap period. Its first infusion of what was described as a modest amount of venture capital occurred in 2001, after it had a commercially viable product. It received additional rounds of venture capital funding in 2005 and 2006.

INTELLECTUAL PROPERTY

Patents are an important part of the firm’s strategy for protecting its intellectual property. It presently has 28 issued patents, with another 55 pending.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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STATE GOVERNMENT INVOLVEMENT

Washington state offers several tax breaks for R&D firms, and additional financial incentives for firms to locate in the eastern part of the state. In addition, the state and the regional port authority for the Snake River have recently underwritten the construction of an R&D facility in Spokane.

RECOMMENDATIONS FOR SBIR

ISR views it overall experience with DoD’s SBIR program as positive, but sees the need for several improvement in its procedures. The award process is too slow. Of increasing concern to the firm is its view that over time DoD’s SBIR program has become subject to creeping cronyism. The pre-selection of topics to favor frequent winners is increasing. Selected firms are receiving repeated awards to work on topics that at times don’t represent new technological advances. ISR reports little success in its more recent efforts to get back into the DoD SBIR program after having not submitted proposals for several years.

The gap between Phase I and Phase II funding was “brutal” for the firm. The impacts of the gap were especially hurtful during the firm’s first 8 years of operation, when it was very small. The firm’s owners were required to go without pay during this period, and to downsize by laying off employees.

The size of Phase I and Phase II awards are seen as reasonable. The real challenge for a firm receiving an SBIR award is moving into post-Phase II activity. The outcome of a Phase II award is not even close to being a product. The award does not provide for the life cycle development of the technology: It provides no support for determining manufacturing feasibility, reliability of the product, or scaling up from bench prototypes to large-scale production. The gap between where a Phase II project ends and the beginnings of product development are enormous. DoD’s technical personnel in charge of setting SBIR topics and overseeing proposal selection and project monitoring do not fully understand these differences.

Increased attention needs to be paid to how DoD selects its SBIR topics, as well as to how these topics align with DoD’s overarching objectives.

SUMMARY

ISR credits DoD’s SBIR program with its founding and long-term growth. Without SBIR, it wouldn’t be where it is. SBIR is described as a program that gives people a good chance to make a go of it. The firm appreciates what DoD has done for it. In return, ISR highlights that the SBIR program has produced a lot of good technology both for DoD and the commercial sector.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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JX Crystals, Inc.

Zoltan Acs

University of Baltimore

FIRM OVERVIEW

JX Crystals, Inc., located in Issaquah, Washington, is an innovator in Infrared Cell Technology. The company’s key technology is the gallium antimonide (GaSb) photovoltaic cell, which responds to longer wavelength radiation than either traditional silicon cells or newer gallium arsenide cells. This new infrared cell can be used in thermophotovoltaic generators as well as in space and terrestrial solar applications.

In thermophotovoltaic systems, photovoltaic cells respond to infrared radiation from a fuel-fired emitter, rather than the visible light energy from the sun. The company’s expertise is in GaSb cell development and its plans are to continue developing these applications. JX Crystals sees tremendous potential in manufacturing its latest commercial products using its innovative technology.

THE ROLE OF SBIR
Founding the Company

JX Crystals was founded in 1992 by Lewis and Jany Fraas. The founders developed 30 percent efficient solar cells, a world record performance, but Boeing, where Lewis Fraas worked, decided against funding the project. While at Boeing, Dr. Fraas contacted NASA officials, who showed interest in the development of infrared cells. They founded their firm after winning two small SBIR contracts.

The company has received 12 Phase I and 10 Phase II awards over a 12 year period. These include funding from NASA for space solar cells; from DoD for quiet battery chargers using thermophotovoltaic IR sensitive cells; and from DoE for thermophotovoltaic cells for home cogenerators and hybrid solar lighting systems.

Support for Nontraditional Ideas

According to Dr. Fraas, if a company is fairly well established with an ongoing product and still wants to do R&D, then participation in the SBIR program can be very useful. From concept idea to award, it takes anywhere from six months to one year to get an SBIR. Many companies prefer to avoid government involvement if they can finance ideas internally. Nevertheless, there are limited

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

opportunities to fund longer-term projects. In such cases, the SBIR is a good way of feeding the next product.

Enabling Role in Building Research Capabilities and Commercialization Opportunities

According to Dr. Fraas, the SBIR program is not enough in itself to accomplish these objectives, but it plays an enabling role that give small innovative companies a chance to suceed.

Employment Effects

Beginning with just two employees, JX Crystals employed as many as 20 individuals before 2000. During the time of recession, it had to reduce its payroll to 5 employees. At the time of the interview the company currently employed two administrative staff, two senior engineers, and an accountant.

COMMERCIALIZATION

While the company markets its infrared cells around the world, the market at present remains limited, consisting mostly of university research laboratories. JX Crystals’ revenues, by the end of 2005, will exceed $2 million. Currently, JX Crystals is negotiating with a furnace company the establishment of a consortium that takes the new infrared technology to market.

SBIR awards funded the development of prototypes for use by DoD. The company’s related civilian products are being sold mainly outside the United States. While SBIR awards did not contribute directly to the development of these civilian technologies, the program is nonetheless credited with helping the technology’s development and the company’s growth.

According to Dr. Fraas, existing regulatory policies inhibit the commercializaiton of this innovative technology in the United States. British Petroleum and Shell, he said, receive subsidies in California based on 20-year-old silicon manufacturing technology. These subsidies are available to a list of qualified vendors. Even if a company has a cheaper product with new innovations, it must pay for qualification testing and approval in order to get on the list—a significant barrier for small innovative firms.

Ms. Jany Fraas, who is from China, has brought the technology to the attention of Chinese officials, who have recognized the technology’s potential. The Chinese government has since offered to pay for the qualification testing of their technology. China is interested in manufacturing the cells and selling them back to the United States.

JX Crystals’ involvement with China is mainly due to their focus on production processes. China is looking 50 years ahead, while the United States is look-

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

ing 50 years behind in trying to promote existing technologies. U.S. companies are disadvantaged on the international market because they are competing with foreign businesses that receive commercial and manufacturing support from their respective governments.

ADDITIONAL FUNDING

The company received a small amount of state funding, mostly from the Washington Technology Center. The company has also collaborated with Western Washington University under this program. While this funding did not provide money for operating expenses, it has helped to move the technology forward.

Over a period of 12 years, JX Crystals partnered with big companies like ThermoElectron, ABB, and Energy Innovation, a company in California. Additional funds have been acquired from sources in Israel, China, and a Buddhist temple.

In earlier years, SBIR funding represented approximately 40 percent of total company revenue. Currently, JX Crystals derives 10 percent of its revenue from an SBIR contract with OSD.

KNOWLEDGE EFFECTS

With approximately 20 patents, the company has secured “ a good lock” on the technology. In addtion to having published about 50 scientific papers, the company also hold a trademark. It also holds four achievement awards: 1 from NASA and 3 best paper awards.

IMPROVING SBIR
Surviving Funding Gaps

Delay between Phase I and Phase II funding makes the survival of small businesses difficult. Even if the company survives, it can lose important capabilities as it diverts staff to other projects or even loses staff. Time has to be spent on finding bridge funding and work on other projects have to be juggled. This takes up time and money. The funding gap between Phase I and Phase II was painful and JX Crystals survived it only because the company had other contracts by that time.

Award Size

A larger Phase I award would make it slightly easier to wait for the Phase II awards.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×
Paperwork and Bureaucracy

The company finds the SBIR process to be fair but not timely. Extensive paper work and long delays before start up were found to be significant hurdles, especially given the small size of this firm.

JX Crystals has received SBIR awards from NASA, DoE, the Army, and DARPA. DoD is rated as being relatively efficient. NASA and DARPA are pretty good. The Army is financially diligent, but technologically unsophisticated.

While JX Crystals is interested in sustainable energy projects, DoE is more focsed on university research than on small business research. According to JX, DoE focuses on “long range unrealistic projects that lead nowhere,” or on “large billion-dollar companies that focus on coal gassification and similar traditional technology extentions.”

Commercialization

The steps involved in bringing a new product into the marketplace start with proof of concept, which can be easily funded by Phase I awards. The second step of building the first prototype is supported by Phase II in the SBIR program. Beyond that, companies must build commercial prototypes and do beta site testing. The SBIR program locks companies into perpetual research and, at most, helps them build the very first prototype. However, it fails to support awardees in completing the award cycle with production and commercialization. While several agencies are aware of this multistep process, the SBIR program abandons small businesses at a fairly early point. Thus, there needs to be a Phase III plan. Phase III could include more extensive testing and improvement of prototye for potential investor funding.

According to JX, the heavy focus on DoD SBIR awards and associated defense systems limits the development of related commercial products for peaceful appications. There is also a lack of follow-through for commercial applications used beyond the military prototypes. This means that small businesses have to look abroad to support for technology transfer and exploitation—“a sad state of affairs.” The exclusive focus on support of only military technology development is a handicap for the U.S. economy because most foreign governments help their industries in the manufacturing and commercial sector.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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JENTEK Sensors, Inc.

Zoltan Acs

University of Baltimore

FIRM OVERVIEW

JENTEK Sensors, Inc., of Waltham, Massachussetts, produces diagnostics and prognostics sensor technologies and systems providing nondestructive testing solutions, health and process monitoring solutions, and materials characterization solutions. These sensors, for example, help monitor damage to aircraft and other high value assets.

Dr. Neil Goldfine founded JENTEK in 1992 as a company of one. Today, JENTEK has 27 employees. In 1999, Deloitte & Touche placed JENTEK 14th on its list of Fastest Growing Technology Companies in New England. In 2007, JENTEK received the FAA/Air Transport Association’s Better Way award for its engine component inspection technology. The company’s customers include the Navy, Air Force, Army, NASA, DoE, FAA, several foreign militaries, and Fortune 500 companies in the aerospace, materials, automotive, petrochemical, manufacturing, and consumer products industries.

THE ROLE OF SBIR
Fostering Rapid Company Growth

For JENTEK, the SBIR program has proved critical in providing the financial resources and infrastructure to facilitate the development of key technologies necessary for JENTEK’s current and planned products. The program is credited with allowing the company to grow to critical mass in 10 years instead of 30 years. According to Dr. Goldfine, providing direct access to DoD customers and their defined needs is one of the most important contributions of the SBIR program.

A Key Source of Funding

From 1995 to 2000, SBIR awards served as the company’s principal source of funding and—complemented by personal resources and private investment—helped drive the company’s technology development and expansion. Throughout its history, JENTEK has submitted 87 Phase I proposals and received 25 Phase I awards. Of these Phase I awards, three are ongoing Phase I programs. Of the 20 completed Phase I programs, 17 Phase II proposals have been submitted with 16 Phase II contract awards.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

Over the last three years, SBIR represents 40–60 percent of the company’s budget. It used to be 70–90 percent. While in the long term JENTEK plans to keep SBIR funding under 40 percent of the company’s total revenue, the SBIR program remains a cornerstone of its technology development strategy, serving as a primary source of the company’s applied R&D.

Leverageing Private Investment

JENTEK leverages its SBIR awards to develop other sources of private investment. For example, the company’s Phase III commercialization award from NAVAIR is included in JENTEK’s marketing materials.

Building Relationships

In addition to providing funds, SBIR also provides JENTEK the opportunity to build relationships with OEMs and with government customers, such as NAVAIR, WR-ALC, OO-ALC, NADEP Cherry Point, NADEP Jacksonville, Kennedy Space Flight Center, etc. These relationships are further strenghtened through subcontracting agreements.

JENTEK also advises its target customers of opportunities to team on SBIR projects. In fact, when the company selects SBIR topics, a top criterion is the potential to team with and enhance relationships with an OEM or other target customer.

COMMERCIALIZATION

JENTEK applies physics-based models to provide reliable and robust solutions to multivariate property measurement and defect detection applications. JENTEK specifically targets those applications that are causing customers a high level of “pain” and cannot be solved using conventional methods. JENTEK can also deliver relatively low-cost turn-key solutions, such as for engine disk slot and Friction Stir Weld Inspection, that offer improved reliability and speed at a very competitive cost compared to conventional methods offered by competitors.

JENTEK estimates that the potential market in the nondestructive testing (NDT) solutions area is approximately $250 million annually; the target market in the health and process monitoring solutions area is substantially greater than $1 billion (including potential applications in electronics, life sciences, and real-time industrial process control); and the target market in the Materials Characterization solutions market is on the order of $250 million. JENTEK focused on building credible business/product lines in well-defined niches, often tied to SBIR dollars, such as (1) engine disk and blade inspection, (2) on-board sensor networks for fatigue detection and monitoring, and (3) magnetic stress gages for aircraft, rotorcraft, and bridges.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

Major competitors vary depending on the market and specific application. In the NDT solutions area major competitors include GE Inspection Technologies, Olympus, Zetec, Wyle Laboratories, Boeing inspection technologies, and in-house NDT groups at OEMs and even inside government agencies. Recently, the number of JENTEK’s competitors was reduced to approximately 10 or 15, as smaller companies were systematically purchased by bigger corporations.

JENTEK has developed and delivered solutions to a wide variety of specific DoD and commerical applications for (1) coating characterization, (2) weld characterization, (3) fatigue monitoring, (4) corrosion imaging, (4) gun barrel inspection, (5) engine disk slot inspection, (6) composite damage imaging, and many more. Also, new developments in through-wall temperature and stress monitoring, as well as in stress sensor networks offer breakthrough capabilities in a wide range of fields including aerospace, energy, and even life sciences.

Examples of commercial deliveries include engine slot inspection systems to NAVAIR, fatigue monitoring systems to Northrop Grumman and Lockheed Martin, Space Shuttle leading edge inspection systems to NASA, C-130/P-3 propeller inspection systems to numerous DoD and foreign military customers, coating inspection systems to Siemens, and FSW inspection systems to Eclipse Aviation and other aircraft OEMs. JENTEK sells products to the private sector, primes, as well as the agencies that funded research.

KNOWLEDGE EFFECTS

JENTEK has had a significant impact on understanding of eddy current sensing capabilities overall. JENTEK is recognized as a leading developer of eddy current technology and is clearly setting the bar for next generation inspection technologies.

In addition to publishing numerous scientific papers, the company has been issued seven patents associated with government funding and twenty-three associated with private funding. Several other patents are pending.

When small companies have patents, they are taken more seriously. Patents (1) create an aura of success, facilitating more serious business relationships with primes; (2) are considered in the award evaluation process; and (3) make the company less susceptible to competitive pressures.

The company holds the trademarks for GridStation, MWM, IDED, and JENTEK Sensors.

Reflecting the scope of its innovations, the company has received numerous awards, including the NAVAIR Phase III commercialization award; Outstanding Phase III Transition Award, 2004, awarded by the Navy Transition Assistance Program; Outstanding Paper Award for Materials Evaluation: “Eddy Current Sensor Networks for Aircraft Fatigue Monitoring,” published in the ASNT Materials Evaluation Magazine, July 2003, Aerospace Health Monitoring, Volume 61, No. 7; Technology 2007 Spin-off Achievement Award from NASA Tech Briefs;

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

and the 2007 FAA-ATA Better Way Award for its engine component inspection technology.

IMPROVING SBIR
Funding Delays

The delay between awards is not usually a problem for JENTEK, now that the company’s size has increased. JENTEK typically has many other programs and can offset funding delays with other work. It is always better when there is a shorter delay; nevertheless, it is far better for decisions to be sound rather than rushed. The company generally does better (at receiving Phase II contracts) when the TPOC takes his or her time and makes decisions based on the best and most complete information. Thus, JENTEK prefers that this process is not rushed. However, once an award decision has been made, delays in Phase II start dates can be painful.

JENTEK typically keeps low levels of R&D funding to support efforts between Phase I and Phase II relevant to JENTEK overall R&D goals.

Award Size

For Phase I, $70,000 to $100,000 is reasonable. Too large a Phase I program becomes a distraction until feasibility is demonstrated. However, larger Phase II awards would be helpful. Ideally, a $750,000 base program with a $500,000–$750,000 option would be advisable. The option should be directly supported/sponsored by the target customer.

Often there is a gap between SBIR funding and program funding (transition money is seen as R&D). However, the NAVAIR matching funds approach is a great solution to this problem and has helped JENTEK succesfully transition several systems (saving the DoD substantial funds).

Award Selection

The award selection process is seen as “surprisingly fair”: “We have blind bid on many projects where the customer had never heard of us and succeeded in winning both Phase I and Phase II awards.” The delays from proposal submittal to award to program completion are not too long to prevent successful technology transfer. These delays are better than a rush to judgement.

However, there is often a conflict of interest in small businesses being evaluated by college professors who compete for the same money. Small companies can find themselves in the awkward position of competing with universities that have infiltrated the funding agencies. In applying for transition money, SBIR companies often have two or three university representatives on the committee

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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who seemingly decide between transitioning a technology or funding themselves. Naturally, the universities choose to fund themselves. This often delays commercialization of deserving technologies. However, diligent small businesses can navigate this process by finding DoD customers with real and pressing needs.

Commercialization Programs

JENTEK notes that NAVAIR events (commercialization forums) have been particularly useful. The Air Force, particularly WR-ALC (Robbins Air Force Base), is great at supporting transition to use as well. NASA has also been very good at helping the company transition systems to use. Other agencies are more research focused and not as interested in near-term commercialization, but this balance is not necessarily a bad thing.

Citing the NAVAIR matching funds approach, JENTEK notes that the SBIR program should mainly promote product transition into Phase III and facilitate the connection between small businesses and primes. It is a great way to encourage small businesses to communicate with the stakeholders at the bases and deliver valuable solutions. Also, SBIR offices should encourage stakeholders at the bases to communicate with SBIR firms, by informing them about the opportunity for such matching. SBIR firms should not be limited in their ability to keep technolgy proprietary; this is the lifeline of any succesfull small technology-oriented company. It is realistic to have open architecture processes with “plug-and-play” proprietary and open products/solutions selectable by customers/users.

However, with the exception of NAVAIR, access to transition support funds is a weakness at all agencies; these funds are needed to bridge the gap between research and implementation dollars. OEMs should be encouraged more to work with Phase II SBIR firms and include these firms in larger programs. This happens, but without formal guidelines and tools. Finally, standardization and centralization impede small business processes. Such standardization often artifically raises the entry fee to compete for real applications beyond the resources of small entities. Of course such standardization, if used properly, can substantially improve efficiency and reduce costs.

Liaising with the Primes

Because one of the SBIR program’s greatest advantages is the opportunity to develop business relationships with primes, a company’s efforts to connect with primes should be an evaluation criteria for Phase I awards. Agencies, in making Phase I award decisions, should consider whether the SBIR company has: (1) a clear relationship with primes or (2) funding to fill out the technology matrix combined with ability to provide value to the customer (who oftentime is the funding agency itself).

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×
Program Cycle

For small companies, functioning in parallel with the government’s twelve month cycle is difficult. Twenty-four month programs are beneficial for SBIR firms and, at the same time, hard to find. Thus, the twenty-four month Phase II opportunity is great for stabilizing small company funding. The recent push by some groups to introduce options (toll gates) after twelve months (in Phase II programs) removes this benefit and makes life much more difficult.

Protecting Intellectual Property

The protection of proprietary information in the proposal submission process is a key issue for small innovative businesses. There are groups that push for openness and devalue companies that hold SBIR data proprietary. The SBIR program should help primes, and particularly government employees, understand that the lifeline of small businesses is proprietary technology. If disclosure of proprietary information is a criterion in funding research, inevitably, small companies will be eliminated from the competition process. This practice, by which only primes can have proprietary information, is an increasingly debilitating burden for small companies and will dramatically reduce the quality of the technology that the agencies receive for their SBIR investments, and overall.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Marine Acoustics, Inc.VoxTec International, Inc.

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

This narrative recounts the genealogy of two related firms: Marine Acoustics, Inc. (MAI), Middletown, Rhode Island, and VoxTec International, Inc., Annapolis, Maryland. Until January, 2005 VoxTec, was a wholly owned division of MAI. In January, 2005 it spun off as a separate firm. MAI has been the recipient firm for SBIR awards, with VoxTec’s founding directly tied to MAI’s receipt of an SBIR award.

MAI was founded in 1988 by William Ellison, a graduate of the U.S. Naval Academy graduate (1963), and a holder of a Ph.D. in underwater acoustics from MIT. Upon his retirement from the Navy, Ellison served as a freelance consultant to Navy Systems Warfare. While he was working in this capacity, Navy officials suggested to him that they would find it easier to enter into contracts and also to have him undertake larger scale projects if his work was performed through a firm rather than as an individual. Accordingly, Ellison formed Marine Acoustics,

COMPANY FACTS AT A GLANCE

Marine Acoustics, Inc

VoxTec International, Inc.

809 Aquidneck Avenue

706 Giddings Avenue

Middletown, RI 02842

Suite 2A

Phone: 401-847-7508

Annapolis, MD 21401

Fax: 401-847-7864

Phone: 410-626-9825

Email:info@marineacoustics.com

Fax: 410-626-9851

 

Email: www.ace@sarich.com

Revenues: $10.6 Million in 2004

$2.5 million

Number of Employees: 35

6

Number of SBIR Awards: 11

 

Phase I: 6

 

Phase II: 4

 

Phase III: 1

 

Number of Patents: 1

Pending: 2

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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locating in the Newport, Rhode Island area, which provided close proximity to Navy facilities and a sought after life style.

MAI provides a range of engineering, technical, operational and environmental planning/compliance support services to a number of government agencies, commercial firms, and universities.

The VoxTec division of MAI was formed by Ace Sarich, a graduate of the U.S. Naval Academy, a Seal veteran with two tours in Vietnam, and a graduate of the Naval Postgraduate School. Sarich also served as a faculty member at USNA, where he taught mechanical engineering and Naval Systems Engineering. After retiring from the Navy in 1986, Sarich worked briefly for a small R&D firm and as a freelance consultant on a variety of engineering projects. Several of these projects involved designing equipment to meet the special needs of DoD’s special operations commands. Sarich joined Marine Acoustics in 1987, where he worked on classified R&D projects out of the firm’s offices in Arlington, VA. Upon forming VoxTec, Sarich first worked out of his Maryland home, but then relocated to an office in Annapolis as the firm grew.

EXPERIENCES UNDER SBIR

Marine Acoustics is reported as having had 1 SBIR award prior to the award that underpins VoxTec’s formation. SBIR thus represents a small portion of Marine Acoustics’ core operations. SBIR’s impacts are manifest though in the events that led to the development of the firm’s handheld voice translator (Phraselator) and VoxTec’s subsequent founding and growth.

The sequence begins with discussions between Sarich and a DARPA program manager, a former high school classmate and Naval Academy classmate, about DARPA’s ongoing efforts to develop field usable voice translators. The state of the art through 2000 consisted of pc-based voice translators, but this platform was too cumbersome for use in field operations. The mission objective was to develop a handheld translator. Sarich, a Marine Acoustics employee, expressed an interest in working on the technology. Subsequently, DARPA developed an SBIR topic for the technology.

