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1 Assessing the SBIR Fast Track and Phase II Enhancement Programs at the Department of Defense This assessment of the operation of the goals, operations, and achievements of the SBIR Fast Track program and the Phase II Enhancement program at the Department of Defense builds on the results of a 2000 NRC report on the DoD Fast Track program and on a broader 2009 assessment of the SBIR program at DoD.1 Drawing on survey and case study analysis, this study assesses the Fast Track and Phase II Enhancement programs in light of their goals. This chapter describes the two key Department of Defense (DoD) initiativesâthe Fast Track program and the Phase II Enhancement programâ designed to improve the commercialization of innovative products and services supported by DoD Small Business Innovation Research (SBIR) awards. It begins with a sketch of the operation of the SBIR program within DoD, drawing on related NRC studies of SBIR and also describes the growing emphasis on commercialization as an objective of the DoD SBIR program as a background to the Fast Track and Phase II Enhancement programs.2 KEY FEATURES OF THE SBIR PROGRAM The Small Business Innovation Research (SBIR) program was created in 1982 by the Small Business Innovation Development Act. SBIR is designed to stimulate technological innovation among small private-sector businesses 1 See National Research Council, An Assessment of the SBIR Program at the Department of Defense, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2009. See also National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, Charles W. Wessner, ed., Washington, DC: National Academy Press, 2000. 2 See National Research Council, An Assessment of SBIR at the Department of Defense, op. cit. See also National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, op. cit. 7
8 REVISITING THE DEPARTMENT OF DEFENSE SBIR FAST TRACK INITIATIVE while providing the government new technical and scientific solutions to challenging mission problems that are cost-effective. SBIR is also designed to help to stimulate the U.S. economy by encouraging small businesses, including woman- and minority-owned small businesses, to market innovative technologies in the private sector.3 Eleven federal agencies are currently required to set aside 2.5 percent of their extramural research and development budget exclusively for SBIR contracts. As the agency with the largest R&D budget, DoD provides half of the total federal SBIR fundingâin fiscal year 2007, the budget for the DoDâs SBIR budget was $1.13 billion.4 Each year these agencies identify various R&D topics, representing scientific and technical problems requiring innovative solutions, for pursuit by small businesses under the SBIR program. These topics are bundled together into individual agency "solicitations" - publicly announced requests for SBIR proposals from interested small businesses.5 A qualifying small business can identify an appropriate topic it wants to pursue from these solicitations and, in response, propose a project for an SBIR award.6 The required format for submitting a proposal is different for each agency. Proposal selection also varies, though peer review of proposals on a competitive basis by experts in the field is typical. Each agency then selects the 3 The SBIR legislation drew from a growing body of evidence, starting in the late 1970s and accelerating in the 1980s, which indicated that small businesses were assuming an increasingly important role in both innovation and job creation. This evidence gained new credibility with the Phase I empirical analysis by Zoltan Acs and David Audretsch of the U.S. Small Business Innovation Database, which confirmed the increased importance of small firms in generating technological innovations and their growing contribution to the U.S. economy. See Zoltan Acs and David Audretsch, Innovation and Small Firms, Cambridge, MA: MIT Press, 1990. 4 Testimony of Michael Caccuitto, DoD SBIR Program Administrator, before the House Committee on Science and Technology, June 26, 2007. Access at <http://www.dod.mil/gc/olc/docs/testCacciutto070626.pdf>. 5 The Department of Defenseâs SBIR solicitations are posted on the Web at <http://www.acq.osd.mil/osbp/sbir/solicitations/>. 6 To be eligible for an SBIR award, the DoD SBIR Solicitation states that a small business must: â¢ Be independently owned and operated, is not dominant in the field of operation in which it is proposing, has a place of business in the United States and operates primarily within the United States or makes a significant contribution to the U.S. economy, and is organized for profit. â¢ Be (a) at least 51 percent owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States or (b) it must be a for-profit business concern that is at least 51 percent owned and controlled by another for-profit business concern that is at least 51 percent owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States. â¢ Have, including its affiliates, an average number of employees for the preceding 12 months not exceeding 500, and meets the other regulatory requirements found in 13 CFR Part 121. Business concerns are generally considered to be affiliates of one another when either directly or indirectly, (a) one concern controls or has the power to control the other; or (b) a third- party/parties controls or has the power to control both Source: The Department Of Defense Small Business Innovation Research (SBIR) Program Solicitation FY06.3, p. 4.