Sarich applied for a Phase I award, which he received in 2000. Using this award, he built a PDA version of the translator. This progress led to a Phase II award in January, 2001, and resulted in the development of a working prototype by September, 2001. Following 9/11, and the subsequent deployment of American military forces in Afghanistan and Iraq, Marine Acoustics received a Phase III award to tool up to begin limited production of the handheld translator. Initial field deployment of the technology began in 2002.

The successful development of the handheld translator led to changes in Sarich’s relationships with Marine Acoustics. As noted, Marine Acoustics started out and has continued to specialize in marine engineering design. Much of its work is done on a cost-plus fee basis. After the firm scaled up to begin Phase III

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

production, it began to encounter difficulties in meshing the accounting and managerial systems associated with being primarily a service-oriented firm that used cost-plus-fee accounting, with those required to grow a high-tech, product-oriented start-up firm. Growth of the latter type of firm, especially one based on internal sources of revenue, was seen as requiring a pricing structure that included overhead and profit margins different from those found in Marine Acoustics R&D contracts. Also, as it perceived broader nondefense markets for its translator technology, such as in law enforcement and medicine, VoxTec saw the need for a new, different orientation to marketing and pricing.

These considerations led to a decision to gradually separate Marine Acoustics and VoxTec. In January 2005, VoxTec International, Inc., was spun off. Under the present arrangement between the two firms, product marketing and sales are handled by VoxTec, while finance and accounting are handled by Marine Acoustics. For every Phraselator that it sells, VoxTec is committed to paying a royalty to Marine Acoustics. When a predetermined total level of payments have been made, the intellectual property underlying the Phraselator will accrue to VoxTec, and no additional royalties will be paid. At that time, the government R&D contracts will be novated from Marine Acoustics to VoxTec.

CAPITAL FORMATION

Operating primarily as a contract R&D firm, providing engineering design services to the Navy, primarily the Navy’s Space and Naval Systems Command, required little in the way of initial capital. Marine Acoustics thus began and has remained a privately held firm, with its stock distributed between its founders and an ESOP.

VoxTec also is privately held. Its activities are funded primarily by existing DARPA and Army contracts. It views going public as a desirable future outcome.

INTELLECTUAL PROPERTY

Marine Acoustics, as a supplier of contract R&D services, has tended not to produce patentable inventions. VoxTec, as a product-oriented firm, however, sees patents as an important source of intellectual property protection. It is beginning to file patents on its inventions, but has not received any patents to date. The firm notes though that much of the technology embedded in its translator already exists in the public domain. Its “technological leap forward” in large part was based on a distinctive integration of components and an acute awareness of and sensitivity towards the operational needs of end-users, that is frontline warfighters.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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EXPERIENCES WITH STATE GOVERNMENT PROGRAMS

VoxTec reports no involvement with Maryland’s technology development or economic development programs.

RECOMMENDATIONS

According to VoxTec, the core features of the SBIR program, including the open solicitations and the sequencing of Phase I and Phase II awards are sound. SBIR’s value is that it provides opportunities both for the sponsoring agencies to learn about new technological possibilities and for firms to pursue them.

The downside to these procedures is that they can make the topic generation and solicitation processes “fishing expeditions” on the part of agency program managers. Managers may use the process to see what’s out there without having a serious intention of making an award. In such cases, firms may spend a lot of time putting together a proposal, with little realistic prospect of receiving an award.

The perception also exists among some firms that selected competitions are wired. Thus, firms are required to spend time deciphering the messages conveyed by program managers and other industry sources about whether or not a solicitation truly represents an open competition.

SUMMARY

Without SBIR, according to VoxTec’s founder, DARPA would not have an operational technology. In a period of approximately 2 ½ years, years, the research funded by DARPA has rapidly progressed from a concept to a prototype to a technology deployed in Afghanistan and Iraq. The award also has served as the basis for the formation of a new firm, VoxTec. As described by the firm, without SBIR, VoxTec would not be where it is today. Although in its early stage of development, and focused at present at scaling up production of its core defense-oriented product, the firm sees its technology as representing a significant advance over existing off-the-shelf products, and as having considerable potential in public and private sector markets.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Multispectral Solutions

Zoltan Acs

University of Baltimore

FIRM OVERVIEW

Multispectral Solutions, Inc. (MSSI) is an industry leader in ultra wideband (UWB), an emerging wireless technology for communications, precision localization, RFID & radar applications. With a core competency in RF (radio frequency) and high-speed digital design, the company has applied this technology to a wide range of military, government and commercial products including low probability of detection communications, high-precision ranging and radar, radio frequency identification (RFID) and precision real-time location systems (RTLS).

MSSI is located near Washington, DC, in Germantown, MD. Dr. Robert Fontana is the company’s principal founder.3 He believes that a key strength of the SBIR program is its ability to fill definite technology gaps in DoD’s arsenal, and its ability to grant small companies an opportunity to develop their businesses.

THE ROLE OF SBIR

The founder recognizes the significant positive role of SBIR, among a number of interrelated factors, in helping the company establish strategic partnerships, acquire external funding, and establish itself in the market, among other outcomes.

A Source of Early-stage R&D Funding

The company realized, very early in its history—winning two SBIRs in its first year of operation—that the SBIR program was a valuable source of nonequity diluting R&D funding. Even when venture capital funds are available for early-stage R&D, the innovative small business is often required to give up as much as 70 percent of the company, often compromising its ability to react to new opportunities.

3

Dr. Fontana earned a masters degree in from MIT and a doctorate from Stanford University, all in electrical engineering. Prior to forming MSSI in 1988, Dr. Fontana worked in the defense industry for Raytheon, Hughes Aircraft and Litton Industries, and as a professor at Carnegie Mellon University.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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A Signal of Quality to Private Investors

Multispectral Solutions used the validation provided by successful performance on a wide variety of SBIR programs as an important leverage for both non-SBIR and angel funding. Winning numerous Phase I and II, and two Phase III, SBIR awards allowed the company to attract additional funds and to advance the technology to a more mature state. Over the course of its history, MSSI has received in excess of $30 million in government R&D funding, largely as a consequence of techniques and products which it developed under SBIR grants. As a consequence, the company has not required any outside funding, although it successfully completed a round of angel funding for $1.75 million which it used to accelerate its commercial applications of the technology.

A Path to Government Contracting

An important contribution of SBIR is that it allows small companies to form relationships inside of the government arena. This task is very difficult without programs like SBIR. For example, one SBIR award, which transitioned into an acquisition contract (Phase III SBIR) for an aircraft wireless intercom system with the Naval Air Systems Command, was the basis for partnering with the Raytheon Technical Services Company. At the delivery point on the Phase II award, Raytheon paid for a license from MSSI to integrate the Multispectral Solutions’ UWB RF card stack into an existing Raytheon product (AIC-14) for use aboard aircraft.

Addressing Agency Missions

Multispectral Solutions has always strived to understand the technology needs of the defense sector, and the SBIR process has been an invaluable mechanism for obtaining such insight directly from the organizations and commands. Furthermore, the SBIR process strongly encouraged the commercialization of the company’s technology, enabling it to produce commercially viable products which can capitalize on the private sector markets.

Employment Growth

It is hard to quantify the effect of SBIR on staffing, because while the program is a prime mover, it is not the only thing that drives employment requirements. Multispectral Solution has grown from employing two individuals in 1989 to 29 individuals as of this interview, of which approximately 25 are full-time R&D staff. In addition, the firm hired some high-level executives as a direct consequence of staffing requirements generated by Phase II and III SBIRs.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Establishing Technological Leadership

The SBIR program helped establish Multispectral Solutions as one of the leading national authorities on UWB, a field that has experienced dramatic technological changes. During the docket proceeding for the FCC rulemaking on unlicensed use of UWB technology, Multispectral Solutions was instrumental in helping the FCC craft a workable draft. The company was a leading responder under the docket and was heavily referenced throughout the proceeding by other respondents.

Multispectral Solutions continues to apply for further SBIR awards but has been selective in responding to solicitations. It invests its resources into writing proposals only if the solicitation seems to advance the company’s core technology.

COMMERCIALIZATION

Within the past few years, the FCC changed its policies regarding ultra wide band technology allowing it to emerge into the commercial sector under its rules for unlicensed (Part 15) equipment. As a result, a number of small UWB companies were formed; however, due to its seniority in the field, Multispectral Solutions considers itself an industry leader. As a consequence of its extensive SBIR experience in designing and building operation systems, the company has specialized in UWB hardware and complete systems. On the other hand, MSSI sees most UWB contenders as having specialized in chipset development for short range, consumer-oriented, wireless communications applications.

MSSI’s commercial products include its Sapphire DART UWB-based Real Time Location System (which received the Frost & Sullivan 2005 Product Innovation of the Year Award), a wireless audio distribution product SpectraPulse sold and marketed by Audio-Technica under exclusive license to MSSI, and a commercial version of its UWB radar.

Interestingly, SpectraPulse is a commercial version of a wireless intercom system that was developed under Phase I, II and III SBIR programs with the U.S. Navy. The Navy Phase III award, for which MSSI was named in 2004 as a Navy SBIR Success Story, is an excellent case story for both the good and bad sides of SBIR contracting. The Navy set aside $24.5 million in acquisition funds for this project. An initial Phase III SBIR award, of roughly $4 million, was used to produce the first article system test for the Navy. Multispectral Solutions was the prime contractor for the award and was responsible for designing mobile units, a wireless card stack, antenna designs, etc. Raytheon was selected as a production partner in charge of integrating the technology within existing military equipment onboard fixed and rotary wing aircraft. Multispectral Solutions, although a relatively small company, planned to complete 40 percent of the work involved in the project, with Raytheon handling the production deliveries to the customer.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Unfortunately, this contract did not come to fruition. Since then, MSSI has significantly downsized its participation in the SBIR program.

KNOWLEDGE EFFECTS

The company’s revenue approached $6 million last year. In this income range, the company is big enough to establish competitive advantage over small start-ups. The company is in the process of doing a first article build for an aircraft ICS system in Navy helicopters.

The company has been issued 10 patents and has filed for several more. In addition to publishing several papers, the company also coordinated the first IEEE conference on UWB in Baltimore in 2002. There were 400–500 attendees from around the world and Multispectral Solutions produced five of the papers presented at the conference.

Dr. Robert Fontana, MSSI founder, president and CEO, was recently elected (November 2006) Fellow of the IEEE for “contributions to short pulse electromagnetics as applied to ultra wideband systems.”

IMPROVING SBIR
Surviving Funding Gaps

Factors in surviving funding gaps include good management (and sometimes good fortune) and, importantly, the SBIR program managers’ timeliness in administering awards. By and large, MSSI believes that the Navy has a good administration process and their program managers are more conscientious than others.

The company does not build funding delays into the standard budget and work force process. Depending on the job, the Multispectral Solutions may stop work until funding arrives. It does not actively seek bridge funding.

Commercialization Assistance

Multispectral Solutions attended commercialization conferences and was recently highlighted as a model company. At these conferences, companies can present their technologies and gain information on the government agencies’ procurement needs. The company finds such support activities very useful.

Award Size

The size of Phase I awards could be increased to $100,000 or $125,000, with the condition that awardees develop an actual product. This strategy would also allow SBIR program managers to make a more educated determination on

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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the viability of Phase II awards. The size of Phase II awards, typically $750,000, seems to be adequate.

Various government agencies offer different sized SBIR awards. In the company’s perspective, SBIR awards should be standardized, using the Navy as a model. The program should also establish procedures that encourage independence from SBIR funding.

Paperwork and Bureaucracy

SBIR paperwork is minimal in comparison to the formalities related to the company’s production contract.

Multispectral Solutions had contracts with several DoD agencies: Army, Air Force, Navy, etc. Navy seems to have a well-organized program with more oversight. They give careful consideration to their expected outcomes and their program managers have a good work ethic.

Award Selection

The selection process may be biased in certain cases. Multispectral Solutions successfully challenged a solicitation that seemed custom-tailored to a particular company’s proposal.

Multiple-award Winners

The company noted that the SBIR program is very beneficial when utilized for its originally intended goal. However, some companies develop business models that live off the SBIR program. A small business that is writing dozens of Phase I proposals each year may not be focused on technology and true commercialization. It may just be trying to turn out volume and pump up revenue rather than leveraging on some specific aspect of their technology and capitalize on the private sector market. Firm representatives believe that some multiple-award firms develop human resource infrastructures for the sole purpose of writing proposals that knock out commercially promising proposals from firms like Multispectral Solutions.

CONCLUSION

In sum, SBIR awards seem to have played a significant role in the firm’s development of its technologies and subsequent growth. At the same time, its experience demonstrates that even successful completion of SBIR awards does not automatically lead to success in production contracts. Nonetheless, MSSI’s experience does underscore the positive role of small firms in meeting DoD technology needs and SBIR’s role in facilitating this contribution.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Next Century Corporation

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Next Century Corporation’s founding reflects a set of personal and business decisions made by its founders following 9/11. One of them, John McBeth, had formerly been employed with a sequence of computer software firms that had gone through a series of acquisitions. He was first with Century Computing, a company formed in 1979, and a recipient of SBIR awards for several agencies. Century Computing was acquired by AppNet in 1998, as part of that firm’s acquisition of 12 other firms and a subsequent public offering. AppNet, in turn, was soon acquired by Commerce One.

Seeking a more creative and entrepreneurial firm environment, in 2001, McBeth, along with 2 other former senior officers from AppNet, left to start a new company. In September 2004, they founded DigitalNet, raising $100 million in venture capital to buy computer software firms.

The 9/11 bombing of the World Trade Center found McBeth at a software conference in San Diego. Forced to drive cross-country for part of his trip back to DC because of the freeze on domestic air flights, and realizing that were it not for a last minute change in flight plans, he would have been on one of the planes that

NEXT CENTURY CORPORATION: COMPANY FACTS AT A GLANCE


8101 Sandy Spring Road

Laurel, Maryland 20707


Phone: 301.939.2600

Fax: 301.939.2606


SIC: 7173


Revenues: $5 million

Employment: 23


Number of SBIR Awards

Phase I: 3

Phase II: 2

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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crashed, McBeth came to the decision that he no longer wanted a career based on buying and selling firms but instead wanted to form his own company.

This company was to function according to a specific set of rules; these rules were a reflection of his personal values and prior corporate experiences. The rules were that the firm would never be sold and would not be taken public (thus ruling out recourse to venture capital or outside investment); its goal would be to help protect the United States, and its products would be designed to save lives.

McBeth was joined by three partners, each of whom invested $500,000, in founding Next Century. Each of the four had experience as senior managers of software firms, and each was well recognized in the industry for their technical expertise and business experience. The $2 million initial investment was intended to permit the firm to function without a need either to secure bank loans for working capital or outside investments. The new firm’s goal was to have a positive cash flow by the time their capital dropped to $1 million, a goal they effectively met. Next Century remains an employee-owned firm.

Next Century located in Laurel, Maryland, in part because of the very favorable rent it received from a local developer and in part because of its convenient location midway between Baltimore and DC, near its major customers.

Next Century’s customer base is similar to the one that McBeth and his partners had previously worked with. Its software has been used by the Navy on the submarine fleet, first responders, and U.S. Special Forces. Next Century also has begun to work with nongovernment customers, providing, for example, software used by a firm that repairs electrical transmission lines and a firm that supplies software services to police departments. It is now expanding its business with U.S. intelligence agencies.

Next Century sees itself as remaining a firm devoted to providing R&D services, but not becoming a producer of the technologies it develops. In his previous employment settings, McBeth had seen 3 efforts to reorient a firm from being a service provider into providing both services and equipment; each effort failed. In his view, a firm must decide between being one or the other. This conclusion is not the same though as saying a firm cannot provide services to both the government and commercial sectors. In his view, and in Next Century’s experiences, it is possible to do both. Moreover, Next Century does foresee the possibilities of spinning off 1 or more firms if its R&D leads to viable products requiring volume production.

EXPERIENCES UNDER SBIR

A central thrust of New Century business strategy has been to be proactive, that is to decide who they want to target, in contrast to what is seen as the reactive—simply respond to customer requests—strategy of the firms with whom its founders were formerly involved. Additionally, in keeping with its founding mission of helping protect the United States and saving lives, the firm decided

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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to focus on the U.S. military, specifically the warfighter, the ultimate end user. Here too, reflecting the immediacy of the tragic outcome of U.S. special military experiences in Mogadishu, Somalia, the firm decided to concentrate on the needs of the U.S. Special Forces. It asked itself: what type of detection and sensor systems were needed by the frontline warfighter?

Its answer initially was a concept, Strategic Insight™ systems, that prvide end users with the right information at the right time no matter where they are. The technological manifestation of this concept was a personal threat warning system that could be used by Special Operations forces for reconnaissance and detection. Next Century prepared a concept paper on the technology. It then sought the advice of Colonel van Ardsdale, a former Delta Force officer who had commanded U.S. forces in Somalia. Its next step was to submit an unsolicited white paper to the U.S. Special Operations Command in Tampa, Florida.

Upon receiving the concept paper, Special Operations invited Next Century to present a briefing on its proposed technology. At the time, Special Operations had been pursuing a related R&D program conducted at a DoD research laboratory, but budget cuts had led it to scale back work on the project. The SBIR program however provided Special Operations with an alternative route to fund research on threat warning systems, and it had listed such as need as one of its SBIR topics. More generally, Special Operations is seen as using SBIR as a parallel R&D system, funding multiple Phase I awards that are then winnowed down (down selected) for further development. (Use of this approach appears to be increasing across several services.)

Next Century’s concept for a threat warning system consisted of software to alert the war fighter to the presence and location of friendly and hostile forces. SOCOM encouraged Next Century to submit a Phase I proposal, which it received. In an unprecedented fashion, SOCOM issued several other SBIR awards to companies developing other parts of the overall solution. These included multiple awards to develop an antenna vest, RF receivers, and a wrist-worn display device. The award to Next Century was 1 of 4 made by Special Operations on the topic.

Within this competitive environment, Next Century’s strategy is to push Phase I R&D into the development of a prototype that can be demonstrated to a sponsor, rather than stopping work at the “paper” design stage. In fact, as part of its Phase I effort, Next Century reached out to the other Phase I contractors and arranged for integration of the overall solution, which it demonstrated at the conclusion of Phase I. This “extra” step, which required that it invest R&D funds above the size of its award, is seen by the firm as having contributed to its success in receiving a follow-on Phase II award of $750,000. This award resulted in the successful completion of a demonstrable technology, leading in turn to Phase III funding (of $660,000) and the transition of support for the technology from SBIR to the DoD’s Advanced Concept Technological Development stage. The threat warning system underwent field trials in May, 2005, with Next Century

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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now serving as both the primary software developer and the systems integrator for the system.

The SBIR program has contributed to Next Century’s founding objectives, and its technological advances under the program are also seen as a great marketing tool. As a source of the firm’s revenue, however, even after its Phase II and Phase III awards, SBIR contracts have seldom exceeded 10 percent of the firm’s total annual revenues.

Next Century continues to see SBIR topics as a fruitful source of R&D funding, and as a means of developing new products and markets, both in the federal government and commercial sectors. It routinely reads the SBIR solicitations from several agencies. When it sees a topic of possible interest, it convenes a meeting of its technical staff to discuss the level of interest of individual firm members and the feasibility of forming a research team. This consultative process typically leads to a severe winnowing of interest, reducing in one case an initial list of 12 topics of possible interest of which only one reached the proposal stage.

Next Century’s approach both to SBIR solicitations and awards for which it might successfully compete also entails investing time and effort in meeting with the topic author to refine the definition of the agency need. This approach is seen as helping clarify both to themselves and at times also to the topic author the precise character of the problem that the agency is seeking to solve. In one case for example, such a conversation led the firm to reconfigure and broaden its approach to its Phase I award from how to deal with weather uncertainty to the mission-planning question of what equipment to take given weather uncertainty.

PARTICIPATION IN STATE GOVERNMENT PROGRAMS

Next Century has had no direct involvement with the state of Maryland’s economic development programs. Previously, while at Century Computing, McBeth had experience with the state’s Department of Business and Economic Development, which provided professional training to the firm’s employees.

RECOMMENDATIONS

Next Century views SBIR as a productive program both for the agencies that sponsor its awards and for the firms that participate in it. In McBeth’s view, the view that SBIR takes too long, makes awards in amounts too small to generate technological advances, and overall is not worth it is dead wrong.

The funding gap between Phase I and Phase II awards is a recurrent source of concern for small firms, which has been aggravated by the increasing practice of DoD and other agencies of making multiple Phase I awards. Whereas formerly, in McBeth’s experiences with his earlier firms, Phase I awards lasted 6 months with provisions for finishing early, thereby allowing awardees to quickly commence work on Phase II activities, under the evolving practice of multiple awards, now

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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down selection for Phase II awards may not occur until all firms have completed their Phase I work. This arrangement can lengthen the gap for a Phase I awardee who finishes sooner. Relatedly, the firm sees DoD and other agency practices of issuing multiple Phase I awards as having merit, especially on “blue-sky” topics as having some merit, but the absolute number of such awards issued on specific topics can be excessive.

The sizes of Phase I and Phase II awards should be increased to $100,000 and $1 million, respectively, even if these changes resulted in fewer awards.

SUMMARY

The SBIR program has permitted Next Century to realize its founders’ objectives of helping protect the United States and saving lives. SBIR is seen as of considerable value to DoD. In Next Century’s experience, SBIR provided U.S. Special Operations with a contractual device to pursue a parallel R&D strategy at a time when programmatic funding had been cut. Next Century’s outputs under its Phase I and Phase II SBIR awards have already been field tested and advanced to Phase III funding. Although a relatively small percentage of the firm’s total revenues, SBIR serves as a repeated signal to the firm of new R&D needs; its successful performance of SBIR contracts, in turn, serves the firm well as a marketing tool in being able to document its performance.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Pearson Knowledge Technologies

Nicholas Vonortas

George Washington University

COMPANY BACKGROUND

Pearson Knowledge Technologies is an educational software development firm based in Boulder, Colorado. In late 2004, the firm, formerly Knowledge Analysis Technologies, joined with Pearson Education, a multiscope education unit of the Pearson parent company, an international media concern that also owns Penguin Books, the Financial Times, as well as major text books in the United States, such as Prentice Hall and Addison Wesley. Knowledge Analysis Technologies was founded in 1998 in the city of Boulder, Colorado by Drs. Thomas Landauer, Darrell Laham, and Peter Foltz. Between 1999 and the 2004 merger with Pearson Education, Knowledge Analysis Technologies earned twelve Phase I, five Phase II, and one Phase 3 SBIR awards. Additionally, four STTR Phase I and three STTR Phase II grants were awarded. SBIR and STTR grants were principally from the Department of Defense (DoD), while the Department of Education and National Science Foundation also contributed. As the parent company, Pearson Education, exceeds the size limit that defines a small business, Pearson Knowledge Technologies, as the company is now known, is no longer eligible for the SBIR program.