ASSESSING THE SBIR FT AND PIIE PROGRAMS AT THE DOD 9 proposals that are found best to meet program selection criteria, and awards contracts or grants to the proposing small businesses. The resulting SBIR funding agreements include any contract, grant, or co-operative agreement entered into between a federal agency and any small business for the performance of experimental, developmental, or research work funded in whole or in part by the federal government. As conceived in the 1982 Act, SBIR programâs award-making process is structured in three phases: â¢ Phase I awards. These awards essentially fund feasibility studies in which award winners undertake a limited amount of research aimed at establishing an ideaâs scientific and commercial promise. The 1982 legislation anticipates Phase I awards as high as $100,000. â¢ Phase II awards. These awards are largerâtypically about $750,000âand fund more extensive R&D to develop the scientific and commercial promise of research ideas further.7 â¢ Phase III. During this phase, companies do not receive further SBIR awards. Instead, award recipients should be obtaining additional funds from a procurement program at the agency that made the award, from private investors, or from the capital markets. The objective of this phase is to move the technology from the prototype stage to the marketplace. Obtaining Phase III support is often the most difficult challenge for new firms to overcome. In practice, agencies have developed different approaches to facilitate SBIR awardeesâ transition to commercialization. Commercial sales and transition to acquisition programs are the principal goals of SBIR Phase III at DoD. The purpose of both Fast Track and Phase II Enhancement is to increase the number and magnitude of Phase III transitions resulting from DoD SBIR awards. The law calls on the Small Business Administration (SBA) to issue policy directives for the general conduct of the SBIR programs within the federal government. These policy directives include such elements of the program as simplified, standardized, and timely SBIR solicitations; a simplified, standardized funding process; and minimization of the regulatory burden for small businesses participating in the program. Federal agencies are required to report key data to SBA, which in turn is supposed to publish annual reports on the progress of the program. 7 The recent NRC study recommended that the amounts for SBIR Phase I and Phase II be increased to $150,000 and $1 million respectively. See National Research Council, An Assessment of the SBIR Program, Charles Wessner, ed., Washington, DC: The National Academies Press, 2008. See Recommendation I in Chapter 2. In making these recommendations, the NRC Committee stressed that recommendations are intended as guidance for standard award size. The SBA should continue to provide the maximum flexibility possible with regard to award size and the agencies should continue to exercise their judgment in applying the program standard.
10 REVISITING THE DEPARTMENT OF DEFENSE SBIR FAST TRACK INITIATIVE THE SBIR PROGRAM AT DOD Under the supervision of the Under Secretary of Defense for Acquisition, Technology and Logistics (AT&L), the Office of Small Business Programs (OSBP) in the Office of the Secretary of Defense (OSD) coordinates the overall DoD SBIR program.8 SADBU provides oversight and sets policy concerning the SBIR program in coordination with the Director of Defense Research and Engineering (DDR&E). The SBIR program at DoD is decentralized. It is administered by the three services (Army, Navy, Air Force), seven agencies (Defense Advanced Research Project Agency (DARPA), the Missile Defense Agency (MDA), Chemical Biological Defense (CBD), the Defense Threat Reduction Agency (DTRA), the US Special Operations Command (USSOCOM), and National Geospatial-Intelligence Agency (NGA)), and the Defense Logistics Agency (DLA), and one staff element (the Office of Secretary of Defense (OSD)) with R&D budgets meeting the legislated requirements.9 This decentralization provides each DoD component the opportunity to adapt the program its particular mission and technological needs. In turn, this implies that the program is not identically administered across DoD. The SBIR program at DoD is also large. The Air Force SBIR program is, on its own, larger than all of the SBIR programs at nine of the ten other federal agencies that participate in SBIR. The Army, Navy, DARPA and MDA SBIR programs each exceed the size of seven of the nine other federal agencies. Given the size of the DoD SBIR program, the performance of the DoD SBIR program has a major impact on how well the overall SBIR program meets its goals. A Combined Solicitation Process Three times a year DoD issues a combined research solicitation for its ten component programs, indicating each programâs R&D needs and interests and inviting R&D proposals from small companies. DoD-wide solicitations announce the topics and provide directions and formats for submission of proposals. Each DoD SBIR component makes its own determination as to which of the solicitations that it wishes to participate in. The OSD OSBP provides the opportunity for every component to participate in whichever solicitation best supports its needs and mission requirements. Prior to 2004 DoD generally conducted two SBIR solicitations a year, the first closing in January and the second closing in July. Currently DoD has 8 The Office of Small Business Programs (OSBP) was previously known as the Office of Small and Disadvantaged Business Utilization (SADBU) 9 DLA participates in SBIR since 2008, but is not a part of the 2001 or current NRC studies and does not participate in the SBIR Fast Track or Phase II Enhancement programs.
ASSESSING THE SBIR FT AND PIIE PROGRAMS AT THE DOD 11 Other (2.8%) OSD (5.1%) Army (23.7%) MDA (10.7%) DARPA (5.8%) Navy Air Force (23.0%) (28.9%) FIGURE 1-1 DoD SBIR budget by component for FY 2008. SOURCE: DoD SBIR Web site, Figure 1-1.eps <http://www.acq.osd.mil/osbp/sbir/overview/index.htm>. Accessed on December 18, 2008. NOTE: The DoD SBIR program, funded at approximately $1.14 billion in FY 2008, is made up of 12 participating components: Army, Navy, Air Force, Missile Defense Agency (MDA), Defense Advanced Research Projects Agency (DARPA), Chemical Biological Defense (CBD), Special Operations Command (SOCOM), Defense Threat Reduction Agency (DTRA), National Geospatial- Intelligence Agency (NGA), Defense Logistics Agency (DLA), Defense Microelectronics Activity (DMEA), and the Office of Secretary of Defense (OSD). three SBIR solicitations each year. The Air Force always participates at least in the first SBIR solicitation. The Army participates only in the second. The Navy generally participates in every SBIR solicitation. Other components are less predictable as to how many and which SBIR solicitation they use. In 2006, the Navy participated in all three, the Air Force and SOCOM in two and the other seven components in a single SBIR solicitation. Companies apply first for a six-month10 Phase I award of up to $100,000 to test the scientific, technical, and commercial merit and feasibility of 10 Air Force Phase I awards are nine months in duration.
12 REVISITING THE DEPARTMENT OF DEFENSE SBIR FAST TRACK INITIATIVE a particular concept. If Phase I proves successful, the company may be invited to apply for a two-year Phase II award of up to $750,000 to further develop the concept, usually to the prototype stage. Proposals are judged competitively on the basis of scientific, technical, and commercial merit. Following completion of Phase II, small companies are expected to obtain Phase III funding from the private sector or non-SBIR military customers to develop the concept into a product for sale in military and/or private sector markets. Multiple Administrative Variables There is considerable variety within and among the DoD agencies in how SBIR is administered. These include how topics are selected and proposals evaluated, the degree of involvement of procurement officials in topic generation, the speed of evaluation and contract award, the potential for awards larger than the nominal dollar limit, the availability and amount of gap funding between phases, availability and constraints on Phase II Enhancement funding, and the availability of follow on Phase III Research and Development (R&D) funding. All of these factors, which may impact commercialization, vary among the DoD component SBIR programs. Commercialization success can be affected by these variables. For example, the specificity of the topic may limit proposals and innovative approaches, which may reduce the private sector appeal of proposals in response to a very specific DoD topic. On the other hand, such specificity may indicate a well understood need that will result in DoD procurement of the solution to that need. Broad topics give more latitude to the proposing firm to propose something with private sector appeal; however, the agency may not select the proposal if they see no clear payoff to DoD. Multiple Missions As noted above, the program administration of SBIR is decentralized in, reflecting the fact that R&D is decentralized at DoD. In turn, R&D is decentralized because each of the agencies conducting R&D has a different mission, structure and R&D focus. While each service has the mission to recruit, train, organize and equip forces for deployment