Pearson Knowledge Technologies focuses on the application of advanced software tools to products for the education, publishing, government, and defense/intelligence markets. Specific products allow a computer to analyze freeform text, up to gigabytes in length, for content in order to provide feedback regarding essay grading, indexing, information retrieval, and job or mission requirements. The firm is also able to adapt these technologies to software platforms in any language.

Most of the company’s products are based on the Intelligent Essay Assessor, the product around which Pearson Knowledge Technologies was built. That innovation will be discussed more extensively later in this report. Underpinning the Essay Assessor is a technology termed Latent Semantic Analysis, a software application that automatically understands text in a manner similar to that of a human.

Product examples centered on the Intelligent Essay Assessor are described here. Summary Street, currently being used by middle and high school students through the Colorado public school system, is designed to automatically grade and review online summaries of readings. Feedback can include an evaluation of content, essay coherence, spelling, grammar, redundancy, and irrelevant sentences. Standard Seeker is a semi-automated, online tool that correlates standards,

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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objectives, and skills lists to publication manuals, including textbooks, lesson plans, and test items. It also allows for more rapid and accurate automatic indexing of these items. SuperManual is an electronic manual designed to allow for fast information searches, especially when compared to hard-copy text versions of the same information. Applications include military training and maintenance manuals and other traditionally large volumes. Career Map matches mission and job requirements with an individual’s personal work and training history. Currently, this product is being used to allow military commanders to semi-automatically assign tasks to specific soldiers and units.

SBIR AND THE FIRM

The SBIR played an important role in the formation of Pearson Knowledge Technologies and its subsequent growth. The founders of the company first came in contact with the SBIR program while serving in the capacity as subcontractors to other SBIR award grantees. Dr. Landauer was one of the original developer of Latent Semantic Analysis, the software code that underpins the Intelligent Essay Analyzer. At first, the innovation was developed and applied in the capacity of subcontractor functions for other SBIR awardees. Then, a Phase I grant was received from the Air Force for an intelligent data-mining agent for rapid and optimal deployment of war-fighting knowledge. Pearson Knowledge Technologies was then formed to handle the increased demand for latent semantic analysis-related projects.

More or less continuous SBIR funding maintained the new company in its early phases and allowed it to survive the late 1990s dotcom bust. Specifically, the Phase II award resulting from development of the first Phase I product kept the company from going under. Automated essay scoring was initially viewed with skepticism by the general public. Pearson Knowledge Technologies (its predecessor to be exact) decided to self-finance the company realizing that market acceptance might be a long process. Venture capital was not considered an option as the founders desired to keep full control of the innovation’s application in order to branch out beyond the armed forces into the educational market.4 More importantly, the technology required more advancement, thus more research while, according to the interviewees, a venture capital investor would have wanted rapid results. The SBIR awards allowed the technology to mature before the company relied on market forces for long-term success.

4

The founders had educational experience. Several of them, including Dr. Landauer, had started from Bell Labs in New Jersey and then moved to Colorado where Dr. Landauer taught for the University at Boulder. Dr. Laham was his student.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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COMMERCIALIZATION PROCESSES

The most important technological advance for Pearson Knowledge Technologies has been the Intelligent Essay Analyzer (IEA). Based on latent semantic analysis, IEA forms the basis of most of the firm’s commercial products. IEA’s main function is to examine a piece of text and extract the overall meaning of that text. The technology can be used to automatically grade essays, retrieve information, and to sort information. One application is in interactive, electronic technical manuals being used by the Navy. Another application is used by some public school systems in Colorado. Students submit essays to an online assessor, which provides instantaneous feedback regarding content, grammar, and spelling, all without human intervention. Students are then challenged to refine and resubmit the essays in order to build writing skills.

Pearson Knowledge Technologies maintains all of the information processing in-house. The firm’s business model is to sell a service, rather than sell licenses to their product, or sell their product as a physical package. Proprietary computer code is thus not compromised and the company can maintain control over who has access to this technology. In order to make the IEA products attractive and affordable for school systems, the firm has, in the past, partnered with various textbook publishers. When a school system purchases a suite of textbooks, it is also given access to the services on the Pearson Knowledge Technologies’ Web site. Teachers are then able to tie in lesson plans from the textbooks directly with online essay review. This is also presumably the major complementarity with Pearson Education, its current parent company, which owns several large publishing houses.

The company does not use patents for intellectual property protection. It considers the enforcement of software patents to be fraught with difficulties. Rather than reveal the necessary information in a patent, Pearson Knowledge Technologies treats its knowledge base as a trade secret and works to stay ahead of the competition through research and development.

The interviewees see writing skills as a fundamental aspect of the learning experience and are concerned that those skill sets are degrading in the public school system. IEA-related products provide access to cost-effective writing aids that do not require additional teacher input. Pearson sees a potential market of around $50 million in the next ten years for these products. One current impediment to a wider use of IEA technology is the lack of access to computer hardware in many schools, as an Internet connection is required to use the essay review product. However, the firm believes that this barrier is being reduced and forecasts wider commercialization in the near future.

COMPANY IMPRESSIONS OF THE SBIR PROCESS

As indicated earlier, the company founders first became aware of the SBIR process before establishing the company while working as subcontractors on a

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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DARPA SBIR award. Most of the firm’s awards have come from DoD agencies that have also been some of the earlier users of the resulting data mining and educational products.

Overall, Pearson Knowledge Technologies has been quite pleased with the SBIR structure. The interviewees stressed that granting funds to small companies in order to perform risky, cutting-edge research is one of the best ways to spend R&D monies. Venture capitalists and big firms, according to Pearson, do not foster the same level of risk taking. Academic grants, while helpful to academics, do not solve the “real” technology problems facing the country, and are not nearly as effective in generating knowledge as are small private companies.

The firm has experienced some minor differences among the granting agencies. For example, the NSF Fastlane process was very cumbersome at first, though Pearson now appreciates the fact that it tells the applying firm exactly what steps need to be taken and in what order they should be performed. Pearson sees the SBIR programs of the National Institutes of Health, the Department of Education, and the National Science Foundation as more academically oriented, while the Department of Defense has a much more specific, mission-oriented application process in place.

Regarding suggestions for improvement, the interviewees made mention of the amount of money involved. In line with many other award recipients, Phase I funding is no longer considered adequate. It was characteristically observed that the money may be enough for very tiny companies with no overhead, but anyone with a formal office and more than one or two employees will find the amount of $100,000 to be insufficient. An award closer to $150,000 would be more appropriate. Phase II awards should be increased as well, up to around $2 million.

The interviewees indicated their warm support for the program: They indicated that federal agencies should be excited to give out these grants for the good of the country. They suspect, however—and, in fact, had heard from at least one employee of a large federal agency—that if the program was not obligatory, the agency would have abolished it.5

Being a small company does impose some logistical hurdles when seeking SBIR grants. Pearson mentioned the large amount of regulations, and changes to those regulations, that accompany the SBIR program. Those regulations can be time-consuming and difficult to understand, and may lead to some firms being intimidated and not applying for the grants. A good solution from the firm’s point of view would be for the government to provide some sort of assistance with navigating through the application, award, and follow-up processes.

For Pearson Knowledge Technologies, a major lacuna with the SBIR program is that the individuals within agencies who approve the grants are not the same or are not connected to those individuals who handle procurement (provid-

5

This corroborates anecdotal information from other government agencies that the authors of this case have come across.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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ing contracts to purchase final goods or services). In order to sell a product or process that has been developed through SBIR awards to a government vendor therefore requires getting to know a whole new set of people. This comment implies the understanding that the chances of winning a government contract increase with networking between the vendor and the procurement end of a federal agency. The outcome, according to the interviewees, is increased barriers for new or small businesses to get a first contract.6

The interviewees also perceived inefficiencies in the structure of federal agencies from the point of view of a small firm. The structure of the armed forces was, for example, said to be highly fragmented, making it very difficult for a new/small unconnected firm to reach various divisions and alert them to their product offerings. One possible solution may be to have some kind of trade show for everyone wishing to do business with a specific federal agency. However, such a trade show would most likely be dominated by federal prime contractors (large diversified companies) leaving little room, in Pearson’s view, for smaller, more innovative companies. The firm recommends that a method be put in place by which those who award the grants can mention specific projects to those who work in the contracting areas of their respective federal agencies.

Finally, the interviewees indicated their perception of a funding gap between federal R&D awards and the market. Such a gap, sometimes known as the Valley of Death or the Darwinian Sea, means that not every commercializable innovation will make it to the marketplace.7 Pearson would like to see more commercialization assistance from the SBIR program than is currently available.

6

This comment becomes more interesting when it comes from a company with exposure to the DoD that, among all federal agencies, is viewed as supporting primarily research closest to final products and processes and most effective in making the link from research to application.

7

Lewis M. Branscomb and Philip E. Auerswald, Between Invention and Innovation: An Analysis of Funding for Early-Stage Technology Development, Gaithersburg, MD: National Institute of Standards and Technology, 2002.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Physical Sciences, Inc.

Irwin Feller

American Association for the Advancement of Science

THE COMPANY

Physical Sciences, Inc., (PSI) was established in 1973 by Robert Weiss, Kurt Wray, Michael Finson, George Caledonia, and other colleagues at the Avco-Everett Research Laboratory, a Massachusetts-based, DoD-oriented research firm. The founders left Avco-Everett to start their own firm in part because they sought a smaller firm research and working environment than was possible at Avco-Everett, which at the time of their leaving had grown to about 900 employees.

PSI is located in Massachusetts, and has retained its major laboratories and corporate headquarters there because it is where its founders live. It has additional operations in Bedford, MA; Princeton, NJ; Lanham, MD; and San Ramon, CA.

The firm’s growth was modest at first. Its initial contracts were with the Air Force and the Department of Energy. By the early 1980s, it had approximately $10 million in revenues and a staff of 35–50. Sizeable reductions in DoE’s R&D budget in the early 1980s caused its contract revenues to fall by approximately one-third. The firm recovered after that period, in part by diversifying the range of its federal customers, such as participation in NSF’s Research Applied to National Needs (RANN) program. As the breadth of its technical competencies kept pace with rapidly changing advances in laser and optics technology, and as it become more actively involved in the SBIR program, it was able to expand its range of technological expertise as well as of federal governmental and private sector customers. For FY2005–2006, its revenues are estimated at $35 million, and its employment level at 175. (These figures include sales and employment levels at its wholly owned subsidiaries Q-Peak and Research Support Instruments, Inc, but exclude employment at Confluent Photonics Corp., a commercial spinout.) Approximately 40 percent of estimated FY2005 revenues is derived from SBIR awards. SBIR awards have contributed a diminishing portion of firm revenues, falling from a peak of about 60 percent in the late 1990s to a projected 35 percent in FY2006.

The founding vision for the firm was to do worldclass basic and applied research and prototype product development under contracts from government and private sector sponsors. It has grown primarily by self-financing and employee stock ownership. This strategy rather, than one based on pursuit of external angel or venture capital, has been adopted in order to avoid dilution of owner/employee direction of the firm. Related to this vision of being a premier research organization was the expectation that the firm’s staff would publish research findings in the open literature. These foundational principles have continued in force to the

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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PHYSICAL SCIENCES, INC.: COMPANY FACTS AT A GLANCE


Address: 20 New England Business Center

Andover, MA 01810

Phone: 978-689-0003


Year Started: 1973


Ownership: Employee Stock Ownership Trust


Revenue: $35m (estimated FY2005)


Total Number of Employees: 175 (Physical Sciences Inc and its two subsidiaries, Q-Peak, Inc. and Research Support Instruments, Inc.)


Number of Patent disclosures: 100 since 1992; approximately 12 per year since 2000


Number of Patents issued: 39 U.S., 54 foreign patents (24 issued to PSI, or pending, and 5 issued to Q-Peak, a PSI subsidiary, are directly related to SBIR/STTR programs)


SIC: Primary (8731)


Secondary (none)


Technology Focus: Optical sensors, contaminant monitors, aerospace materials, weapons of mass destruction detectors, power sources, signal processing, system modeling, weapons testing


Funding Sources: Federal government R&D contracts and services (80 percent); sales to the private sector, domestic and international (20 percent).


Number of SBIR Awards: Phase I: 435

Phase II: 176

DoD SBIR Awards: Phase I: 337

Phase II: 98

Number of STTR Awards: (included in above)


Publications: Total: Over 1,200 to date, probably 50 percent of which are SBIR/STTR-related (an accurate number has not been determined)

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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present, accounting for the firm’s emphasis on R&D and prototype development rather than manufacturing, which would require additional external capital.

The firm’s initial financing came from the assets of its founders, including mortgages on their homes, and funds from family and friends. The firm has drawn little support and seen few benefits in the various technology development programs operated by the state of Massachusetts. Massachusetts is seen as lagging behind other states in the scale and flexibility of programs targeted at fostering the establishment and growth of small, high-technology firms.

In keeping with its pursuit of autonomy and a concentration on contract R&D, PSI has limited its involvement with venture capital firms. Its engagement with them has generally involved the launching of spin-off firms to commercialize products derived from PSI’s R&D technological developments, all of which flowed from SBIR funding. To date, this involvement has been infrequent, and the economic record has been mixed. One such firm in the area of medical instrumentation failed when it couldn’t raise sufficient (third stage) venture capital funding to complete clinical trials and obtain FDA approval. Another spin-off firm underwritten by venture capital funds did succeed, and was acquired by a strategic partner. A more recent venture in the area of optical communications is currently manufacturing components for the telecommunications and cable television industries.

From its inception, the firm’s business strategy has been to specialize in the performance of contract research and development and prototype development. In terms of DoD’s categorization of R&D, the firm sees itself as oriented towards 6.2 and 6.3 projects. In the terminology derived from Donald Stoke’s classic work, Pasteur’s Quadrant, it has strategically chosen to position itself in Pasteur’s Quadrant, that is as a performer of R&D characterized by the pursuit of both fundamental understanding and utility.

PSI’s initial research expertise was based upon and has continued to center on the development and application of laser and optics technology. Reflecting the experience of its founders, the firm initially targeted the aerospace industry as its primary customer. As optical technology has evolved to an ever-wider set of applications, the firm’s technological and market bases have widened to encompass applied R&D, production operations, and bundling of “hands-on” service delivery with the application of newly developed products, especially in the areas of instrument development, diagnostics, and monitoring.

Over time, PSI has applied its core research expertise to a widening, more diversified set of technological applications and for an increasingly diversified set of government and private sector clients, both in the United States and internationally. It has strategically positioned itself in an R&D market niche defined by multidisciplinary expertise and research infrastructure in specialized high-tech areas too small to attract major investments by large DoD prime contractors, while at the same time too mission-driven to elicit competition from universities. Its interdisciplinary orientation reflects its origin: Its founding partners repre-

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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sented expertise in aeronautical and mechanical engineering, physical chemistry, and physics. Its current R&D projects encompass optical sensors, laser systems, space hardware, contaminant monitors, aerospace materials, weapons of mass destruction detectors, power sources, signal processing, system modeling, and weapons testing. Reflecting the breadth and interdisciplinary nature of this R&D portfolio, its research staff has R&D expertise in fields extending from astrophysics to zoology.

Given this breadth of activity, the firm operates on a matrix model; it has multiple divisions, arrayed across general topical areas. Its research staff, however, operate across divisions, employing their specific expertise to multiple projects It also employs cross-division review procedures to set priorities, sift prospective responses to DoD solicitations for Phase I proposals, and provide critical technical evaluation of work in process.

The firm’s primary customer is the Department of Defense. DoD R&D contracts drawn from across several Services account for an estimated 70 percent of firm revenues. In recounting the impacts of its R&D endeavors, PSI emphasize the application of its technologies and the beneficial impacts these applications have had on the ability of DoD sponsors to achieve mission objectives. Given this emphasis, it sees concepts and related measures of technology transfer, applications, contributions to mission needs, and impact as more important indicators of the quality of the work it performs under Phase I and Phase II SBIR awards than more commonly used measures of commercial impact.

Some of the firm’s contracts with DoD involve development of specialized, one-of-a-kind, technologies, that are seen as significantly contributing to the service’s mission, but for which the total market, public or private sector as measured by sales volume, is quite small or nonexistent. Other DoD contracts lead to the development of technologies, mainly in the area of instruments, that the firm seeks to market to the private sector. For example, PSI’s development under SBIR awards of sensor technology to detect methane gas leaks has been sold to gas companies. In general, sales to the private sector are largely based on technologies developed for DoD under SBIR awards.

PSI’s strategy of emphasizing contractual R&D has led it to purposefully limit the degree to which it seeks to move beyond bench and field prototypes, especially in the scale of manufacturing activities. Thus, it engages in limited production for specific instruments for DoD and other federal agencies. When its technological developments lead to commercially viable products, PSI follows a mixed strategy. One strategy is to form new firms, with new, independent management, that operate as partially owned spin-outs. Shaping this business decision is the firm’s view that the “cultures” and operational needs of contract R&D and manufacturing firms differ sufficiently that it is more efficient to operate them as separate entities rather than attempt to combine them into one larger firm. Conversely, wholly owned subsidiaries, which are focused on R&D activities, have become eligible for SBIR competition on their own. Since 1990, PSI has

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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formed four new product companies employing technologies developed by their R&D activities. In general, though, PSI sees itself as operating in technologically sophisticated areas whose commercial markets are too small to attract the interest of venture capital firms.

Another strategy is to sell directly to a customer. This strategy is followed for products where the scale of production is low and does not require extensive capital investment in new plant and equipment. In cases where the product has larger market potential but primarily as a subcomponent in a larger complex technological product, PSI has licensed the (patented) technology to an industry leader.

PSI also notes that the gestation period of the technological advances contained in several of its DoD R&D-funded projects is often quite lengthy, with the implication that attempts to measure the commercial import within short periods of time, say 3 years, can be misleading. Its experiences with DoD also have demonstrated the multiple but at times different uses to which a technology has been applied rather than that projected in an initial proposal. PSI also conducts classified research, one effect of which is to limit public disclosure of the technological or economic impact of some of its activities. Its 30-year history also highlights cases in which a different service than the one that supported the initial Phase I award has made beneficial use of the resulting research findings or technology.

EXPERIENCES WITH SBIR

PSI received its first SBIR award in 1983, 10 years after its founding. The SBIR program however is credited by the firm for contributing significantly to growth and diversification since then. As stated in its corporate material, “The Small Business Innovation (SBIR) program has played a pivotal role in PSI’s technical and commercial success, and has been responsible for a family of intelligent instrumentation products based on proprietary electro-optical, and electromechanical technologies.”

Since its first award, PSI has been a highly successful competitor for Phase I and Phase II SBIR awards. As of 2005, summed across all federal agencies, it had received an 435 Phase I and 176 Phase II awards, placing it among the top 5 recipients of SBIR awardees. PSI has received SBIR awards from multiple agencies, including several DoD services, NIH, NSF, NASA, DoE, NIST, and EPA.

Acknowledging its distinctive performance in SBIR competitions, PSI, however, rejects the label that it an “SBIR mill.” Rather, it sees itself as winning SBIR awards because it provides valuable R&D services to its (repeat) federal agency customers, who have limited discretionary resources other than SBIR.

SBIR awards are seen as an especially flexible mechanism by which DoD can contract for the development and application of advanced instrumentation for monitoring and testing. SBIR Phase I and Phase II awards are seen as an especially effective and appropriate mechanism to further DoD’s 6.2 R&D ob-

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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jectives, especially in advancing technologies to the stage of a bench prototype. It notes that the Phase II award frequently culminates at that stage; additional R&D support is seen as needed to move the technology through the stages of field prototypes, engineering prototypes, and eventually to manufacturing prototypes, with each of these stages being necessarily preludes to the commercial introduction of a new product.

Addressing the delays between Phase I and Phase II awards, PSI considers it prudent to avoid spending money on Phase II awards until it receives formal notice that its proposal has been successful. However, at times, it will allocate company funds to bridge the gap between awards in order to keep an R&D project going. Since this support invariably involves closing down or deferring other R&D projects, at times those being conducted by other divisions, decisions about the use of internal funds involve extensive consultation with R&D staff. PSI’s current size and matrix organization are seen as enabling it to somewhat buffer these delays, an advantage it now sees itself as having as compared with smaller firms or those with limited SBIR award portfolios. It will shift staff among projects, as needed, to minimize interruptions in the course of work on projects deemed likely to win Phase II competitions. (The Navy is singled out for commendation on its ability to compress the time between Phase I and Phase II awards).

RECOMMENDATIONS FOR SBIR

PSI believes that SBIR needs to maintain and indeed increase its emphasis on breakthrough technologies. It is concerned that the increasing emphasis being placed on and within SBIR towards commercialization will cause it to “die by incrementalism.” Commercialization is conventionally measured by sales, at times with the implication that only those to the private sector “count.” In the view of the firm, this narrowing of the objectives of the SBIR program omits or obscures the contributions that the “application” of the outputs of specific SBIR projects can make to the mission requirements of DoD. As stated by PSI representatives, a root cause of this problem is the failure at times to recognize that the legislative intent of SBIR is both to meet the mission-oriented needs of the sponsoring agencies and to produce commercial spin-off, wherever possible. Over time, the two objectives have incorrectly been interpreted as one, with the latter one becoming the exclusive criterion for evaluating the aggregate performance of SBIR awardees, and the program itself.

PSI also sees an increase in the dollar size of Phase I and Phase II awards as needed, even at the trade-off of DoD and other federal agencies thus being able to make fewer awards.

Administrative expenses chargeable to the SBIR program also are seen as needed to reduce the unduly lengthy review processes for both types of award and to shorten the time between Phase I and Phase II awards. PSI recognizes that its

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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views on administrative costs differ from those of most other participants in the SBIR program, who see such charges as subtracting from the amount available for awards to firms.

SBIR’s award processes are described as fair, but not necessarily competent. Acknowledging that agencies may encounter difficulties in recruiting competent reviewers who do not have conflicts of interest, PSI’s reaction to some reviews of its proposals is that some reviewers are flat-out incompetent. Among federal agencies with SBIR programs, DoD is viewed to have the most efficiently run program, with the Navy being deemed the best of all services. One reason is the DoD culture that encourages one-on-one conversations with program managers and cutting edge technology. Similarly, NIH is held to have a highly effective SBIR program. It is seen as truly viewing small firms as contributing to technological innovation, and as understanding that multiple Phase II awards are frequently necessary to convert findings generated from Phase I awards into marketable products and processes. NIH also is commended for the breadth of its outreach activities; these include meetings between the firm and NIH program managers, and opportunities at larger forums for small firms to interact with university researchers and other, larger firms. NIH review procedures though are criticized for the propensity of some reviewers to confuse SBIR proposals with R01 submissions. While the proposals are arguably of equal quality, the scoring system used for SBIRS is different from that used to evaluate an R01.