under joint commanders, the differences in equipment needs between Army Divisions, Navy Carrier Groups and Air Force Wings are often dramatic. These differences lead to differences in the kinds of topics, and in the way the services have structured their own acquisition organizations and the research, development and engineering organizations that support acquisition. Certain needs common to all services have been made the responsibility of a single service, whose needs and capabilities are predominant. For example, among the Armyâs lead R&D responsibilities are small arms, food, clothing, and wheeled vehicles. Each service has R&D organizations at various locations supported by contracting offices. Services conduct basic and advanced
ASSESSING THE SBIR FT AND PIIE PROGRAMS AT THE DOD 13 research, develop and demonstrate technology, and develop and engineer systems in their areas of interest. Most of this effort is accomplished through universities and defense contractors.11 The services also must provide life cycle support in maintaining and upgrading equipment that is already in the field. â¢ The Defense Advanced Research Project Agency (DARPA) focuses on high risk, high payoff critical defense technologies that may support any of the services or other DoD needs. Most of their focus is on technology development and demonstration. They make use of service R&D organizations and contracting agencies to evaluate and support their efforts, which are largely contracted. Much of the DARPA organization is transient. The services and other agencies provide people to work at DARPA as program managers for two to four years (often less than the life cycle of SBIR from topic generation to completion of phase II). DARPA gauges success of an R&D project (including SBIR projects) on whether at the end of the project, the technology transitions into one of the services or agencies in DoD. By their very nature, many DARPA projects will not succeed and move forward. â¢ The Missile Defense Agency (MDA) has the mission to develop the capability to defend forces and territories of the United States, its allies and friends against all classes and ranges of ballistic missile threats. Much of its R&D is coordinated from Huntsville, Alabama, home of one of the Armyâs principal Research, Development & Engineering Centers. MDA is advancing several state-of-the-art technologies in seeking to develop an effective missile shield. A larger, more structured and focused organization than DARPA, MDA also uses the services to help execute its R&D mission. â¢ The Defense Threat Reduction Agency (DTRA) mission is to safeguard America and its allies from Weapons of Mass Destruction (chemical, biological, radiological, nuclear, and high-yield explosives) by providing capabilities to reduce, eliminate, and counter the threat, and mitigate its effects. DTRA R&D focuses on the effects of Nuclear, Chemical and Biological weapons (the latter two for defense against such weapons). They do not actually develop or procure weapons; thus limiting the potential for government funded SBIR Phase III of their topics. Private sector sale of SBIR Phase II results tends to be limited to occasional spin-offs of the actual technology in the SBIR. â¢ The Chemical and Biological Defense (CBD) Programâs mission is to ensure that the U.S. military has the capability to operate effectively and decisively in the face of biological or chemical warfare threats at home or abroad. Technologies developed under the SBIR program 11 DoD often sets objectives for defense contractors for the involvement of small businesses, and contractors often support small businesses in their SBIR efforts.
14 REVISITING THE DEPARTMENT OF DEFENSE SBIR FAST TRACK INITIATIVE have the potential to transition to the Joint Program Executive Office for Chemical and Biological Defense (JPEO-CBD) if the appropriate level of technology maturity has been demonstrated. The Army serves as executive agent for the SBIR portion of the CBD Program. â¢ The National Geospatial-Intelligence Agency (NGA) mission is to provide timely, relevant, and accurate Geospatial-Intelligence in support of national security. The NGA R&D budget is too small to require a separate SBIR program, but the agency chose to have one because of the potential for SBC in the critical NGA field of information technology. NGA makes only two or fewer Phase II awards per year. NGA is the only DoD component that participates voluntarily in the SBIR Program because they see the potential benefits of leveraging this powerful program. â¢ USSOCOM has a small R&D program focused on near term needs of Special Operating Forces provided by the services. â¢ The Office of the Secretary of Defense (OSD) DDR&E has a small SBIR program, which has attempted to establish topics with a high potential for dual use. Multiple Operational Processes The SBIR process within a Service must operate within the organization and Research, Development and Acquisition (RDA) processes used by that Service. In decentralized systems such as employed by the Navy, SBIR procedures vary among the Systems Commands. In general, SBIR is integrated into the R&D Programs of each Systems Command. â¢ Navy. The Navy allocates the money rather than the topics, allowing each Command to determine how it will be spent. As a result, the Navyâs Acquisition Program Executive Officers (PEO) have a significant role in topic generation and selection of proposals, especially for Phase II. Acquisition Program Offices frequently fund Phase III or provide additional Phase II funding. The usefulness of the SBIR results to the Navy is an important part of the selection process. In many cases this may lead to selection of more mature technologies and less risk taking, trading a higher probability of success for a lower potential payoff. â¢ Air Force. The Air Force also manages SBIR in a decentralized way. The program is managed within each of the technical Directorates in the Air Force Research Laboratory, Test Centers and Logistic Centers that are located across the country. Proposal approval is decentralized to the Directorate level. The Air Force awards Phase I for $100,000 for nine months rather than the nominal $75,000 for six months. The extra time and dollars, ceteris paribus, helps bridge to Phase II.
ASSESSING THE SBIR FT AND PIIE PROGRAMS AT THE DOD 15 â¢ Army. The Army, by contrast, centralizes topic, Phase I, and Phase II proposal selection; this centralized process began with FY92 Topics and Phase I proposals. The Army calculates how much of the annual SBIR funding will be needed to fund the first year of new Phase II awards and to pay for the second year of Phase II awards approved the prior year. It then determines how many Phase I awards can be awarded with the remaining funds. The Laboratories, which are allocated topics based on relative size of their R&D budget, are also allocated backup topics in the event their primary topics do not survive the Armyâs centralized selection process. The Armyâs ten senior Scientists/Technologists, who receive input from evaluators and managers at the laboratories, head the centralized selection of topics and proposals. The Director of the Army Research Office heads the Source Selection Board for Phase I. The Army SBIR process recently reinvigorated its connectivity to the acquisition community by allowing each PEO to author two topics each year. â¢ DARPA. In DARPA, topic selection and proposal decisions have usually been decentralized to the Technical Office Directors. The individual technical project officers who author the topics have had considerable input to proposal evaluation and to decisions to invite a Phase II. â¢ DTRA. In DTRA, the technical Directorates control the topics, but the proposal decisions are made by a board composed of the deputies from each directorate. â¢ MDA. The Missile Defense Agencyâs predecessor, the Ballistic Missile Defense Organization (BMDO) had an open process for 18 years that allowed companies to submit a Phase II whenever they were ready. However, when BMDO became MDA in 2001, that open process was stopped. Starting with the 2002 solicitation, MDA began to conduct an âinvitation processâ in much the same way that the three Service (Army, Navy, Air Force) components administer their Phase II award processâthat is, by only inviting those companies that they want to have Phase II to submit a proposal. Also, while BMDO had a single Source Selection Authority for all SBIR awardsâThe SBIR Program Managerâthat selection decision is now made at MDA by a committee and steering groups. A GROWING EMPHASIS ON COMMERCIALIZATION The 1992 Reauthorization The 1992 SBIR reauthorization resulted in an increase in the portion of the agency extramural R&D budget set-aside for the SBIR program from 1.25 percent to 2.5 percent. This increase was consistent with a recommendation