At the other end of the distribution, NSF’s SBIR program is said to be the worst among federal agencies, both because of its protracted review and award processes and the confusing commercial emphasis of its (mostly academic) reviewers. It is also the only agency that restricts companies to four proposals per year. DoE is seen as having very smart personnel, but lacking respect for the R&D capabilities of small businesses. Instead, in its operation of the SBIR program, DoE sees small businesses mainly as vendors of new products, particularly instruments, that are to be used in national laboratories. NASA has mission objectives similar to the DoD, but needs to improve on communicating its goals and requirements through program manager-to-company interactions.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Procedyne Corporation

Irwin Feller

American Association for the Advancement of Science


Procedyne was established in 1961 by three professors from Stevens Institute of Technology: Dr. H. Kenneth Staffin, Dr. Ernest J. Henley, and Dr. Robert Staffin. The firm started as a consulting business, drawing upon H. K. Staffin’s and Henley’s expertise in chemical engineering and R. Staffin’s expertise in electrical engineering. Soon after, in about 1964, the firm took on its current configuration of being a technology-based firm that provided services to large manufacturers. The firm’s core competencies were in the optimization of manufacturing processes, specifically those found in the automotive and chemical processing industries.

The firm located in New Brunswick, New Jersey, because this was the area in which the founders lived. Also, over time, Procedyne has found it valuable to be located near Rutgers University, which has strong research and educational programs in science and engineering, especially those related to material science and process engineering.

Earnings from consulting activities generated by the three founders were a major source of the firm’s initial capital—both for operations and for expansion of facilities. Another source of early capital, circa 1970, was an investment of $300,000, by the new enterprise department of Hercules Incorporated. This investment stemmed in part from H. K. Staffin’s prior involvement with Hercules, where he had served as the operations manager of its polyolefin plastics division.

PROCEDYNE CORPORATION: COMPANY FACTS AT A GLANCE


Address: 11 Industrial Drive

New Brunswick, NJ 08901

Phone: 732-249-8347

Ownership: Privately held; equity

SIC: 3567

Technology Focus: Fluid-bed furnaces; industrial R&D; engineering systems design


Number of SBIR Awards—Phase I: 7

Number of SBIR Awards—Phase II: 2

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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The investment also reflected the then short-lived practice of large firms in many established manufacturing sectors to create in-house venture capital units to invest in embryonic new technologies and start-up firms. Hercules’s investment gave it a 10 percent equity stake in Procedyne, coupled with an option to invest an additional $350,000 for a larger ownership stake, which it subsequently exercised. Hercules subsequently held their equity for an extended period, but chose the stance of a passive investor. The company’s founders subsequently bought back these shares. Similarly, in the early 1980s, the firm attracted investment from an external investor, who invested $1 million for a 30 percent stake. Again, soon after, Procedyne bought back these shares.

Drawing on their expertise in chemical engineering, Procedyne moved into engineering systems, specializing in the application of fluid-bed processing, a technique long in use in petroleum refining but little used in manufacturing industries. Over time, Procedyne’s growth has been based on a combination of downstream and upstream integration—first moving downstream to build fluid-bed furnaces that would embody its engineering systems design, and subsequently in an upstream manner, becoming a source of technical expertise in testing and applied, industrially oriented research and development.

This technological expansion began about 1980, when Procedyne developed new techniques for maintaining constant temperature baths in fluid-bed processing that in turn permitted a more reliable and less costly method for applying coatings to various surfaces. The core technology had broad applicability, being useful to the Navy in coating surfaces as well as to the plastics industry in forming molds. At about this time too, Procedyne purchased a nearby failing metal working firm, that extended its capabilities into the production of equipment that embodied its technical designs.

The firm describes its vertical expansion and movement into new applications as being heavily shaped by its customer’s orders. Procedyne would accept a contract that involved a stretch in both in technological and manufacturing capabilities, and then would have to deliver. This “bootstrapping” strategy was described as risky, as it required the firm to solve technical problems while meeting contract requirements for operational pieces of industrial equipment. The strategies however served to both enrich Procedyne’s in-house technical expertise, while broadening its end-user markets. The firm credits the breadth of scientific expertise of its founding managers along with their combination of a research and an industrial applications orientation for successfully carrying off this strategy.

Procedyne experienced cyclical fluctuations in business that rocked the company. In the 1980s, it had begun a major expansion tied to large orders from the Abex Corporation, a major manufacturer of cast steel railroad car wheels. To meet these orders, Procedyne built large furnaces, requiring heavy capital investments. By the late 1980s, the railroad industry was contracting sharply, as did orders from Abex, which fell from $4–5 million annually to about $1 million.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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This fall-off in sales and Abex’s subsequent bankruptcy led to major reductions in Procedyne’s revenues and employment. In turn, these setbacks have led the firm to seek to diversify in its activities and markets.

The SBIR program has been a small portion of Procedyne’s revenues, but is seen as having contributing significantly to the expansion of the firm’s technical capabilities and product lines. Procedyne’s participation with the SBIR program began in the mid-1980s. The firm had performed prior work with DoD and was familiar with its contracting system. Once it became aware of the SBIR program from general sources, it saw it as a useful means of extending the applications of its core technology. The potential for commercialization served as the lens through which the firm evaluated its technical capabilities against DoD and other agency solicitations.

The firm received a few Phase I awards from the Department of Defense and the Department of Energy related to extending its fluid-bed technology to the application of coatings on metal parts to improve their wear-resistance. They also were successful in part in winning Phase II awards on some of these Phase I projects. The Phase II projects related to fluid-bed technology produced good technical results, and led to a patent, but proved not to be economical for industrial use. From the firm’s perspective, however, the Phase II projects produced a significant advance in technology as well as adding to its knowledge about chemical reactions in fluid beds. It was then able to use this knowledge to apply the technology in other industrial settings.

Procedyne’s SBIR projects had two other distinctive impacts on the firm. First, the firm’s renewed activities in applied R&D led it to move systematically into becoming a supplier of R&D to other industries. It established an R&D division that provided technical consulting services related to chemical processing and heat treating to other industries interested in determining whether or not fluid-bed processing technology could be applied to their components. The output of this division was typically either a technical report, which was the final product in cases where fluid-bed processing proved not to be applicable, or a technical report that at times led to follow-on business in cases where the technology was found to be applicable. Industrial R&D has been a staple part of Procedyne’s business for approximately 15 years, serving about 30 firms per year and generating about $1 million in revenues annually. Its combination of a general-purpose R&D division with core engineering design and manufacturing capabilities is seen by Procedyne as one of its hallmark competitive advantages.

Second, SBIR played a major role in catalyzing the firm’s interaction with a faculty researcher at Rutgers University that led to the development of a new firm built about technical advances in nanoscale microstructure materials. In 1986, following attendance at a seminar at Rutgers on nanoscale microstructure research on tungsten carbide, Procedyne saw the potential of applying its fluid-bed technology to substantially scaling up production of this material, which at the time was being produced at the milligram level for laboratory purposes. At the

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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time, Rutgers already had a patent pending on the new material. Procedyne and Rutgers jointly submitted a Phase I proposal to the Navy to make nano-phased tungsten carbide and cermets for high wear parts performances. Both the Phase I and a subsequent Phase II proposal were technically successful.

Following these technical successes, in about 1990. Rutgers and Procedyne shared equally in the formation of a new firm, Nanodyne, which designed and fabricated facilities for a demonstration plant in New Jersey, but which was incorporated in Delaware. Formation of the company had ripple effects on university-state government relationships. Rutgers, as a state institution, was bound by state legislation, which at the time limited the equity share that a faculty member could receive in a start-up firm based on his/her research. The negotiations leading to the formation of Nanodyne bumped up against this ceiling, leading in turn to changes in state legislation that removed this ceiling.

Nanodyne received several infusions of venture capital and investments from established firms, such as Ampersand and De Beers. After several years of operation in New Jersey, in about 2000, the firm was bought by Union-Manjere, a Belgium based firm, and moved to North Carolina.

SBIR is seen as an excellent program. In the firm’s view, Nanodyne would not have been established if not for the SBIR program. The size of SBIR awards is seen as reasonable; $75,000 is seen as a realistic amount to assess the feasibility of a technology. Procedyne experienced no major problems with maintaining research activity caused by delays in decision making and funding between Phase I and Phase II awards, in part because it was able to secure two $10,000 bridging awards from the New Jersey Commission for Science and Technology.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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RLW, Inc.

Irwin Feller

American Association for the Advancement of Science


RLW was founded in 2000 by Lewis Watt and William Nickerson, former researchers at The Pennsylvania State University’s Applied Research Laboratory (ARL). (ARL is a university-based research facility, specializing in underwater acoustics; historically, its primary sponsor has been the U.S. Navy.) Both Watt and Nickerson had prior experience with DoD, when they formed RLW. Watt is a retired Marine Corps officer; Nickerson had worked as a civilian program manager in Navy depot management. In 1985–1986, while in this role, he had written topic statements for SBIR solicitation.

Watt and Nickerson were recruited from ARL by Oceana Sensor Technologies, a Virginia-based firm that sought to combine its expertise in hardware with their expertise in software development and familiarity with management of ship maintenance and related logistics. At first, in 1999, the relationship was based on consulting agreements between Oceana Sensor Technologies and Nickerson.

RLW, INC.: COMPANY FACTS AT A GLANCE


Address: 2029 Cato Avenue, State College, PA 16803

Phone: 814-867-5122

Year Started: 2000


Ownership: Private


Annual Sales (FY2004): $3.8 million; FY2005 (estimated) $7.6 million


Number of Employees: 39 full-time; 11 part-time


3-Year Sales Growth Rate: Compound annual doubling


SIC Code: 7371


Technology Focus: Software development for monitoring smart machines


Number of SBIR Awards—Phase I: 12

Number of SBIR Awards—Phase II: 9


Number of Patents: 1 pending

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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When first formed, RLW’s primary revenues were subcontracts from this firm, which also took equity in RLW. The relationship between the 2 firms however soon proved unsatisfactory, and ended after about 18 months.

During this period, Watt and Nickerson wrote three SBIR proposals, two as subcontractors for the Virginia firm, one to the Navy through RLW. Only the latter proposal was funded. Coming at the time of the separation from the Virginia firm, the SBIR award is seen as having been critical to RLW’s establishment. Without it, the firm likely would not have survived for long.

During its first 3 years of operation. RLW also received a $240,000 award from Pennsylvania’s Ben Franklin Partnership Program to support development and marketing of one of its first products. Under terms of the BFP program, RLW must pay back twice this amount as the project generates revenues. Repayment is made in the form of a percentage (3 percent) of gross revenues on the product line. An appealing feature of the BFP award is that unlike bank loans, only the firm is liable for the amount of the loan, not the firm’s principals.

Although the BFP program is credited with assisting RLW’s survive its early years, Pennsylvania’s programs to support high-technology small and medium-sized firms are seen as lagging behind those of other states. Virginia was singled out as a state that actively facilitates the efforts of such firms to compete for SBIR awards. Relatedly, Pennsylvania lacks tax credit or loan programs for small firms whose assets are primarily “intangibles,” as is common for firms based on software development. The general lack of such capital and the onerous terms under which state funds are made available made life “miserable” for RLW in its initial efforts to secure working capital. Because the state wouldn’t take a secondary position on bank loans, RLW founders were required to pledge their personal assets to borrow working capital. The firm continues to locate most of its operations in Pennsylvania because that is where the founders prefer to live; overall though, it reports “no business reason to stay in Pennsylvania.”

RLW expresses wariness about involvement with the venture capital community. To receive venture capital, a fledging firm must commit itself to an expansion plan that is likely to be infeasible. The result is that a firm is forced to turn again to venture capital for additional rounds of funding. This process however dilutes the founders’ ownership of the company. The SBIR program fills an early-stage funding gap when a technology is too risky for industry to invest in and when the perceived market is too small or too uncertain. It also helps protect the founder’s equity. The SBIR program is the best way to fund start-up companies.

RLW’s initial core technology was software that provided for the internal monitoring of the “health” of machines, including vibration, pressure, temperature, electrical current, and voltage. About this core, the firm is engaged in expanding its product lines and markets in several directions. In terms of product lines, given the tight integration of hardware and software, it has sought to reduce it reliance on outside suppliers of components, which now represent about one-third the value added of a product, and to expand its manufacturing capabilities. Its goals are to reduce the size and cost of its product, while simultaneously

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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increasing its reliability. It also is seeking to expand its market, both within the Navy and to the commercial sector, adding new capabilities for Web-based transmission of data.

RLW has transitioned from being a firm that sold its man hours, that is its consulting expertise, to one that is selling products. An additional transition is its shift from being a supplier of software to one that increasingly provides an integrated software-hardware product. It is selling its product to equipment manufacturers of pumps and motors. One potentially attractive market is the power generation industry.

RLW has received 12 Phase I awards and 9 Phase II awards. SBIR Phase I and Phase II awards presently represent about 49 percent of the firm’s revenues. Its plans are to outgrow its dependence on SBIR awards by increasing sales both to the DoD and commercial sectors. The SBIR program however has distinctive features that make it attractive to small firms, and RLW plans to continue to submit proposals. In particular, SBIR awards provide good protection for intellectual property, that enhances the position of small firms in negotiations with larger firms, especially DoD prime contractors. Also, SBIR awards in effect serve as a form of early venture capital, akin to the allowances for independent research and development available to larger DoD contractors. This source of funds typically is not available to small firms. Also of importance to the firm, SBIR funding permits it to venture into new R&D areas and expand market potential without having to yield ownership to external investors.

The firm has one patent pending, but more generally, given its emphasis on software development, has relied primarily on copyrights to protect its intellectual property. Research publications, presentations at professional meetings and state government workshops on the SBIR program, and frequent briefings to DoD officials, have followed from its SBIR-funded research. Overall though, reflecting its departure from a university setting, the firm sees itself as being finished by publications, having been there and done that.

Drawing on Watt’s and Nickerson’s prior experiences with DoD contracts, RLW has experienced few audit or management problems working under federal government or DoD reporting requirements. Its accounting system has been designed to meet DCAA requirements.

Given that it’s a new firm with limited capital, delays between Phase I and Phase II awards have “nearly sunk” the company. Cited was one case with an 8 month delay that required the firm to incur considerable additional debt in order to keep operating. No explanation was provided to RLW for the delay, although it is attributed to the slow pace at times with which DoD contract officers process SBIR awards (relative to larger program awards). DoD’s processing of SBIR awards though is seen as having improved over time.

The current sizes for Phase I and Phase II awards are seen as reasonable. The Phase I level approximately supports 1 person for 6 months. The firm’s experience though is that each of its Phase I awards has incurred costs equivalent to 1.5 times the award.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Savi Technology

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Savi Technology was established in 1989 by Robert Reis, a Stanford University engineering graduate and serial entrepreneur, about the core technological concept of installing radio frequency emitters, or tags, in products as a means of identifying their location. Based on an experience in which Reis had difficulty locating his young son in a store, the original market concept was to install the technology in children’s shoes as a way for parents to monitor their whereabouts. This concept quickly proved technically and commercially unworkable.

The value of integrating radio frequency identification devices (RIFD) with the Internet for purposes of supply chain management soon became evident, and it is along these lines that Savi has developed, becoming an international leader. From the late 1980s through the early 1990s, the firm experienced modest growth. Its growth has increased rapidly since then, especially after adoption of its tech-

SAVI TECHNOLOGY: COMPANY FACTS AT A GLANCE


615 Tasman Drive

Sunnyvale, California

Phone: 408-743-8000

Fax: 408-543-8650


Revenue: $89 million (2004)

Employment: 250


Number of SBIR Awards: 4

Phase I: 3

Phase II: 1

Number of Patents: 13; 20 pending


Selected Awards:

1994

National Small Business Innovation Research Company of the Year

1996

Tibbetts Award

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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nology by the Army, where it is credited with greatly improving the efficiency and effectiveness of DoD’s logistic management capabilities.

By the mid-1990s, Savi made a major business decision to systematically focus on the defense market. This strategy has led to a sequential extension of its technology to a widening set of DoD requirements, international defense customers, homeland security, and asset security management.

Savi is now the major supplier of RFID technology to the Department of Defense, and one of the key technologies provides to its Global Total Asset Visibility Network. It has developed a strong international presence, being a major supplier of RIFD and related technologies to the United Kingdom’s Ministry of Defense, NATO, NATO member nations, and Australia. It also is increasingly engaged in the development of globally interoperable logistics monitoring systems with major international ports. It has also built a steadily increasingly commercial business, especially among multinational firms.

If its technological path has been relatively straightforward, consisting of a continuing stream of improvements and widened applications of its radio frequent identification technology, Savi’s history as a firm has been circuitous. As a relatively small firm, with about 40 employees and $10 million in sales but with limited markets, Savi was sold in 1990 to Texas Instruments for $40 million, which at that time was following a diversification strategy. Soon after however, following the death of TI’s chief executive office, Savi’s place within TI became unclear. In 1997, TI sold Savi to Raytheon, which was in the process of acquiring several firms as part of a diversification strategy. Raytheon’s business strategy soon gave way to one of concentrating on core businesses, with Savi at the margins of Raytheon’s operations. In 1999, Savi’s management entered into a buy-out agreement, purchasing the firm from Raytheon for $10 million.

CAPITAL FORMATION

Begun as a start-up operation, augmented with an infusion of angel capital in 1992, Savi remains a privately held firm, albeit with several rounds of venture capital since its management buy-out. Being sold twice and then regaining its autonomy via a management buy-out, although at one level detracting from Savi’s ability to articulate and operate a focused technology development and business strategy, has over time proven beneficial to the firm. TI and Raytheon are estimated to have invested $50 million in Savi’s R&D. As a consequence, when Savi regained its independence, it was on a stronger technological and production basis than when it was first sold. As described by Vikram Verman, Savi’s CEO, the firm’s history thus resembles the story of Jonah, albeit with a positive outcome: as a fledging firm, it was swallowed up by a whale—actually 2 of them, nurtured inside their bellies, and then disgorged as a stronger unit, better able to fend for itself.

Savi has had 4 rounds of venture capital funding since 1999, raising a total

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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of $150 million. Among these investors are Accel, UPS Strategic Investment Fund, Mohr Davidow, Temasek, an investment holding company for the Port of Singapore and Neptune Orient Lines, Hutchison Whampoa and Mitusi, among others.

EXPERIENCES UNDER SBIR

The SBIR program provided two key inputs into Savi’s long-term growth. First, a combination of DARPA and Navy SBIR awards to the firm in 1989 and 1990 provided it with the seed capital that enabled it to refine the initial technological concept of radio frequency identification tags, such that it performed as needed when its initial market opportunity surfaced during the First Gulf War. Second, it provided the funding that led to the employment of Vikram Verman, then a Stanford University Ph.D. student in engineering. Verma was born in India, moving to the United States at age 18 to study electrical engineering. Upon completing his undergraduate degree at Florida Institute of Technology, he moved first to the University of Michigan and then to Stanford University for graduate work. He joined Savi in 1990, advancing steadily from staff engineer, to vice-president for engineering, to his current position as CEO.

In total, Savi received 38 SBIR awards, with the last of these awards being received in 1992. Savi credits its subsequent technological and business success to these early SBIR awards, even though it did not commercialize the technology identified in the initial SBIR projects. Rather, in its formative period, essentially between 1989 and 1991, SBIR awards were critical in helping Savi build the organizational infrastructure, engineering teams, and knowledge base that undergirded its subsequent growth. Furthermore, although successful in competing for SBIR R&D awards, Savi never saw itself as a government contract R&D firm. Rather, its founding and continuing objective has been to be a commercially oriented, product-based firm. R&D is a means to obtain a competitive advantage for its products and related services.

Savi sees its greatest asset to be the know-how and organizational infrastructure gained from multiple R&D projects. These internal, often intangible assets, permit it to deal from a position of strength when it negotiates with external investors, such as venture capital funds. Verma estimates that Savi received a total of $3 million in SBIR awards for the development of RFID. For its part, the firm invested about $150 million in development, and that development took approximately 10 years.

INTELLECTUAL PROPERTY

Intellectual property protection in the form of patents is seen as of modest importance to Savi. It files patents primarily to defend it technology and market position, not as a means though of securing license revenues or of entering into

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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cross-licensing agreements. As viewed by the firm, its know-how and organizational capacity to assemble high-performing engineering teams are the main sources of its continuing technological innovativeness.

INVOLVEMENT IN STATE GOVERNMENT PROGRAMS

Savi has not participated in any state of California high-tech or economic development programs.

RECOMMENDATIONS

Savi’s participation in the SBIR program ended by the mid-1990s. Accordingly, its assessments of the SBIR program and recommendations for its improvement relate more to the general place of the program within the U.S. national innovation system than to its specific programmatic details. In its view, the SBIR program accords with the federal government’s role of financing R&D before a technology is commercially viable, and before a fledging firm can attract external capital. SBIR should be viewed and used as a source of seed capital. It is a means to an end, the end being the development and production of a usable and competitively marketable product. Firms that make a habit of living off the SBIR program are misusing the program. To guard against this practice, selection criteria should include requirements that firms detail how they plan to commercialize a product. Also, the importance and contributions of the SBIR program need to be more fully and effectively communicated.

SUMMARY

The SBIR program served both as a source of seed capital for Savi’s early R&D on RFID devices that have been the base of its employment and revenue growth and as the foundation for the knowledge and organizational infrastructure that have made it an internationally prominent firm in supply-chain management technology. Although it no longer participates in the program, Savi views SBIR as an essential element—a national treasure in America’s long-term capacity to compete internationally on the basis of technological innovation.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Scientific Research Corporation

Zoltan Acs

University of Baltimore

FIRM OVERVIEW

Scientific Research Corporation (SRC) is a privately held company specializing in defense applications. With fifteen locations throughout the United States, SRC offers products and services in Communications, Signal Intelligence, Radar Systems and Test & Evaluation. The company’s Atlanta operations, which account for approximately 15 percent of company revenue, participates in the SBIR Program and focuses on research, product development, technology insertion and engineering services to enable Assured Communications for Deployed Warfighters.

SRC is a winner of the Small Business Administration 2000 Tibbetts Award.

The company was founded in 1988 by Dr. Charles Watt, whose prior responsibilities includes service at Clemson University, the Georgia Institute of Technology, the Office of the Secretary of Defense (OSD), and the U.S. Navy, as well as with the Bell system and Bendix Cororation. While working as lab director at Georgia Tech Research Institute (GTRI), Watt focused radar testing and evaluation programs. He founded SRC to pursue a program that captured his interests but GTRI would not pursue. In a period of 5–10 years he bought out the initial investors, and SRC became privately owned by the Watt family.

In the 1990s, the company landed a contract on a satellite communication program with the SPAWAR Systems Charleston. That program attracted experts in the communications area like Alan Harris and David Chapman. The primary customer, for a long time, was SPAWAR Charleston. As the company expanded, it started employing people on-site at the government location.

SRC now now employs approximately 850 management and staff. SRC passed SBIR bid eligibility in late 2001.

As SRC transitioned engineering work to offices on-site at the customer location, it turned to the SBIR program to fund engineers at the Atlanta office. The company’s entry into SBIR is intended to bring work to a part of the labor force and attract some previously unavailable R&D funding.

ROLE OF SBIR
Unique Features

SBIR provides basic research funding to small businesses, without requiring them to compete with large organizations. SBIR is the only source of R&D

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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available to small business today, given the consolidated acquisition practices seen across the government.

The program also provides intellectual property protection in the form of SBIR Data Rights.

Developing Innovative Products

SRC has utilized the SBIR awards to develop technology, products, and engineering product support in three areas:

  1. “Assured C4ISR Wireless Networks for the Deployed Warfighter,”

  2. “Rapid Replacement technology insertion for replacing failing, obsolete mission critical electronic systems deployed in the field and the associated support equipment,” and

  3. “Unattended Ground Sensor (UGS) Systems.”

The “Assured C4ISR Wireless Networks for the Deployed Warfighter” area incorporated and integrated several specific technologies as acquired under seven SBIR topics to produce an integrated product family of mobile wireless network software and hardware modules covering multiple layers of the Open Standards Interconnect model. This approach allows SRC to deliver specific network management, wireless network operations, covert communications and intelligence collection capabilities in combinations and packages specifically tailored to meet customer requirements while maintaining interoperability and economies of scale.

SRC’s “Rapid Replacement” technology provides form, fit, and function replacements for failing, obsolete mission critical electronic systems deployed in the field (N01-188 & N97-060) and the associated support equipment (N01-013 & AF97-234) for life cycle sustainment. SRC has developed this technology over the last 15 years to provide reusable hardware and software modules for integrating form, fit, and function replacement solutions that meet U.S. Military requirements. “Rapid Replacement” technology developed from previous efforts was integrated with commercial-off-the-shelf and newly developed hardware and software modules to provide solutions for SBIR Topics N01-188, N01-013, AF97-234, and N97-060. New hardware and software modules from these SBIR topics have been integrated with SRC’s “Rapid Replacement” technology to provide form, fit, and function technology replacement solutions for the United States Air Force, Army, and Navy.

The Unattended Ground Sensor (UGS) Systems Technologies incorporated and integrated several specific technologies as acquired under six SBIR topics including Intersensor Information Assurance, Netted Full Spectrum Sensors, Energy Efficient Routing, Compressed Voice Over Variable Bit Rate Links, Common Object Request Broker Architecture (CORBA) Security Services, and Adaptable Packet Switched, Battle Command Information.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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In total, SRC has received 30 Phase I awards and 20 Phase II awards between 1995 and 2002. It has also received over $3 million in funding from non-SBIR DoD programs, over $1 million from private industry, and over $1million has been invested by SRC.

A Marketing Tool

SBIR has also been used as a marketing tool, both during Phase I research for proving the feasibility and during Phase II prototyping. SBIR has help attract over $4 million in investments—much of this by customers outside of the SBIR programs who needed specific capabilities engineered into SRC’s product, and were willing to pay to have those changes incorporated. The company also invested in itself.

Employment Effects

The SBIR program helped SRC establish a product development group in Atlanta when the market for engineering services was declining in the late 1990s. This office would be drastically different if it had not participated in the SBIR program. If there was no SBIR, the company would have probably sustained a 7 percent employment increase over a period of about 10 years. SBIR also changed the company’s focus more to product development and led to the development of several products especially in the wireless networking area.

COMMERCIALIZATION

SRC operates in a multibillion dollar market, with major competitors that includes Boeing, Lockheed Martin, BAE Systems, Northrup Grumman, Raytheon, SAIC, Telcordia, BBN, AT&T, General Dynamics, Cisco. The firm believes that it maintains that its technical superiority and depth of technical capability, responsiveness, flexibility, and cost provide its competitive edge.

Sales

SRC estimates over $25 million in sales to date for products related to TurboLink, Covert Communications and “Rapid Replacement” technologies. SRC was recently awarded a five year $25 million Phase III IDIQ contract (a type of contract that provides for an indefinite quantity of supplies or services during a fixed period of time) for “Assured C4ISR Wireless Networks for the Deployed Warfighter” from AFRL/IF (Hanscom Air Force Base). SRI is also expecting a five-year $25 million Phase III IDIQ contract from NAVAIR for replacing the T-45 CRT Multi-Function Display with the Touch Thru Metal (TTM) Multi-Function Color Display. In addition, SRC is working with the Army to establish

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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a five-year $25 million Phase III IDIQ contract for “Unattended Ground Sensor (UGS) Systems.”

The largest product that came out was a turbo link product that served as a gateway between ATM and other networks including IP. An Asynchronous Transfer Mode (ATM) is a cell relay, packet switching network and data link layer protocol which encodes data traffic into small fixes sized cells. This differs from other technologies based on packet-switched networks (such as the Internet Protocol [IP] or Ethernet) in which variable sized packets are used. SRC ended up selling turbo link to several programs within the UK that supported UK army and navy applications. Drawing from this expericne, SRC developed gateway technologies that have been successful within the United States. It also developed through SBIR several ad hoc routing protocols that are predominantly IP based.

Licensing Agreements

SRC holds 37 licensing agreements for evaluating and testing MobileRoute® and Wireles Adhoc Routing Protocols, 2 licesning agreements for evaluating and testing Wavelet Packet Modulation (WPM), and 1 licensing agreement each for TurboLink®, NetTempo, Covert Wireless Network Sensor, and Computer Network Attack.

Procurement

SRC estimates that about 50 percent of products developed with SBIR were sold back to the agencies funding it. The other 50 percent is nonrecurring engineering that adapted the product to a specific application.

Is procurement commercialization? Yes, SRC belives that selling the product back to the agency is commercialization. However, they belive that a lot of good technology with good applications and good uses are not taken advantage of by the agencies. “The SBIR program could improve its procurement process by enabling procurement from small businesses without going through some of the primes. The Navy has been pretty good about that.”

KNOWLEDGE EFFECTS

The company filed for three patents. 3 pending patents for TurboLink® (U.S. & EU), MobileRoute®, and Wavelet Packet Modulation (WPM).

It holds the following trademarks: TurboLink® (U.S. & Canada), MobileRoute®, BandShare®, IPOverdrive®, and EasyConfig®.

The company has published a number of technical papers:

  • SDR Forum 2003 Technical Conference, November 2003 “Hardware-in-the-Loop Simulation Techniques for Validating SDR Software”

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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  • MILCOM 2003, October 2003 “Energy-Efficient Networking Techniques for Wireless Sensor Networks”

  • MILCOM 2003, October 2003 "Exploiting the Synergies of Circular Simplex Turbo Block Coding and Wavelet Packet Modulation"

  • SPIE Wavelets X Conference, August 2003 "Enabling Time-Frequency Agility: Wavelet Packet Modulation in Practice"

  • SPIE 2003 "Solving Bezel Reliability and CRT Obsolescence"

  • Proceedings of the 36th Asilomar Conference on Signals, Systems & Computers, Pacific Grove, CA, November 2002 “Receiver Timing Recovery for Adaptive Wavelet Packet Modulated Signals”

  • SDR Forum’s 2002 Software Defined Radio Technical Conference, November 2002 “A Portable Software Implementation of a Hybrid MANET Routing Protocol”

  • MILCOM 2002, October 2002 “Intersensor Information Assurance for DoD Tactical Networks”

  • MILCOM 2002 “Experimental Comparison of Hybrid and Proactive MANET Routing Protocols”

  • SPIE Aerosense 2002 “Wavelet Packet Modulation: solving the synchronization problem”

  • Invited Presentation at Second Annual Communications 21 Conference, Washington, DC, March 2001 “IP Quality of Service in Mobile Ad Hoc Networks”

  • MILCOM 2000 “Alternate Path Routing in Mobile Ad Hoc Networks”

  • MILCOM 2000 “Adapting The DOCSIS Protocols for Military Point-to-Point Wireless Links”

  • IEEE Computer Magazine, September 1998, “Algorithm-Agile Encryption in ATM Networks”

  • IEEE MASCOTS ’98, July 1998 “IPB: An Internet Protocol Benchmark Using Simulated Traffic”

IMPROVING SBIR
Surviving Funding Gaps

SRC was large enough and well established in other business opportunities prior to the SBIRs so that personnel could be assigned to other efforts during the delay between Phase I and Phase II. A key component for this was a strategy of selecting new Phase I contracts that leveraged prior technologically related Phase I/II efforts so that a common work force could be shared as needed.

Within the R&D group the firm made sure that both the first and second solicitations in a given year funded related projects. In this way, the people that might be displaced by the transition gap for the first project could work on the second project. SRC acknowledges that “along the way we did lose a couple of principle investigators because of gap in funding, and when we got the Phase II, we had to provide for acceptable substitution.”

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Award Size and Duration

SRC believes that the size and duration of the awards should be commensurate with the challenge to be addressed. “Some efforts can be easily done for the $100,000, and some can’t event scratch the surface for that amount. There should be some variation maybe depending on the nature of the problem that needs to be addressed.” A similar problem is seen with Phase II awards. “There is more money there, but if you’re developing a product, especially if you want to have a true product at the end vs. a prototype/proof concept; there’s a pretty big difference there.”

“You should be able to propose what it will take to do the work versus what you can do for the budget. Phase I efforts of 6 months and $100,000 are barely adequate for Principal Investigator to produce a paper feasibility study. However, customers are increasingly demanding to see some physical demonstration of feasibility in Phase I. Additional funding of $50–100,000 is needed in Phase I. The current Phase II funding profile of $750,000 spread over 24 months is not adequate for development of product prototypes suitable for transition directly to military programs.”

SRC has found that 3–4 sequential Phase IIs are required to get a prototype to sufficient maturity for transition. Hence, their practice of bidding new SBIR’s that leverage prior work. Consequently, the first or second customer for the SBIR technology frequently doesn’t see mature prototypes until after his program is over; the third or fourth customers are the beneficiaries. This is frustrating to customers.

Spreading the current $750,000 over two budget years also results in SBIR technology being made outdated by commercial developments. Funding levels of at least $750,000 per year for 2 years or $1.5 million in a single allocation are needed to deliver reasonable prototypes. Much additional work is needed beyond that to produce ready for market products.

“The Phase I & II funding levels should be increased, just for reasons of cost growth over the last 15 years if nothing else.”

Award Selection

Phase I award selections are seen as being fair and are timely. SRC considers the most critical aspect in the bid selection process to be the direct contact discussion with the topic point of contact. Failure to have this dialogue, preferrably face-to-face, usually results in a no-bid decision because SRC has learned through many failed bids that the topic write up does not provide all of the necessary information to prepare a successful bid. Phase II awards vary by agency, internal agency priorities and availability of funding.

The Navy now has the superior process in SRC’s opinion, because it couples Phase I and II with the end customers. For a Phase I topic to be advertised, there must be a program willing to advance the effort to production. NAVAIR in partic-

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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ular has significantly advanced this with the use of Phase III IDIQ contracts and direct program office participation. Funding levels are still too low and slow.

The Air Force comes in second, in SRC’s estimation, because they assign an R&D engineer to each topic so that a firm can at least identify the R&D customer and tailor the proposal and program to that customer. Historically, the Air Force did not tightly couple SBIRs to end customers. This is changing now with the inception of IDIQ Phase III contracts to transition technology to program office products.

The Army’s review process is multitiered and a small businesss has no insight into the process outside the Army’s technical point of contact, who frequently had no involvement in the editing of the topic orginally. The Army also does not couple their R&D efforts to program offices making Phase III transitions difficult.

Bridging the Small Business Definition

SRC recommends that firms retain their small business status if they grow over the course of their involvement in the SBIR program. “One of the objectives of the SBIR Program is to grow businesses. If you were less than 500 employees and eligible to bid for Phase I then grew to over 500 employees while executing Phase I you should be eligible for Phase II. This opinion is common in the community, but it is subject to individual office policies.”

Transition to Commercialization

SRC believes that the disconnect between the SBIR acquisition and an end-user/product customer is a major weakness of the SBIR program. This disconnect can be seen in Phase I where the technical point of contact is not the topic author and has no vested interest in the topic with no time, money, or interest in the topic’s success. Even with a successful Phase II, there is often no identified Phase III customer—with the prototype, in some cases, too immature for an end customer. Significant program additions are needed to improve the trasitions to Phase II and Phase III.

SRC believes that the Phase II Enhancement/Plus program needs to be expanded and simplified to encourage product customers to risk a little money to evaluate a prototype and begin the process of transitioning to a Phase III effort.

SRC further notes that the Phase III IDIQ contract should be made a universal final step in all successful Phase II programs. This removes the contracting barrier to transitioning to any number of program customers and allows the company to build a business on those contracts. Program offices should receive encouragement to use SBIR products, either through direct funding of the effort or a reward scheme.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Specialty Devices

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Specialty Devices was founded in 1986 by Paul Higley. Higley’s background is in electrical engineering and ocean engineering. Prior to founding the firm, he had worked for Raytheon and Science Applications in Rhode Island, but then left for a position with Atlantic Richfield, Texas. The attraction of the Atlantic Richfield position was that it was to work R&D projects directed at identifying emerging technologies. Higley found this prospect more exciting than location financial considerations. The sharp decline in the price of crude oil in the mid-1980s and associated cutbacks in oil industry R&D led Atlantic Richfield to curtail this R&D program, which led Higley to move out on his own. Life style considerations led him to remain in Texas, even though only approximately 20 percent of the firm’s business is with the oil industry.

Specialty Devices started out as a one person firm, operating out of Higley’s spare bedroom. He drew on his previous business contacts with oil firms and Department of Defense personnel to launch a business that combined the conduct of marine surveys for the oil industry with engineering design of new marine

SPECIALTY DEVICES: COMPANY FACTS AT A GLANCE


1104 Summit Avenue

Suite 104

Plano, TX 75074


Phone: 972-578-7501

Fax: 972-423-8480

<http://www.SpecialDevices.com>


Number of Employees: 15

Revenues: $1 million (FY2005)

Number of SBIR Awards: 5

Phase I: 3

Phase II: 2

Number of Patents: 1

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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technologies. Since its founding, the firm has grown to 15, a number of whom were hired from former customers. The added employees have added to the firm’s capabilities in physical oceanography. Specialty Products also engaged in joint funding of R&D projects with several universities.

As suggested by its name, Specialty Devices’ strategy is to specialize in a small, niche market, offering high-tech approaches to a variety of engineering design assignments. This specialty is the design and construction of prototypes of bathymetric, reservoir management, sediment mapping, sediment coring, and hydrographical survey systems. Its 3 main business areas are display systems, marine survey equipment, and deep ocean observatory design. At the technological core of these services and products is the firm’s expertise in optics.

The firm has performed contract work for a diversified set of defense, aerospace, and oil industry clients. Its primary markets have shifted back and forth over time, depending on the annual flow of contracts. At present, its sales are distributed approximately between 60 percent military and 40 percent private sector; in earlier years, this ratio was reversed. The absolute size and relative importance of military sales is likely to increase in the immediate future as it is currently engaged on a contract to upgrade the radar system displays on Navy destroyers, and in line to possibly perform such work on larger Navy ships.

Although it continues to see itself as a contract R&D firm, Specialty Devices also sees larger opportunities in commercializing its technological innovations. However, it sees its ability to move its new designs from R&D prototypes and limited production to larger scale, commercial introduction as being constrained by several factors. As described by the firm, at times it encounters internal competition between its engineers’ R&D interests and final product manufacturing efforts. To alleviate this pressure, the firm is outsource manufacturing of some components and separating production from engineering.

Another obstacle to the firm’s objective is the cost of scaling up for volume manufacturing. It estimates the medical market for 3-D dimensional displays at $1 billion, but notes that it would take sums in excess of $10 million to scale up to reach a competitive level of output. Given these market realities, its sees its most viable business strategy as one of licensing its technology to the larger firms that dominate either the medical equipment industry, such as GE, or the flat display industry, such as Sharp, Samsung, or NEC.

Specialty Devices also has considered spinning off its display technology into a new firm, using venture capital as a source of funding. Its plans along these lines remain in a formative stage, though. In part, the firm’s hesitation about adopting this strategy is that it would require a considerable portion of Higley’s time and effort to raise the necessary capital, which, in turn, might detract from the firm’s current performance. Not thinking the time as yet right for a major transition, it has chosen not to participate in SBIR sponsored activities, in which consultants have been employed to tutor Phase II awardees on how to write business plans to be included in Phase III proposals.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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CAPITAL FORMATION

Specialty Devices’ establishment was financed by Higley’s personal funds, an initial stake that required borrowing from funds set aside for his children’s education. The firm remains privately held; its growth has been financed by retained earnings.

INTELLECTUAL PROPERTY

Specialty Devices views intellectual property protection as important for some of its products, and has patented its 3-D display technology. For other of its products however, it sees the combination of a small potential market and the costs of securing a patent too high to make filing a profitable approach to securing intellectual property protection. Instead, it believes that the technical sophistication of its products serves to make reverse engineering by its competitors too expensive for them to undertake, thereby providing the needed degree of proprietary protection.

INVOLVEMENT IN STATE GOVERNMENT PROGRAMS

Specialty Devices has collaborated with Baylor University on a collaborative R&D project, funded in part by a Texas state government program directed as fostering small business-university cooperation. The state grant was used primarily to fund students.

EXPERIENCES WITH SBIR

Specialty Devices received its first SBIR award in 1997 on a project submitted jointly with a faculty member at the University of Texas-Dallas. The faculty member knew about the SBIR program and approached Higley requesting his collaboration. The project in turn yielded a patentable technology, with the patent held by the university.

In total, the firm has received 3 Phase I and 2 Phase II SBIR projects. These awards have come from the Air Force, DARPA, and the Navy. Highlighting the range of uses to which its core technology can be put, Specialty Devices’ initial Phase I and Phase II awards from the Air Force were for R&D on an early version of a 3-D display system. The Air Force is described as interested in the technology emerging from the awards, but has not provided funds to enable the firm to scale up to volume production. Further developments of the display technology, as noted above, have occurred under SBIR awards from the Navy. Overall, Specialty Devices’ emerging display technology is seen as having great market potential, but is described as not yet having reached the point where it is ready for commercialization.

The firm has experienced several, lengthy funding gaps, extending as long

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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as 1 and 2 years, between its Phase I and Phase II awards. In part, the longer gap occurred because it extended its effort on a Phase I award to enhance the quality of its work, and thus missed the deadline for a funding cycle. In general, it has responded to the gaps in funding by cutting back on the level of effort directed towards the projects, but continuing to pursue them, using internal funds. It also notes though that its Navy SBIR contact officer fought hard to accelerate funding of its Phase II award.

RECOMMENDATIONS

Specialty Devices views the SBIR competitive selection process as fair, the size of the Phase I and Phase II awards as reasonable and, overall, the structure of the SBIR program as working effectively.

A concern though to the firm about the program is the presence of firms that survive on SBIR awards. Such firms are seen as being good at writing proposals, but not at innovation. They are seen as only being interested in Phase I and II awards and then work on the project becomes minimal. This attitude is antithetical to Specialty Devices’ perspective on the role that SBIR is intended to play in the U.S. national innovation system. It also harms broader public perceptions and assessments of the SBIR program. SDI has been impressed with the capability and knowledge of the DoD SBIR program technical representatives on its projects, and believes the quality of the DoD people involved is a major contribution to the success of the SBIR program and to minimizing the abuse of the SBIR program.

SUMMARY

SBIR is a fabulous program, in the firm’s view. Without SBIR, Specialty Devices would not be what or where it is today. The SBIR program has served as a critical source of funds for the firm to undertake new R&D. SBIR has contributed to Specialty Devices’ increasing role as a provider of goods and services to DoD and to its core technological and product base, which is seen as having considerable private sector potential. In seeking to grow further and to move its technologies into the private sector, however, the firm finds itself at a transition point where it needs to resolve business strategy issues related to transitioning from a contract R&D performer, specializing in niche markets, to one engaged in larger scale production. This effort is underway.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Starsys Research Corporation

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Starsys was formed in 1986 by Scott Tibbitts and Daryl Maus, initially as Maus Technologies. Mr. Tibbitts and Mr. Maus were colleagues who had worked for Rockwell International, in the Boulder, Colorado, area and who believed that by pooling their expertise they could make improvements on existing technologies and direct them to underserved markets. The specific technology related to nonelectronic thermal control systems; the specific intended market was commercial water heaters.

The projected market however proved not to be a profitable one. The technological concepts underlying the firm’s initial products were quickly found to have value in spacecraft. In 1988, the firm reorganized as Starsys Research, and reoriented itself towards the development and fabrication of innovative aerospace actuators and mechanisms. Starsys’ initial sale of spacecraft hardware was as a subcontract supplier of components to JPL, which had mission responsibility for major NASA space launches. JPL’s acceptance of Starsys technology led to follow-on sales for NASA space missions and to the opening of new markets

STARSYS RESEARCH CORPORATION: COMPANY FACTS AT A GLANCE


4909 Nautilus Court North

Boulder, CO 80301

Phone: 303-583-1400

Fax: 303-530-2401


Employment: 130

Revenues: $21 million


Number of SBIR Awards:

Phase I: 7

Phase II: 7

Number of Patents:

3 active; 1 pending

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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with commercial and government customers (e.g., Air Force and MDA). Further contributing to Starsys’ growth was the incorporation of its technology in the launching of commercial telecommunications satellites, such as Iridium. In total, its mechanical and electromechanical subsystems technologies have been successfully flown on over 200 spacecraft.

Over time, the firm’s technological emphasis shifted to the design and development of components (e.g., deployment mechanisms, latches, locks, antennas) for launch release systems and satellite capture systems. Starsys now produces a range of products, ranging from off-the-shelf catalogue products to unique products developed to meet specific customer requirements. Approximately two-thirds of its current revenues are derived from sales to DoD services, with the balance being distributed among sales to NASA and commercial customers, including international sales. Reflecting its founding orientation, the firm has a strong market, end-user orientation. The company’s R&D and product development is geared towards customer needs, and it seeks to develop technologies that are applicable across a broad spectrum of uses, markets, and customers.

In 2000, Starsys acquired the American Technology Consortium, ATC. The expertise and product history brought by ATC increased the product offerings in electromechanical subsystems. Sales growth within this market sector was significant from 2001 through 2004.

Starsys’ location in Boulder reflects a combination of life style preferences of its founders and its close proximity to a number of larger aerospace firms, such as Ball Aerospace and Lockheed Martin Space Systems. Locating in Boulder also has facilitated interactions with the University of Colorado, with which the firm has teamed on several proposals and works closely on programs.

CAPITAL FORMATION

Starsys started as a two-person, garage shop, bootstrapped business. Its initial capital came from the personal savings of its founders. Its growth has been financed largely by retained earnings. Throughout the company’s first 17 years, it made no efforts to secure venture capital or angel capital.

EXPERIENCES WITH SBIR

SBIR awards have represented only about 5 percent of the firm’s revenue, but are viewed as having made important contributions to its market position. If work on its current SBIR projects takes hold, it could lead to strong sales potential.

Starsys expresses acute concern about the fairness of the SBIR topic generation and selection process. Rather than being “straight,” these processes are seen as dependent on networking and negotiations, in which some firms devote time to building relationships with laboratory personnel to insert selected topics into DoD solicitations. The topic specifications in effect are geared to meet the qualifica-

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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tions of a single firm. Even though they may write “killer” proposals, “outsiders” responding to the solicitation are at a competitive disadvantage.

Starsys has written many proposals, only to receive a “thank you for participation,” but essentially “good-bye” response from the sponsoring agency. Its own successes in SBIR competitions indeed are held to be higher when it has had prior contacts with a sponsoring laboratory.

DoD’s feedback to firms in cases of unsuccessful proposals also needs improvement. Current feedback is negligible. All the firm learns is that is has not been selected. DoD laboratories are unwilling to provide more specific information about the shortcomings of the technical merits of the proposal. This information would be of considerable value to the firm in submitting proposals under future competitions.

Even as it recognizes the needs for careful technical reviews of Phase II proposals, Starsys considers the gap between Phase I and Phase II proposals, even under the Fast Track system, as unacceptable from a schedule and execution perspective. Under a typical sequence, if a Phase I project ends in December, with concurrent submission of a Phase II proposal, the proposal would not be reviewed until February, and funding not received until May. This funding gap detracts from a firm’s ability to maintain work on a project, sustain the technical team, and prevent long delays in the achievement of the technical goals sought from the onset of the project. Typically, it would need to reassign individuals who were working on the SBIR project to other firm projects. At the same time though it experiences direct or indirect pressure from DoD to continue work on the project. To do so however requires the use of internal firm R&D and/or marketing funds. Further detracting from the attractiveness of the SBIR program in such situations is that its pre-contract expenses are not reimbursable. The investment of firm resources on Phase I and subsequent Phase II awards can readily exceed the available profit derived from the awards. Thus, even as it sees topics that fit within its technical competence and hold potential value to the firm, it must still weigh whether or not submitting a proposal is a worthwhile investment.

INTELLECTUAL PROPERTY

Despite its emphasis on products, intellectual property protection in the form of patents is seen as having only modest importance for the firm. Among the reasons for the limited efforts to secure patents is the small size of the market for much of the firm’s innovative technology and the small number of direct competitors. Many of the products are specific to a mission application and thus unique to the customer. Products that can be commercialized are often produced for niche applications and thus have high barriers to entry for competitors. Additionally, the cost and time to secure patents are often prohibitive. More generally, the firm sees its intellectual property as residing inside the heads of its personnel, rather than being embodied in specific mechanisms, susceptible to reverse engineering.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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INVOLVEMENT IN STATE GOVERNMENT PROGRAMS

Starsys reports no direct involvement with state of Colorado technology development or economic development programs.

RECOMMENDATIONS

To improve the proposal submission and selection process, it would be helpful if the initial briefings provided by DoD to firms would be more specific. The SBIR workshops do not provide the true inner workings of the process and thus are of minimal value. Direct one-on-one time with principal investigators would provide better insight as to the intent of the topic and the ability of a firm to provide a credible and winnable proposal.

The amount of funding for Phase I and Phase II awards are generally reasonable, but would benefit from some upward adjustment. The Phase I award of $100,000 is a reasonable amount to attract a firm’s interest, and is adequate as seed funds to produce what was described as PowerPoint engineering, essentially advancing a technological concept to the stage where design work could be completed. A preferable approach to Phase I funding, according to the firm, would be to increase Phase I funding to a level that permitted a firm to develop prototype hardware as well as complete the initial trade studies and conceptual design. The ability to generate a working model of the design concept helps add credibility to the program and reduces risk as the program advances towards the Phase II efforts. Advancing to this stage would make it easier for DoD to determine which Phase I awards should be awarded Phase II contracts. Such a modification would be especially helpful to Starsys, which views itself more as a hardware company focused on generating design engineering solutions that are put into flight applications for spacecraft mechanical and electromechanical subsystems than as a pure design engineering company.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Systems & Process Engineering Corporation (SPEC)

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Systems & Process Engineering Corporation (SPEC) was established by Randy Noster in 1986. Noster had been working at BAE Systems, Austin, Texas on the design of chips for sensor technology, but found that BAE’s business strategy and areas of research emphasis were shifting away from his vision of designing chips capable of on-board signal processing for detection purposes. Noster was joined by a few former colleagues to launch what was described as a “garage start-up.” The firm started with “sweat equity” by Noster and his colleagues; they wrote 14 proposals during the course of the firm’s first 6 months, submitting them to DARPA, Army, and MIT.

Systems & Process Engineering’s core technology has centered about the design of multipurpose integrated chips for detection, signal processing, and

SYSTEMS & PROCESS ENGINEERING CORPORATION: COMPANY FACTS AT A GLANCE


101 West 6th

Suite 200

Austin, TX 78701-2932


SIC: 8731

Number of Employees—2005: 50

Revenues Estimated between $10 million and $19 million

Number of Patents: 6

Number of SBIR Awards

Phase I: 133

Number of SBIR Awards

Phase II: 38

Awards:

1998 Tibbetts Award

 

1999 STRICOM “Star Award

 

2002 Tibbetts Award

 

2004 Heavy Hitter Award

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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communications. It defines itself as a product development firm. It employs an array of R&D contracts, including SBIR awards or subcontracts with other SBIR awardees, to develop new products, primarily for the defense and aerospace industries, but also, over time, for the commercial sector, such as the oil and gas industry. Systems & Process Engineering’s initial contract was with MIT’s Lincoln Laboratory, which had a DARPA contract on detection processing. Subsequent contracts came from firms with which Noster and his colleagues had prior contacts.

Using its core expertise in the design of sensor technology and systems integration as a base, the firm’s business strategy remains flexible. It has designed chips for a wide variety of sensor technologies, specializing in on-board integration of sensor technologies, resulting in more compact, single module equipment. If and as a product is seen to have commercial potential, SPEC transitions the technology to a spin-off firm. To date, it has successfully done this twice, launching Extreme Devices in 1998 and Coherent Logix in 2005.

Systems & Process Engineering describes itself as being able to quickly response to changes in technologies and changes in markets. It describes itself as going where opportunities emerge and dropping those for which limited market potential is seen. This strategy has led to some ups and downs in its revenues and employment; employment peaked at 80, but fell after the dot-com bubble. It has now stabilized at approximately 50.

Systems & Process Engineering now has a diverse array of R&D and service contracts from several federal agencies, as well as a major subcontract with an aerospace firm. These contracts range from R&D, systems integration, and systems support, including servicing operations of one of its product in Iraq.

At present, the firm’s business is derived approximately as follows: 40 percent as a prime contractor on U.S. government contracts; 30 percent on commercial contracts; 20 percent SBIR awards; 10 percent others.

CAPITAL FORMATION

As noted, Systems & Process Engineering started as a small operation, drawing on investments by its founders. Although it had 1 aerospace firm and Motorola and IBM plants, Austin in 1986 was characterized as lacking in high-tech industries, and either a banking or venture capital industry interested in supporting small, high-tech start-up firms. When Noster approached local banks and the regional SBA office to borrow money for equipment, the response he received was that these lenders understood real estate, cattle, and oil and gas, but that they didn’t do high-tech.

Austin is seen as having come a long way since then. Local sources of venture capital now exist for high-tech firms, with Systems & Process Engineering’s growth constituting part of the evolution of the growth of the city’s high-tech sector. For example, in spinning off Extreme Devices and Coherent Logix the

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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company was able to secure venture capital from a local VC firm, Austin Ventures, as well as national venture capital firms, such as KLM Capital and ARCH ventures. Systems & Process Engineering though still remains a privately held firm.

STATE GOVERNMENT INVOLVEMENT

Systems & Process Engineering has received no specific support from the state of Texas. It is cited though by state officials as an exemplar of the development of the high-tech sector in Austin.

INTELLECTUAL PROPERTY

Systems & Process Engineering actively seeks to guard its intellectual property. It employs a full-time corporate counsel, who devotes approximately one-half his time to intellectual property matters. The firm files provisional patents on most inventions, although it does not always pursue a permanent patent.

SBIR EXPERIENCES

Systems & Process Engineering learned about the SBIR program in 1986 during a visit to the SBA office in San Antonio, which they had visited to obtain information about SBA programs. They immediately began writing proposals. Of the 11 they submitted, 2 were funded in early 1987, 1 from the then Missile Defense Command, the other from the Army.

Since 1987, the firm has received SBIR awards from several federal agencies, including NASA (fiber optics), Air Force (connected wireless), and the Army (austere supply chain management).

Systems & Process Engineering views the SBIR program as a co-funding for product development, not as a funding source for research, per se. It filters SBIR topic selection first by assessing whether the topic would like to a specific product that met U.S. government needs, then by whether the topic would led to a product marketable to the commercial sector. It also estimates that it invests an amount equal to an SBIR award for Phase I projects and in supplying the financial glue that maintains a project during the gap between Phase I and Phase II funding.

RECOMMENDATIONS FOR SBIR

Its experiences with the DoD-SBIR program lead Systems & Process Engineering to offer extensive recommendations for the program’s future operations. In general, its assessments highlight the positive contributions that SBIR has made to the development of small high-tech businesses, to technological innovation, and to mission needs. SBIR is seen as providing good value to the government in terms of value per dollar for leading edge technology develop-

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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ment. Recent modifications to the program, such as combining Phase I and Phase I Option programs into one proposal, help reduce the schedule and funding delays between programs. SBIR’s use of Web technology for downloading and submitting proposals also are seen as working well.

Several aspects of the SBIR program are, however, seen as requiring improvement. These include the following:

  1. Incentives to Program Executive Offices (PEOs) and prime contractors to transition Phase II SBIR technologies and products more efficiently to Phase III applications in major “programs of record” are needed. SBIR topics tend to represent the priorities of the various service laboratories. Less apparent, at least from the perspective of an SBIR awardee is whether there is a procurement “socket” into which the technologies they have developed under Phase I and Phase II awards can be fit. Tremendous institutional inertia within DoD’s procurement practices exists; there is an institutional bias towards large programs and thus large prime contractors, whereas smaller firms are more innovative, more on target to end-user needs, and faster in responding to changing needs.

  2. The timeline between and among topic generation, release of a proposal, and selection of proposals is too long, causing several problems. The information in the SBIR Topic is dated by the time the topic gets released for proposal. The delay between the time when a topic was originally accepted by an agency and when it actually gets released as a proposal leads to situations in which when the firm’s first discussion with the topic author reveals new requirements and information not readily apparent from the initial posting of the topic. A process in which the topic author had an opportunity to update the requirements and information in the topic immediately before release of the topic for proposal would provide more accurate information to prospective bidders.

  3. The SBIR debriefing process could be improved. The typical debrief for a proposal that was not accepted points out many positive attributes and then states the proposal was not selected for funding by a “rigorous selection process.” This provides little feedback to the SBIR contractor to make decisions on judging if the particular technology is of further interest to the U.S. government. A more useful SBIR debrief process would be to provide the same package of feedback information to all vendors that proposed, the SBIR debrief information would contain (a) number of proposals submitted for this topic; (b) summary of different technology solutions proposed for this topic, (c) agency review of benefits and costs of the different technology solutions proposed.

    Also, for the benefit of firms that submitted proposals but did not receive funding, a statement about which technology solutions were funded, allowing for deletion of company names other than the names of award winners with abstracts, would be helpful, if only to guide them in determining the future course of their R&D efforts.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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  1. The level of Phase I funding should be increased. The basic funding levels for Phase I of $100,000 have basically remained unchanged for over 10 years. The Phase I funding levels should be raised to keep pace with inflation and to provide the SBIR contractor the ability to produce critical component prototypes for demonstration rather then just paper studies.

  2. Substantial addition optional funding should be permitted for Phase II awards. The Air Force has started to make an additional $500,000 available beyond the base $750,000 Phase II funding to fill the gap between Phase II R&D and commercial development of the embryonic technology. This type of funding option should become standard for all Phase II SBIRs.

  3. Reporting requirements should be standardized to reduce overhead for both the government and the SBIR awardee.

    The standard Phase I SBIR program requires monthly reports. This requires the SBIR contractor to write a report, the vendor’s contracts officer to submit a DD250, the government contract officer to process the DD250, the COTR to review and approve the monthly report, and the government contractors officer to submit payment. For each four weeks of technical work effort, there is considerable overhead to process monthly reports.

  4. A third-party review board, independent of agency control, is needed to resolve conflicts that arise in the transition of SBIR development programs to “programs of record” status, including production and field operations by prime contractors, especially to insure protection of the an SBIR awardee’s intellectual property rights.

SUMMARY

Although it began with and continues to have diversified customers and revenue sources, Systems & Process Engineering credits SBIR as underlying everything that it is. Systems & Process Engineering core technologies have all had SBIR support. Technological innovation, as demonstrated by Systems & Process Engineering experiences, is a multiyear, multistage process. The firm estimates that its major innovations have taken from 6–8 years to develop, and have frequently been based on, and required, multiple SBIR awards. These technologies have increased DoD’s ability to fulfill mission needs, and have also found use in the commercial sector. The main issue confronting the SBIR program, in its view, relates to the dynamics of the Phase III/acquisition and procurement processes. Systems & Process Engineering is right at the cutting edge of emerging technologies, but it has no ready path to introduce its technologies into larger systems.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Technology Systems

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Technology Systems was founded in 1985 by Charles (Chuck) Benton, a software specialist, who during the early 1980s had authored a series of video games for a number of California-based firms. As the demand for new video games slowed, Benton relocated to Maine, where he served as a software development consultant for a number of firms. While in Maine, he learned about the SBIR program via some of the program’s brochures as well as an outreach seminar sponsored by the state of Maine to encourage the state’s small businesses to apply for SBIR awards.

Benton submitted a number of Phase I proposals, succeeding with his third submission. The successful proposal was to DARPA to examine the applicability of arcade level technology to military training. This Phase I proposal led to a Phase II proposal. Overlapping with these awards, Benton also successfully competed for an Air Force Phase I award to develop a flight simulation training program. (This project served dual purposes: At the same time that Benton was developing the program, it was being treated as a component of a larger Air Force research project, in which research psychologists were seeking to study how

TECHNOLOGY SYSTEMS: COMPANY FACTS AT A GLANCE


35 Water Street

PO Box 717

Wiscasset, ME 04578


Phone: 207-882-7589

Fax: 207-882-4062


Number of Employees: 11

Annual Revenues: $1-5 million range


Number of Patents: 1


Number of SBIR Awards

Phase I: 10

Phase II: 7

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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people learn.) The DARPA and Air Force Phase II projects served as the basis for Technology Systems’ formation, and permitted it to add employees.

Since its inception, Technology Systems has reinvented itself several times to remain viable in the face of competition, changes in DoD’s organization of its R&D and procurement systems, and the complexities of transitioning from a contract R&D to product development and manufacturing firm. The willingness to engage in this reinvention in large part reflects Benton’s preference to remain an independent entrepreneur who lives in Maine. Had he been required to make the frequent adjustments to his start-up firm’s business strategy while living in Massachusetts, he likely would have gone to work for a large firm.

From 1987–1991, Technology Systems essentially was a contract R&D firm, heavily dependent on SBIR awards for its revenues. In August, 1991, as its Phase II awards ended and with no opportunity to secure Phase III funding, the firm had zero income, and was forced to furlough all its employees.

Following this experience, Technology Systems sought to diversify its markets. From 1992 to 2000, it began a dual process of diversification: first, in expanding the number of clients for whom it conducted contract R&D; second, in beginning limited production of products that embodied its new software. In this period, it reached a stage at which its revenues were apportioned approximately equally between contract R&D and product sales. The 50 percent of its revenues derived from contract R&D were distributed about equally between the federal government, primarily DoD, and industrial firms. Among the latter customers were major defense and consumer product firms, such as Computer Sciences Corp, Loral, and SAIC. In effect, Technology Systems sought to position itself further up the learning curve in simulation technology, selling this technology as an input in larger technological systems. In its emphasis on product sales, the firm’s competitive strategy was to offer favorable price-performance bundles; thus, in one sector, offering what it described as 70 percent of the functionality of a rival’s product at 10 percent of the prices.

The firm’s strategy changed again about 1999, as a series of events among the services that each resulted in reduced revenues. At about that date, DARPA and Army funding of R&D began to decline and the Air Force laboratory with which the firm had been dealing was closed as a result of a wave of DoD base closings.

In its search for new customers and markets, Technology Systems has had to extend itself to the edges of its core competencies. It has done this by moving into the design of software and optimization models for industrial controls, at the same time finding its new primary customer in the needs of the U.S. Navy. Contemporary shipbuilding technology in effect requires the customization of single I-beams. These new production requirements place new demands for software systems that can optimize production. This is the niche that Technology Systems has sought to fill. Its success in developing this software has reached the point where the firm has just spun off a new firm to specialize in further development

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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and applications of industrial control software. In this new venture, Technology Systems is teamed with another firm.

The firm has also become involved in developing communications and mission planning software for undersea warfare systems. This technology derives from an integration of research support it received from the National Science Foundation for work on distributed networking with SBIR grants from the Navy.

Technology Systems also has begun to develop a product line in geo-registered visualizations that are added to video to support tactical and navigational operations. This technology is of interest to the Navy, both in mine clearing operations and maritime navigation. Technology Systems’ efforts to commercialize this technology via establishment of a spin-off firm, Looksea, however have not been successful to date. While a product launch management team was assembled, Looksea failed to produce commercial sales or attract outside investment. Technology Systems now sees itself as having to liquidate Looksea because it is draining the firm’s resources. This experience has led Technology Systems to rethink its commercialization strategy, pointing to increased reliance in the future on licensing its technological advances rather than attempting to create spin-off firms.

CAPITAL FORMATION

Technology Systems was a bootstrap operation. It was underwritten by the SBIR awards and Benton’s own finances. One attractive feature in the forming of software firms, according to Benton, is that they typically do not require as much initial capital as prototype development and/or manufacturing firms. Technology Systems remains a privately held firm.

According to the firm, constraining its ability to grow, especially, as noted above, in transitioning from a contract R&D firm to one engaged in even modest scale production, is the meager supply of external capital available to start-up, high-tech firms in Maine. The venture capital/angel capital market in Maine is described as “functionally nonexistent.” At best, to the extent that outside investors do exist, they are seeking to acquire ownership of high-tech firms on terms that offer little return to the founding entrepreneurs.

INTELLECTUAL PROPERTY

Technology Systems holds a somewhat dualistic view about the importance of intellectual property protection. It does not hold patents as generally needed to protect the firm’s intellectual property, which typically are shielded by know-how and tacit experiences. However, it recognizes that patents may generate several external benefits: Both to customers and potential investors, they may be a sign of technological innovativeness and prowess. They may also constitute an intan-

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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gible asset that would serve to increase the market value of the firm, were it to be bought by other investors or go public. Accordingly, the firm does seek patents: It currently holds 1 patent, and has several pending applications.

INVOLVEMENT IN STATE PROGRAMS

Technology Systems has benefited from several State of Maine R&D and economic development programs. As noted above, its early awareness of and information about SBIR was fostered by outreach workshops sponsored by state agencies. Technology Systems also has received both seed grants ($5,000–$10,000) and development grants (which range from $100,000 to $250,000) from the Maine Technology Institute, a state program designed to foster the growth and development of selected industrial sectors. Technology Systems also received technical assistance from the Maine Patent Program in filing for its first patent.

In all, the firm gives the state of Maine high scores for the assistance it has provided start-up, high-tech firms.

EXPERIENCES UNDER SBIR

Technology Systems describes the fairness and timeliness of SBIR’s review procedures as generally being “pretty good.” It recognizes, but accepts as a fact of life, that some agencies/laboratories have “favorite sons” that at times give specific firms a lead in competitive races. It considers the size of Phase I and Phase II awards to be reasonable. It has not found the funding gap between Phase I and Phase II awards to be a major problem, as it has generally been able to maintain the momentum of a project by using internal resources to redeploy its staff. It also accepts as a fact of life the ebb and flow of funding for specific topic areas; indeed, it sees this as a positive feature of the SBIR program, as this ebb and flow leads over time to the entry and exit of firms from successive competitions, thus providing for a process of natural selection in who wins. However, it does not look with favor on the proposal to set aside a portion of DoD SBIR funds for the biotech sector.

Of especial concern, and harm, to the firm has been the reorganization of the Army’s R&D programs. This reorganization entailed the establishment of designated battle laboratories to address the specific R&D needs of various branches, e.g., artillery, tanks. The support contracts for the laboratories were then awarded to Lockheed Martin. Accordingly, Technology Systems soon found itself in a position that whenever it proposed a technological idea to a battle laboratory, Lockheed Martin, as the support contractor, was able to interject its claim to conduct the needed R&D. From the perspective of Technology Systems, it was dealing with a stacked deck, which made pursuit of Army R&D contracts not worthwhile. It has thus exited the simulation industry.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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RECOMMENDATIONS

Increasing the number of annual solicitation rounds in DoD competitions from 2 to 4 would be of great benefit to small firms, such as Technology Systems. In the last round, the firm prepared 6.5 proposals; this was a grueling experience.

DoD’s Fast Track process also is seen as unintentionally distorting good business practice. In one case, the firm undertook to do a Fast Track submission to extend its R&D on lasers. It entered into discussions with several high-tech firms to secure the required matching funds. The firms were interested in Technology Systems’ technology, but unwilling to advance funds on the grounds that they typically did not do so for R&D projects. Technology Systems thus found it necessary to submit its proposal as a standard Phase II submission. Its proposal was not funded, in part, according to the firm because the DoD program manager had expected it be submitted as a Fast Track submission, and thus downgraded it when it became part of the regular competition. (The proposal subsequently was funded through an alternate channel, in part because of the interest of Bath Iron Works in the technology.)

SUMMARY

The SBIR program was a key contributor to Technology Systems’ founding, and has served as a valuable, if variable source of R&D funds for the firm as it has reinvented itself with respect to technologies, markets, and customers over its almost 20 year history. From the firm’s perspective, the SBIR program also has yielded good value to the American taxpayer. By enabling Technology Systems to work at the leading edge of technological innovation, the program has generated substantial cost savings in the ways in which DoD has been able to conduct its operations. Research supported by SBIR also has had a broader national impact on industrial practice. Technology Systems’ initial R&D project for DARPA on network simulation has been incorporated into ISO and IEEE standards. Estimation of the savings generated by the firm’s SBIR awards is conceptually feasible although difficult, because the firm’s technological advances are typically incorporated into larger training and weapons systems provided by DoD’s prime contractors, such as Lockheed Martin.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Thermacore International, Inc.

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Thermacore was founded by Yale Eastman in 1970. Eastman was an employee of RCA, assigned to working on the development of heat pipe technologies related to the conversion of heat to electricity, with specific application to the nuclear power industry. When RCA ceased work on the technology, Eastman left to form his own company to continue his former work, staying in Lancaster, Pennsylvania, where RCA’s plant was located.

Thermacore started as a “garage” start-up. At the same time, the shift in national energy and environmental policy from nuclear to solar power led the new firm to focus its attention on developing heat pipe technologies for solar applications. It remained a small firm with no more than 10 employees throughout most of the 1970s, working on specific industry and U.S. government R&D contracts. It began to grow but along this same trajectory, conducting contract R&D firm, primarily for NASA, DoD, and DoE under a series of non-SBIR and SBIR contracts.

Thermacore now is a globally oriented firm, providing products for the computer, telecommunications, power electronics, medical, and test equipment industries. It continues to invest in R&D to widen the range of uses of heat pipe technology. Reflecting its transition from an R&D to a production-oriented firm, contract R&D projects from NASA and DoD and original equipment manufac-

THERMACORE INTERNATIONAL, INC.: COMPANY FACTS AT A GLANCE


780 Eden Road

Lancaster, PA 17604-3243

Phone: 717-569-6551, Fax: 717-569-4797

SIC 3443

Number of Patents: 61

Number of SBIR Awards: 82

Phase I

Phase II

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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turer presently represent approximately only 6 percent of the firm’s revenues. The balance, 94 percent, comes from sale of commercial products.

As seen by Thermacore, the marketplace caught up to its technology. As the market for personal computers grew, so too did the importance of dissipating the PC’s internal heat. In the early 1990s, Thermacore was approached by Intel to discuss the prospects of transitioning from low volume to mass production of its heat pipe technology. With financial support from a venture capital firm, Thermacore then took the risk of setting up a production line before receiving orders. Subsequently, it received large orders from several major PC manufacturers, such as HP, Dell, IBM, and Sun.

This expansion into the PC market provided a quantum jump in the firm’s scale of operations, as well as its transition from an R&D firm primarily oriented to product development to a volume manufacturer of a commercial product. The transition was described as requiring at times painful transitions in the firm’s outlook and staffing patterns. The firm’s personnel had to adapt to new sets of customers and a new orientation towards marketing. Experiences under the SBIR program are seen as having helped in making these transitions, as earlier work on SBIR projects had provided valuable training experiences for Thermacore’s engineering and technical staffs, providing it with a “brain pool” of “know-how” related to manufacturing reliability. These tacit skills have contributed to the firm’s ongoing competitive position even as patents on its initial core technologies have expired.

Thermacore remained a privately held firm during its first 20 years, eschewing a public offering lest it dilute ownership control of the firm. In 2001, as part of his retirement, Eastman sold the firm to Modine Manufacturing, Wisconsin, an international leader in thermal energy management, with estimated sales in FY2005 of $1.5 billion, which operates it as a wholly owned subsidiary. This new ownership arrangement has meant that Thermacore is no longer eligible to participate in the SBIR program. It does however continue to do some SBIR-funded research as a subcontractor to firms conducting Phase I and II research.

The firm has remained in Lancaster for historic reasons. As the production of PC’s increasingly has shifted to southeast Asia, the firm has been experiencing increased pressure from its major customers to locate its production facilities close to them. It now has a high volume manufacturing branch in Taiwan (Thermacore Taiwan).

EXPERIENCES WITH SBIR PROGRAM

Thermacore began active pursuit of SBIR awards soon after SBIR’s program establishment, detailing one of its engineers to monitor SBIR topics. In 1984, it submitted two Phase I proposals to NASA and DoD on topics related to high performance heat pipes; it received awards on each proposal. Thermacore’s pursuit of SBIR awards was tied to an emphasis on product development and

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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commercialization. Their repeated involvement in the SBIR process is seen as highlighting the length of time, amount of financial support, and number of incremental technological advances needed to move an R&D concept into a useful product, whether for government agencies or the commercial sector. Thus, for Thermacore, SBIR awards served as the basis for sequential improvements in its core technologies in heat pipes. Heat pipe technology was seen as a dual-purpose technology: it was supported by government agencies for its usefulness in defense and aerospace, but over time, with customized modifications, has become an innovation employed in a diverse set of private sector industries.

Reflecting the resulting lesson that technological innovation is a complex process, the firm notes that no single SBIR award led to a specific innovation. Nor is it possible to attribute any single use within a larger military or aerospace technical system to any single award or contract. Instead, it was the accumulation of technical advances under these awards coupled with the firm’s in-house expertise that resulted in its innovations. New products are viewed as involving the meshing of multiple ideas.

During its period of eligibility, Thermacore received (82) SBIR awards from several government agencies, including DoD, NASA, and DoE. It considers the SBIR proposal selection process(es) to have been fair and timely. Having a diversified portfolio of awards from different agencies meant that it was able to handle the gaps it experienced between Phase I and Phase II awards by redeploying technical personnel. Even so, especially in its early years, when it had fewer awards, the gap made for a roller coaster existence in meeting payroll.

INTELLECTUAL PROPERTY

Thermacore, historically, has followed a policy of seeking patent protection for its inventions. It presently has 62 patents. Patents are viewed both as a device for protecting intellectual property and as a means of symbolizing the firm’s technological leadership. Recent experiences in short-lived, unsatisfactory foreign joint venture however have also highlighted to Thermacore how fragile patent protection can be with partners who learn the technology and then seek to become competitors and in countries where intellectual property rights are loosely enforced. Increasingly, the firm has placed value on its tacit knowledge, embodied in large part in the technical expertise of its engineers responding to customer needs.

INVOLVEMENT IN STATE GOVERNMENT PROGRAMS

Thermacore’s involvement with the state of Pennsylvania technology development programs has been limited and unsatisfactory. It participates in one project under the state’s Ben Franklin Partnership Program, a state program that funds private sector R&D, typically on a cost-sharing basis, as well as typically

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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in partnership with a university researcher. The collaboration with researchers at Penn State University did not prove satisfactory. It was seen as benefiting the researcher’s laboratory while producing little value to Thermacore.

RECOMMENDATIONS

Even though it is no longer eligible to participate in the SBIR program, Thermacore sees the program as having considerable value, and recommends that it be continued.

SUMMARY

Thermacore’s history highlights how DoD and other government agency SBIR awards can contribute to development of a technology whose end uses extend well beyond the mission objectives or commercial uses pursued at the time of initial project support. Thermacore views SBIRs as having helped it to push the envelope in technical performance and to establish its credibility in the marketplace. SBIR awards played a critical role both in terms of supporting R&D on its core technologies and in enabling it to shift from an R&D, product development firm tied primarily to government contracts to a world leader in selected commercial markets. The combination of technical expertise coupled with its increasing knowledge of marketplace needs and opportunities has made Thermacore the international leader in the field of heat pipe technology. Also evident in Thermacore’s establishment and growth is the lengthy process at times required to bring a technology to practical uses.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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ThermoAnalytics, Inc.

Zoltan Acs

University of Baltimore

FIRM OVERVIEW

ThermoAnalytics, located in northern Michigan, develops Computer Aided Engineering (CAE) software for commercial and military thermal analysis and infrared signature prediction. The company also develops custom software for thermal and infrared signature management and provides consulting services for design and analysis. ThermoAnalytics is now a $5.5 million company.

ThermoAnalytics was founded by Keith Johnson and Allen Curran, both mechanical engineers and specialists in the thermal sciences. The company spun off from a Michigan Technological University contract research group in 1996. The original universty group was incorporated as a nonprofit and provided defense consulting services. It specialized in applied physics projects for the Army. After the Army cut funding for R&D, the group strengthened their ties with the big three automotive companies, developing dual-use tools that determine the infrared signature, thermal-heat transfer of vehicles.

While Ford Motor Company was interested in the product, it had difficulty dealing with a university nonprofit entity, encountering issues with licensing, training, and support. The automotive company needed the services of a for-profit software engineering firm. The principals therefore determined that it was time to spin off and diversify their markets in the government and commercial sectors. Immediately after ThermoAnalytics was established, the founders started looking into opportunities provided by SBIR.

ThermoAnalytics remains an applied R&D company, even though it markets products. The company started out with 8 employees, all with R&D background. As the company grew, Mr. Johnson’s role transitioned from being an engineer to being an operations manager. While ThermoAnalytics added more administrative and marketing staff to payroll, 75 percent of its 35 employees continue to work as engineers and physicists in applied R&D.

ROLE OF SBIR

The SBIR funding has helped ThermoAnalytics grow from being a service company to a company with commercial and military product sales. ThermoAnalytics continues to grow by taking advantage of SBIR topics that are in its core areas.

Keith Johnson became aware of SBIR while working with other firms providing services for DoD. He helped co-author a proposal while at Michigan Tech.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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The Army liked the proposal. However, due to delays in the funding process, ThemoAnalytics had already established itself as a small business by the time the first Phase I was awarded. The project was very successful and earned a Phase I, II, and III.

The project’s success, facilitated by the fact that ThermoAnalytics already had a CRADA with Ford at the time of the award, helped prove the technology’s dual use. This agreement led to further contracts with Ford. Without SBIR, the company believes that it would have still established its relationship with Ford, but would have remained a small work-for-hire contractor without ability to sell on the commercial market.

In 1996, ThermoAnalytics had the fastest radiation solver. Lacking a patent, however, the company knew that it must continue to innovate. That is where SBIR awards were crucial. SBIR awards helped ThemoAnalytics to finance product development, freeing revenue to meet sales and marketing expenses. According to ThermoAnalytics, this strategy has been commercially successful.

The company has received 13 Phase I awards between 1997 and 2005, and 10 Phase II awards between 1998 and 2005. By taking advantage of the Phase II Plus matching funds ThermoAnalytics has attracted over $1 million in third-party funding and about $1 million in SBIR matching funds.

ThermoAnalytics believes that a key feature of SBIR—not available through other government programs or sources of private funding—is the ability to create a proprietary product with the company retaining the rights to commercialization. SBIR awards also allow small business to have an R&D group within their organization that is paid through outside funds rather than IR&D.

COMMERCIALIZATION

The firm’s competitive advantage relies on the speed and simplicity of CAE software that supports rapid prototype design. The product has niche applications on the military side. In the commercial sector, the product is differentiated because it is very different from solutions povided by competitors. ThermoAnalytics emphasizes that one of its strenghts is its “low innovation inertia,” that is quick product development and quick turnaround. Competitors include CFD companies such as FLUENT and several others.

In the defense industry, the software can be utilized in infrared munitions that detect and destroy an object by sensing heat. The application on the demand side is signature management: keeping objects cool so they are invisible to sensors. On the private commercial side, particularly the automotive industry, the software has applications in thermal management related to exhaust, converters, and electrical components. Innovations in the automotive field have also resulted in more fuel-efficient designs by reducing aerodynamic drag. These reductions in drag also produce problems related to overheating.

There is also demand for the company’s products in Germany, which has

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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both a strong military and a strong automotive industry. The company’s product is sold in Germany through small distributor companies (employing usually two people) that specialize in export sales. The distributor finds the customers for the product, but ThermoAnalytics’ Web site is also a strong referral source. The Web site contains demonstration software and a demonstration product that can be accessed by entering individual contact information. This information is forwarded to the distributor for follow-up and potential leads.

In all, the firm estimates, conservatively, that its market size is $10 million for the product and $10 million for consulting services. The split in revenue over the last 3–5 years has been 75 percent military and 25 percent commercial. This is because the military has more funds to invest into development. According to ThermoAnalytics, the automotive industry, when faced with economic downturns, is known to cut from the R&D budget first. “While this keeps the shareholders happy, it hurts the company in the long run.”

Thermoanalytics develops and sells directly all its products. International sales are done through independent distributors. The software is licensed and sold to a variety of agencies: prime contractors, government agencies, and commercial companies.

KNOWLEDGE EFFECTS

Since ThermoAnalytics innovates in the area of applied physics, rater than basic physics, the majority of algorithms exist in textbooks somewhere. While patent protection is elusive, the company notes that there are, nevertheless, unique ways during the software development process that provide intellectual property protection.

The company lists 15 scientific papers published and four trademarks registered for the company and its products. It has also won six awards for its innovative research.

IMPROVING SBIR
Surviving the Funding Gap

The company notes that the funding gap was a problem in the earlier years when holdup in the congressional budget delayed the Phase II award. These gaps have, on occasion, put the company’s work at risk. This gap is managed by diverting staff into other projects, when necessary. In addition, the company notes that the Phase I option provides bridge funding.

The company also notes that the Army has a more structured schedule than the Navy and Air Force that makes planning easier. The Army also provides a much better Phase II Plus match.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Award Size

ThermoAnalytics believes that the Army’s model of Phase I 70,000—6 months, Option 50,000—4 months, Phase II 730,000—2 years is best. It notes that the only timing problem emerged when the Phase II proposal needed to be submitted when only about 4 months of the Phase I had passed.

Award Selection

The award selection process is seen as fair and, timely. However, the company believes that the award selection processes should be standardized across agencies. Solicitation schedules for all agencies should be posted yearly. The agencies should ensure that adequate time has been allowed for the Phase II request for proposal and the completion of the Phase I research.

Commercialization Assistance Programs

ThermoAnalytics has participated in a limited way with commercialization programs. Given that it is already well versed on SBIR and has previous direct commercialization experience, these events are no longer seen as very helpful.

Commercialization Transition

ThermoAnalytics believes that the SBIR program should provide incentives for award recipients to “buy in” early into the process, work with the prime contractor, actually develop a product, and secure adequate funding for Phase III.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Trident Systems

Irwin Feller

American Association for the Advancement of Science

FIRM HISTORY

Trident Systems was established by Nicholas Karangelen in 1985. Karangelen is a U.S. Navy Academy graduate and was selected and trained by Admiral Rick-over for service on nuclear submarines during the cold war period. Upon being commissioned in 1976, he served on fast attack submarines. Karangelen left

TRIDENT SYSTEMS: COMPANY AT A GLANCE


Address: 10201 Lee Highway, Suite 300

Fairfax, VA 22030

Phone: 703-691-7794

Year Started: 1985

Ownership: Privately held, equity based

Annual Sales: FY2004 $20 million

Number of Employees: 115

3-Year Sales Growth Rate: 44 percent per year on average

SIC Code: 8711

Technology Focus: Systems Engineering Research and Development; Systems and Software Engineering: C4I Systems, Touch Screen Technologies; Enterprise Collaboration Centers


Number of SBIR Awards—Phase I: 56 (DoD Phase I): 56

Number of SBIR Awards—Phase II: 32

Number of Patents: 4

Number of Publications: Numerous technical papers, articles, books, including EIA Systems Engineering Data Standard EIA-927: Common Data Schema for Complex Systems


Awards

17 Virginia Small Business Technology Achievement Awards

NAVSEA Value Engineering Award

Washington Navy Yard Campus Renovation Award

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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the Navy in 1981. He then worked for TRW, in Mclean, Virginia as a systems engineer until 1983, when he was recruited by IBM to work on an advanced submarine combat system. Work experiences with TRW and IBM were described as excellent opportunities for on-the-job training, as they added new skills to Karangelen’s earlier training in physics and engineering. However, they also proved frustrating. Big firms were described as overly wedded to existing ways of doing things—they didn’t like to get out of their boxes.

A series of family events, coupled with what Karangelen, a second generation Greek-American, termed his cultural heritage of entrepreneurship, led him in 1985 to decide to start his own firm. Trident hired its first employee in 1986. It operated primarily as a “services” company, selling hours of consulting services to major DoD contractors, such as GE and Westinghouse, but had no prime contracts. This work served both to build Trident’s reputation as a knowledgeable, reliable performer and to give it new insights into DoD requirements.

In about 1988, one of the firms for which Trident was working was becoming too large to qualify for a DoD-Navy set-aside program in which a 5 year, cost plus fixed fee contract was to be bid on systems development for antisubmarine warfare. Trident, which then had 4 employees, submitted a proposal as the prime contractor and in a highly competitive contest, won the contract. The stability of the contract, the quality of the work it performed under it, and the business relationships developed during performance of the contract are described as having launched Trident on the growth trajectory it has experienced since the late 1980s.

Trident has grown primarily by expanding its business about its core competencies, adding to them as requested to by its customers. These core competencies began with requirements analysis for weapons systems) then advanced into systems engineering, and more recently into systems design. In this latter capacity, it had previously worked principally as a subcontractor for larger DoD prime contractors, augmenting their in-house staffs, but now serves as prime contractor on many programs.

By 2004, Trident’s revenues had reached $20 million, and its employment level had risen to 115. The larger portion of its systems engineering and design work is performed at its headquarters in Vienna, Virginia. The firm has recently moved into further downstream integration, and now is beginning to build products for niche markets based on its systems design work. Toward that end, it has recently built a light manufacturing assembly plant in Pennsylvania. It also bootstrapped much of this expansion, relying on retained earnings and high levels of reinvestment in product development.

CAPITAL FORMATION

Having little capital at the time of Trident’s founding, Karangelen started the firm in his home, essentially providing consulting services. From the very

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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beginning though, his goal was to own and operate a company. This led him to incorporate as a privately held stock company, rather than to operate as an S corporation.

Although originally envisioning a business strategy of distributing stock to employees and then going public after a period of 10 years or so, Karangelen chose instead to defer this approach lest it detract from managerial autonomy. To overcome an inherent flaw in employee stock distribution plans that builds up pressure over time to go public, namely that the firm must go public in order for employees to realize the economic benefits of their share holdings, Trident arranged for a formal appraisal of the company’s value, and then used the firm’s retained earning to buy back stock from employees at this price. Trident’s employee stock purchase plan was then replaced with a profit sharing plan that distributes a significant portion of the companies profit to employees on a merit basis. One result of this shift to a profit sharing strategy was to increase employee attention to the firm’s profit margins. Employees are described as having become more aggressive in seeking out new businesses and generating additional contracts.

As a self-financed firm, Trident experienced huge cash flow problems in the early years of operation. When Karangelen first sought a bank line of credit (of $11,000) for working capital, the bank initially required a comparable deposit before it would make the loan (at the then prevailing interest rate of 17 percent). A bank loan to provide working capital was eventually negotiated.

EXPERIENCES UNDER SBIR

Trident began to submit proposals to the SBIR program about 1986, submitting 4 or 5 unsuccessful proposals before it won one. Reflecting in part its own experiences but presented as a more general observation on the value of the SBIR program, Trident notes that SBIR is one of the few contract mechanisms currently in place to provide “size appropriate competition,” that is opportunities for small firms to compete for DoD’s R&D and procurement contracts.

Not all the benefits to the firm from the SBIR program have been manifested in Phase II or Phase III awards. In one example cited by the Trident, it was unsuccessful in its proposal for a Phase II award following work it had done under a Phase I award. The software it had written as part of its Phase I work was unique, and permitted touch screen rather than mouse control of computer screens. Development of the software spawned a general purpose technology, which has permitted the firm to branch into working of specific touch screen solutions for several different computers and end user markets.

Trident’s success in developing DoD related technologies under the SBIR program has not led to proportionate successes in landing procurement contracts, however. According to the firm, in the overwhelming majority of cases, small businesses that have successful relevant capabilities and technologies do not achieve major positions in DoD acquisition programs. In some cases, the small

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

business technologies may be seen as competing with established program interests or as a distraction from the program’s plan. Some program managers may be unwilling to invest program funds in alternative technology candidates when they believe (as most are seen to do, according to the firm) that their programs are on track. Prime contractors are described as often polite but generally unwilling to bring in a promising externally developed (and potentially disruptive) technology when they have an internally developed alternative or believe (as most do) they can reasonably develop an alternative internally. In most cases, even well intentioned attempts to include small business in major DoD programs fall short because of factors unrelated to the high technical quality, reduced costs, and shorter development times offered by small business and their technology solutions. These missed opportunities represent what the firm believes to be to be the largest single impediment to current initiatives to transform DoD’s weapon systems acquisition processes.

One such “missed opportunity,” as reported by the firm, is its development of a handheld situation awareness technology, named DISM (Dismounted Intelligence Situation Mapboard). DISM development was initiated in FY1996 as part of an SBIR project to determine if it was possible to provide standard digital military maps (supplied by NIMA) with standard military symbology and standard military digital messaging on, what was then, the early generations of commercially available hand held computers. The goal was to provide map-based situation awareness to dismounted troops on small light handheld computers at affordable cost.

DISM capabilities were successfully demonstrated in FY1999 by Trident and subsequently integrated and tested with the Army’s FBCB2 program and briefed to the Land Warrior program. Using DISM, any unit can have an instant tactical digital network for situation awareness (SA) and command and control (C2) data by connecting the DISM palmtop to the unused digital channel of their fielded SINCGARS radios. However, DISM has remained outside of the traditional Army acquisition channels even after receiving a very favorable evaluation as the dismounted extension to FBCB2 and being recognized by several operational commanders (82nd Airborne and 101st Airborne) as an opportunity to field a near-term, low-cost dismounted digitization capability. In the face of strong support for DISM by the operational forces, in the wake of failures by two large prime contractors to deliver an acceptable solution (at a cost of hundreds of millions of dollars), and instead of evaluating DISM, which the Army laboratory at CECOM had supported, the Army’s PEO for Soldier systems initiated development of a new system called Commander’s Digital Assistant (CDA) in FY2002 which essentially copied the DISM functionality (including using DISM graphics in program briefings). CDA was recently heralded by the Army as an SBIR success story; however, there has been no widespread deployment of CDA or head-to-head test against DISM, which is now a mature demonstrated and tested technology.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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The difficulties that Trident has encountered in securing procurement contracts for the products it has developed, some of them under SBIR awards, is viewed as symptomatic of systematic shortcomings in DoD’s acquisition practices and cultures. The major barrier to successful transition of DoD SBIR awards is held to rest in the mindset of acquisition program managers. Whereas Karangelen sees small firms as representing the nation’s most powerful transformation force, DoD acquisition offices are described as reluctant to recognize the value of small firms and their abilities to produce discrete advances in technology. Representing large programs, they are seen as motivated to maintain the status quo rather than to adapt to new possibilities. They are also described as fearful of allowing small firms to show the possibilities of technological success lest these successes call into question prevailing policies and practices that favor big, billion dollar, Star Wars-type of weapons acquisition programs. Further adding to this reluctance of program managers to responds to the technological opportunities offered by small firms, whether as a result of SBIR or other firm initiatives, are the blocking efforts of some prime contractors who erect barriers to entry for small firms through closed system architectures.

According to Karagelen, considerable resistance exists to change both in the program offices and prime contractors that are now engaged in development and upgrade of the current generation of Navy ship combat systems. This resistance, from an historical perspective, may be understandable: Current procurement and acquisitions policies and practices did lead to the development of the ships and weapons systems that won the cold war and which are arguably without peer in the world today. The above shortcomings are seen as stemming from a reinforcing combination of DoD contract practices, procurement policies, and consolidation in the U.S. defense industry. According to the firm, throughout the 1980s, DoD R&D solicitations covered a wide size range of contracts, from $100,000 to multimillion dollar awards. Relatedly, this size distribution encompassed a range of topics, that allowed small firms to identify their niches and thus submit bids. Over time, however, as a result of the bundling of DoD programs and the consolidation of contracts into fewer, larger contracts opportunities for mid-size firms to bid on research contracts began to diminish. This consolidation, in part, has been rationalized on the grounds that it is more efficient to award fewer, larger contracts than a larger number of smaller ones. The result, according to the firm, has been a steady reduction in the number of mid- and large-size DoD contractors, as a result of mergers. Karangelen also noted that as the old firms die out or disappear few new mid-sized firms capable of supplying DoD with goods and services are being born. The result is that the DoD contracting environment is becoming steadily less competitive. The major firms—Boeing, Raytheon, Lockheed—take turns winning major contracts, in the name of maintaining the defense industrial base. At lower contract levels, say in the $20 million–$80 million range it is more likely to find a dozen competitors for an award. These contracts though tend to be for “services,” not weapons acquisition.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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Delays between Phase I and Phase II awards also created problems for Trident during the early years of its SBIR awards. It found it necessary to shift staff among projects, to deal with tight financial squeezes at the end of fiscal periods, and at times to shut down or tie off projects. Over time, it learned to hire staff who had the ability to “shift gears” among projects; its growth also provided with additional internal funds to cope with delays.

INVOLVEMENT IN STATE GOVERNMENT PROGRAMS

Although favorably noting that Virginia has had an active state-level program that both provides technical assistance to firms on how to compete for SBIR awards and awards some small grants, Trident itself has not participated in any of these programs.

RECOMMENDATIONS

SBIR has been a highly successful program. Because it provides one of the few niches in DoD’s research program that is compatible with the capabilities of small firms, size should be expanded. Making the program larger would obviate a need to make stringent trade-offs between the number and size of SBIR awards. Moreover, DoD’s topic selection process likewise has improved over time. The increase since 1999 in the number of Phase III awards also is a desirable trend, with the qualifier that the larger percentage of these awards—an estimated 80 percent—have been concentrated in the Navy. Another desirable trend has been that some agencies are starting to award larger Phase II awards.

DoD’s SBIR program could still be improved. However, the focus of the really needed changes are in the Defense Acquisition System. Among the recommended changes are the following:

  1. Establish an education initiative for prospective program managers at the Defense Acquisition University. The Defense Acquisition University should provide clear guidance on the advantages of using the Phase I and Phase II SBIR and STTR contracts to identify and qualify capable small businesses and their innovative technologies for transition to DoD Acquisition programs and in use of the Phase III contracting mechanism for transitioning SBIR-developed technologies into the mainstream of acquisition programs. Appropriate SBIR program employment guidance should be included in each of the online and in-class courses taught by the Defense Acquisition University in the program management career track.

  2. Require ACAT 1 and 2 program managers to include program-plan specific milestones for the transition of SBIR developed technology and utilization of other small business developed commercial-off-the-shelf (COTS) technology in their program plans and budgets. Program managers and their staffs should be directly involved in generation of SBIR topics, the selection of Phase I and

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

Phase II SBIR awards, the evaluation of the Phase II contract products, and the transition of successful Phase II efforts into their program. The programs’ long-range multiyear budget should include funds designated for Phase III contracts and other proven commercially available technologies from small businesses in the same manner these out-year budgets are established for other program activities. Program managers should be required to report on SBIR utilization at each major program milestone and specifically on Phase III SBIR contracts awarded.

  1. Require all contracts awarded over $100 Million in ACAT 1 and 2 programs to include SBIR Phase III subcontracting goals for the prime contractor with attendant fee incentives for exceeding and penalties for not achieving those goals. When a prime contractor bids a small business subcontract as part of a proposal, the prime contractor should be required to execute the subcontract on award of the prime contract unless the prime can show due cause. In situations where subcontracts are not awarded, a letter report stating the reasons should be provided by the prime contractor to the program office and the SBA, and a rebuttal to that letter should be solicited from the small business. From these inputs the SBA and the program office could make a determination to either release the subcontracting requirement or not. In addition, the DoD AT&L Office should provide a plan for requiring and incentivizing prime and subprime defense contractors to subcontract to DoD SBIR firms, as they currently do with minority, woman-owned and veteran-owned small businesses. Such a plan would include recording SBIR Phase III contract award metrics just as other small business metrics are recorded and yearly report to Congress.

  2. Establish a SBIR Phase III Acceleration program in the DoD that would require each service to identify at least 25 topics each year that have completed Phase II for accelerated transition to development and production in acquisition programs of record. Each of these topics would also be approved by the respective Requirements and Budget directorates of the service chiefs to ensure that they address high priority military requirements and that sufficient funds have been budgeted to complete development and production of the selected topics. This program is intended to expand the very small cadre of DoD Program Executive Officers and program managers who have successfully embraced the SBIR program and taped the wealth of affordable and innovative technology resources for their programs.

SUMMARY

Trident ascribes a significant portion of its success and growth to the SBIR program. Without SBIR, it wouldn’t have survived, grown, or flourished. The ability to compete for SBIR awards, and the technical and economic successes it achieved because of these awards, permitted the firm to follow a totally different business model than would have been possible had it been forced to secure external capital.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

SBIR solicitations provide a range of opportunities for small firms to identify, bid for, and perform DoD-related R&D; the list of topics is described as akin to a college catalogue. Trident revenues and employment levels have grown steadily, although not continuously since the late 1980s, and considers its experiences under the SBIR to have been at the heart of this growth.

The contribution of the SBIR program to the firm’s growth has taken several different forms. One project, described as a highly successful SBIR, led to the development of a handheld situational awareness system. Trident contrasted its success in designing and developing this product with the experiences of larger DoD contractors, which has received far larger awards for comparable technologies but which were unable to produce a useful product.

The technological and mission benefits generated by DoD’s SBIR program are dissipated in the transition between R&D and acquisitions. SBIR produces fruit, which is not picked up by the acquisition system. DoD’s acquisition system is overly resistant to change, especially in allowing more open competition. Program offices and prime contractors have a strong investment in the existing monolithic approach (i.e., one large prime contractor who is responsible for the program). Prime contractors are seen as firmly entrenched and skilled at constructing the case for their continuing role as monolithic system provider and gate keeper for innovative, competitive (and potentially disruptive) technologies. DoD program offices have been open to discussing the merits of the open architecture (OA) approach and quick to identify how they are currently implementing OA elements into their programs, they also are not often successful forcing significant change on their prime contractors who largely determine the fate of the program.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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ViaSat, Inc.8

Peter Cahill

BRTRC, Inc.

BACKGROUND

ViaSat, Inc., was formed in 1986. Three outstanding engineers, who were in their early thirties, founded the firm. The founders were fellow employees at M/A-COM Linkabit, a San Diego based satellite telecommunication firm. Linkabit had been founded by Andrew Viterbi and Irwin Jacobs, who later founded QUALCOMM. Linkabit was very high tech, extremely innovative, a magnet for the very best in digital communications. It has spun off about 40–50 firms in southern California.

Following the classic path of newborn technology firms, the three, who were unaware of SBIR at the time, began business in a garage with under $25,000 in capital. Initially, ViaSat consulted with defense firms, which were preparing proposals for satellite programs, with agreements that a winning proposal would result in an engineering subcontract to ViaSat. After two such “proposal” contracts, ViaSat obtained venture financing of $300,000 from Southern California Ventures.

Venture funding had little impact on company growth compared to the impact of the SBIR program. The venture funding was used as a financial safety net, while SBIR fueled growth, providing research and development (R&D) dollars, and providing entry to contract dollars without the extensive red tape of competition. ViaSat won its first Phase I award ($49,955.00) from the Navy in the summer of 1987. This led to a Phase II in 1988. Subsequent modifications to the Phase II contract made its ultimate value $1.2 million.

From the beginning, every contract, whether consulting with defense firms, conducting SBIR, or doing follow on R&D, was aimed at developing products to manufacture. The first breakthrough was the initial SBIR for a Communications Environment Simulator, for use in air combat test and evaluation. That SBIR created a specialized test equipment product basis, and demonstrated ViaSat’s ability to design and manufacture. ViaSat credits that product as producing $42 million in sales to the Department of Defense (DoD) and $17 million in sales to private industry. Subsequent to the Phase II, DoD contributed an additional $5 million to developing the technology.

ViaSat’s initial successes in defense and government related products continues today in its Government Systems division. Products include terminals,

8

Case study is based on an interview in July 2004 with James P. Collins, the vice president for Business Development, and on information in ViaSat Annual Reports and on the ViaSat Web site.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

control systems, and training terminals for UHF and wideband military satcom; MIDS/Link-16 tactical communication terminals; data messaging processors and software for clear communication over noisy tactical channels; RF communication simulation systems; and secure networking products enabling encrypted communication over nonsecure networks.

ViaSat had its initial public offering (NASDAQ: VSAT) in 1996, an IPO that the firm attributes to the impact of their SBIR awards. Unlike management in many emerging technology firms, which change their upper level management as they obtain venture funding, grow and go public, ViaSat founders, Mark Dankberg, Mark Miller, and Steve Hart, continue to provide strategic vision and control of the company. The three had complementary skills and remain in key roles at the company today. Dankberg is Chairman and CEO, Miller is Chief Technical Officer, and Hart is Vice President of Engineering.

ViaSat “graduated” from the SBIR program in late 2001 with the acquisition of Comsat Laboratories. This acquisition of the satellite products group of Lockheed Martin Global Telecommunications brought the company size to over 500 employees. By the end of their fiscal 2005, annual revenue had grown to $346 million (18th consecutive profitable year) and employment to 1,029 employees.

Prior to going public, ViaSat was listed on the INC.500 list of fastest growing private companies three times. The company is on the Forbes list of “200 Best Small Companies,” and the Business Week list of “100 Best Small Corporations.” ViaSat is an ISO9001 certified company.

ROLE OF SBIR

The R&D of SBIR has been a huge determinant in company growth. SBIR developed products, and particularly in the early years provided credibility with prime contractors. The company would have succeeded without SBIR due to the strength of the ownership team, but they would have been unlikely to have achieved their current level of success, and it would have been a much different company. SBIR spurred the growth of technical capabilities at a much faster pace and provided opportunities to develop technical strengths in new areas.

Lack of SBIR would have slowed growth tremendously. In a highly competitive field, ViaSat requires a continuous significant stream of R&D to maintain and grow its share of the telecommunications manufacturing market. In the early years almost all R&D was either SBIR or contracts resulting from SBIR success. In 1994 the company began internal R&D (IR&D), which has amounted to as much as ten percent of its revenue. In spite of this large internal investment, SBIR remained vital in that it was used for higher risk, more innovative ideas. IR&D could then mature the proven idea. Forty-nine Phase I, 24 Phase II, and follow-on developmental contracts from DoD have provided ViaSat with a quarter billion dollars in R&D funding and a resulting wealth of products.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×
INNOVATION AND IMPACT

ViaSat views Demand Assignment Multiple Access (DAMA) Networking as its most significant innovation. DAMA resulted from two Air Force Phase II awards in 1991 for 5 KHZ and 25 KHZ SATCOM DAMA modems. The Phase II awards provided credibility and money to exploit their key technology. For a period of time, ViaSat was recognized as the world expert. This development has resulted in an ongoing product line providing satellite terminal equipment for ships, aircraft, ground station terminals, and missiles. Using SBIR and additional R&D, ViaSat has advanced DAMA from its roots in Code Demand Multiple Access (CDMA) to two proprietary technologies, Paired Carrier Multiple Access (PCMA) and Code Reuse Multiple Access (CRMA).

ViaSat has established itself as a trusted provider of both equipment and technology development to DoD. DoD customers include the Army, Navy and Air Force. It is one of two prime contractors for Multifunctional Information Distribution System (MIDS) Link 16 systems, which provide the primary tactical data distribution system for DoD. In June 2004, ViaSat won a equipment delivery order valued at approximately $47 million for MIDS terminals from the Space and Naval Warfare Systems Command (SPAWAR), San Diego. MIDS provides secure, high capacity, jam resistant, digital data and voice communications capability for U.S. Navy, U.S. Air Force, and U.S. Army platforms. Soon after this production contract, in December 2004, ViaSat was awarded an Engineering Change Proposal modification and corresponding delivery order anticipated to be valued at approximately $60 million for development of a Joint Tactical Radio System (JTRS) compliant version of the MIDS terminal. JTRS is a programmable radio technology that contributes to the new “network-centric” vision of the military by enabling a variety of military wireless communications devices to easily communicate with each other.

In the commercial arena, ViaSat produces innovative satellite and other wireless communication products that enable fast, secure, and efficient communications to any location. Products include network security devices, and communication simulators. ViaSat also has a full line of VSAT products for data and voice applications, and is a market leader in Ka-band satellite systems, from user terminals to large gateways.

Just as technology developed under DoD SBIR has led to commercial products, ViaSat commercial satellite IP networking products are finding a number of applications for the military. For example ViaSat LinkStar® and LINKWAY® IP-based satellite networking products, widely used in commercial enterprise networking, are the core networking technology for the Coalition Military Network (CMN), recently fielded by Lockheed Martin for U.S. Central Command (USCENTCOM). Rather than multiple tactical Satcom units, the new commercial technology, under the Kuwait Iraq Command, Control, Communications and Computers (C4) Commercialization (KICC) project, is creating a permanent communications infrastructure.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×
COMMERCIALIZATION STRATEGY

The focus of every ViaSat R&D effort, whether under contract or IR&D, is development of a product that it can manufacture and sell. Its expertise is in design, development, assembly and test. They contract out lower cost components like Chasses and cables, while retaining in house high value such as integration and test. One of its acquisitions, U.S. Monolithics (USM) is exceptionally adept at packaging RF transceivers in high performance low-cost MMIC modules, which are designed into ViaSat military and commercial products.

In the early years ViaSat subcontracted to larger DoD Primes. Now, ViaSat, due to its proprietary technology and Phase III noncompetitive awards, is the often prime and many of these larger firms subcontract to it.

PRIVATE RETURNS AND SPILLOVER EFFECTS

ViaSat-developed technology provides increased capability at a lower cost. Communications Satellites have an inherent capacity using their as built technology. ViaSat software allows increasing that capacity without putting up a new satellite. Its research has driven the market to keep up. In other cases it has allowed them to keep up. It has increased efficiency allowing more users at improved quality of service. These improvements provide an increased number of messages/calls at any instant in time and over any period of time. They allow improved use and allocation of the spectrum. The net result is the same system of satellites can handle nine to ten times as many users, messages or calls.

ViaSat views its major competitors to be Rockwell, BAE, Harris and Raytheon. In the area of other SBIR success metrics (besides sales and growth), neither publications nor patents would provide much evidence of success. They make presentations at military Communications sessions and chair sessions but this is a relatively small effort. Presentation to the military user and RDTE community has value. Sharing with their competitors does not. As of 1999, ViaSat reported only one patent resulting from SBIR. Instead of patents, they rely on data rights from SBIR and rapid innovation and fielding to stay ahead of market. They do more patenting of the research funded by their IR&D program. The commercial side lacks the protection of DoD funded research.

VIASAT VIEWS CONCERNING SBIR APPLICATION AND AWARD PROCESSES

The interviewee was not sure how ViaSat learned of SBIR, but during the timeframe of the first SBIR, the firm was actively seeking new sources of funding, and the founders were well connected with other leaders of small innovative companies in the communication technology rich San Diego area.

Geographical location was important to the firm’s opportunity for proposing and receiving SBIR. San Diego in the 1980s and 1990s did quite well in

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

communications technology. The University of California in San Diego was at the cutting edge in telecommunications. This impacted where the firm was founded. The Navy’s SPAWAR, also in San Diego, had an active SBIR program in telecommunications.

Topics, technology, and prior experience have determined the agency to which the company proposed. The founders were experienced in working with DoD. DoD was in constant pursuit of improved communications. DoD provided the best opportunities. In addition to satellite communication, about half of the awards have dealt with line of sight, terrestrial communications.

All of their SBIR has been with DoD. ViaSat felt that the minor differences among the application and award processes of DoD component SBIR programs gave no perceived enduring advantage to one agency over another.

The firm’s SBIR proposal strategy was to stay within its core competencies. It has had several awards on broad topics, others on narrow topics. It has worked with agencies to try to influence future topics. The number of proposals it submitted for any solicitation depended more on what topics were requested than any other factor. However, when business looked slow, more proposals may have occurred.

Most proposal work was done at night and on weekends. Its average investment on a Phase I was about $2000 to $3000. They once put in 22 proposals on a single solicitation. “Once you are doing a few, you often can raise that by a factor of two to three without that much additional work by taking advantage of similarities.” The real work in obtaining a Phase II was in finding follow on sponsorship. This required finding and convincing other program managers to go to the SBIR sponsor and say that they wanted the result of the Phase II. SPAWAR, Hanscom AFB, MA; Rome AFB, NY; and Ft. Monmouth, NJ, were mentioned as locations that they visited

ViaSat has experience in applying for and receiving awards from other government R&D (non-SBIR) programs. In comparison to SBIR, they tend to partner more on other government R&D programs, which tend to be bigger and require much more complicated proposals. SBIR provides natural access and a much easier proposal process.

They would recommend reducing some of the bureaucratic requirements of SBIR application process. They pointed out that commercialization data requires more work. (It should be noted that they had to enter data for many awards, and that they only participated in one solicitation that required that data before outgrowing the program. Once entered, updating for subsequent solicitations requires only a small fraction of the effort.)

ViaSat believes some topics are well thought out, but some are not. Some are more rigorous, and validated. It is easier to propose if the topic is clear. It does believe that having some catch-all broad topics is a good thing. Topics should allow Phase I to focus on innovation.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
×

From their perspective, the DoD practice of two SBIR solicitations per year was frequent enough.

They believe that the selection process appeared fair. The money pool seems to allow multiple awards on the same topic when appropriate.

VIEWS ON FUNDING AMOUNTS AND TIMING

They often experienced delay between Phase I and II. Bridge funding, when available, was never enough. Delay used to require taking people off the effort. In the later years, once they had a healthy cash flow, it became an inconvenience, but in the early years delay was critical. Reduction in delay, and covering the gap would improve the program.

ViaSat no longer qualifies for Phase I but believes continuing to make small awards is better than increasing the size and giving less awards. However, the award needs to be large enough for the firms to demonstrate that they can make something of it at reasonable cost.

OVERALL PROGRAM VIEWS

ViaSat identified dedicated government sponsors and noncompetitive Phase III as real strengths of the program. A sponsor who never gives up and advocates company efforts can be key to success. After Congress tried to clarify that the government could award Phase III noncompetitively, ViaSat still had difficulty convincing contracting officers that noncompetitive Phase III awards could be made. That gradually improved. ViaSat learned how to prove its case, but it may still be a problem for some firms and contracting officers. Noncompetitive Phase III gives small firms some leverage with primes. For ViaSat, outgrowing participation in Phases I and II does not prevent the award of Phase III. Continued eligibility for noncompetitive Phase III contracts is important to the continued positive impact of SBIR on firms that grow or are acquired.

A weakness that ViaSat perceives in the SBIR program is the disconnect between the SBIR firms and the primes. The primes have no incentives to use SBIR firms. Primes often see no advantage.


Recommended Change The government Planning and Programming process for R&D and Procurement makes it difficult to transition from Phase II. Every PE is programmed far in advance to be spent in a particular way. The successful Phase II becomes a spoiler. To get funded, you have to get support from an established program. They would like to see a change in the Planning and Programming process to make funding available for Phase III at conclusion of Phase II.

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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RESEARCHER INSIGHTS

Each of the Armed Services are involved in what Secretary of Defense Rumsfeld refers to as Transformation—transformation in how they organize and how they fight. Central to all other DoD Transformation Initiatives is the concept of Network Centric Warfare (NCW). In simplest terms, NWC is waging war in the information age.

NCW means that information is acquired, processed into intelligence and provided to everyone who needs it seamlessly. Thus an aircraft would know exactly where all the threat acquisition and air defense weapons were on its path. A platoon would know the path to take to avoid observation and fires until it could flank and attack a threat force from an unexpected direction. A general would know where all the threat forces were and what they were doing, and everyone on the friendly side would be able to distinguish between threat combatants and friendly forces and noncombatants. Air, land and sea forces would be completely interoperable and mutually supporting.

There are many technical challenges to making the concept of NCW a reality, challenges in sensor systems, in information architectures, protocols and hardware, in understanding individual and group behavior and in the communications hardware required. ViaSat is a critical player in providing the interoperable communication pipes that will enable the Network. It has that capability because of the stimulus of SBIR.

The act establishing the SBIR program identified four goals for the program: technological innovation, commercialization, the use of small businesses to meet agencies’ research and development needs, and participation by minorities and disadvantaged persons.

How do the SBIR awards at ViaSat measure up to these goals? ViaSat innovations spurred by SBIR have changed the industry; their $350 million in annual revenue (from a standing start) and their involvement in meeting not just the research and development needs of the agency, and in fact some of the most vital needs, gives evidence that they embody what the Congress was trying to foster. (They are not, however, minority or disadvantaged.)

Two points need to be made in light of current consideration by elements of the administration and Congress of Venture Capital and possible limits on the number of Phase II awards.

  • ViaSat had Venture Capital before its first SBIR. Although the founding individuals never relinquished control of the company, this enormous program success and their significant contributions to National Defense might not have occurred under some interpretations of the presence of VC.

  • ViaSat used 24 Phase II awards to develop its most innovative technology. It was a frequent winner. Some current initiatives under discussion for the SBIR Program would have eliminated it from SBIR, treating them as an “SBIR Mill.” Such initiatives would limit SBIR eligibility to relatively few Phase II

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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awards per firm. The loss of the last nine or sixteen (choose the cutoff) of the ViaSat Phase II awards and the resulting Phase III would have materially reduced the contributions of ViaSat. We know that very few awards and very few SBIR companies succeed in achieving significant innovation, significant impact on meeting agency needs, and large-scale commercialization. Is SBIR best spent nurturing proven winners or in spreading it thinly with no focus on successful commercialization?

Suggested Citation:"Appendix D: Case Studies." National Research Council. 2009. An Assessment of the SBIR Program at the Department of Defense. Washington, DC: The National Academies Press. doi: 10.17226/11963.
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