16 REVISITING THE DEPARTMENT OF DEFENSE SBIR FAST TRACK INITIATIVE from the National Research Council to increase SBIR funding as a means to improve the U.S. economyâs ability to adopt and commercialize new technologies.12 By 1992, the SBIR program had also become politically popular, in part through the advocacy of small businesses. In conjunction with the emergence of innovative small start-ups in computing, biotechnology, and advanced materials, there was ample support for program expansion in 1992.13 The increase in the percentage of R&D funds allocated to the program was accompanied by a stronger emphasis on encouraging the commercialization of SBIR-funded technologies. The 1992 reauthorization explicitly highlighted commercial potential as a criterion for awarding SBIR awards.14 For Phase I awards Congress directed SBIR program administrators to assess whether projects have âcommercial potentialâ in addition to scientific and technical merit when evaluating SBIR applications. With respect to Phase II, evaluation of a projectâs commercial potential would consider the existence of second-phase funding commitments from the private sector or from non-SBIR sources and the existence of third-phase, follow-on commitments within procurement agencies, along with other indicators of commercial potential.15 Furthermore, the reauthorization directed that a small businessâs record of commercialization be taken into account when considering the Phase II application. To further reinforce the emphasis on commercialization, the 1992 reauthorization moved the goal âto increase private sector commercializationâ from fourth to second in the list of SBIR program goals. The reauthorization did not provide specific guidelines as to how much weight should be given to commercialization as compared with the programâs other goals, such as technological innovation or importance to the agency mission. The 1992 GAO Study As a prelude to the 1992 Reauthorization, the General Accounting Office (GAO) conducted a study of SBIR programs across all federal agencies (including DoD) to evaluate the aggregate commercial trends of products in the 12 National Research Council, The Government Role in Civilian Technology: Building a New Alliance, Committee on Science, Engineering, and Public Policy, Washington, DC: National Academy Press, 1992, p. 29. 13 For an account of the evolution of the SBIR program, see George Brown and James Turner, âThe Federal Role in Small Business Research,â Issues in Science and Technology, Summer, 1999, p. 53. 14 Robert B. Archibald and David H. Finifter, âEvaluation of the Department of Defense Small Business Innovation Research Program and Fast Track Initiative: A Balanced Approach,â in National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, op. cit. 15 In many cases, SBIR technologies (such as those related to missile defense or space applications) have limited or no commercial potential, except for follow-on orders from the respective agencies. That is, these agencies themselves must be the âcommercial client.â Moreover, these agencies often do not provide subsequent orders for Phase III products and services. For example, technologies developed for the NASAâs Mars Rover have a very limited market.
ASSESSING THE SBIR FT AND PIIE PROGRAMS AT THE DOD 17 third phase of SBIR.16 The survey questionnaire sent out in 1991 to all the Phase II awardees from the first 4 years (1984 through 1987). GAO said that they chose the earliest recipients because studies by experts that they had consulted on technology development concluded that five to nine years are needed for a company to progress from a concept to a commercial product. Their rationale for not including Phase II recipients from 1988 or later was that, in most cases, those project recipients had not had sufficient time to âmake or breakâ themselves in Phase III. Responses to the GAO study indicated that 10 percent of the projects studied had not completed Phase II and even the earliest projects studied had inadequate time to mature. Although upbeat about the overall early indications of commercialization, GAO expressed some concern over the rate of commercialization in DoD. DOD INITIATIVES TO IMPROVE COMMERCIALIZATION In the aftermath of the 1992 Reauthorization, DoD initiated program changes designed to improve the rate of SBIR commercialization. The Fast Track Initiative Initiated with the 1996 SBIR solicitations, as a two-year pilot policyâ the SBIR âFast Trackâ allowed SBIR projects that attracted matching funds from third-party investors during the Phase I award period to receive a significantly higher probability of a Phase II SBIR award, as well as expedited processing to reduce the delay in reaching the market. Toward the end of a small company's Phase I SBIR project, the company and its investor submit a Fast Track application. In the Fast Track application, the company and investor state that the investor will match both interim and Phase II SBIR funding, in cash, contingent on the company's selection for Phase II award. The matching rates needed to qualify for the Fast Track are as follows: For small companies that have never before received a phase II SBIR award from DoD or any other federal agency, the matching rate is 25 cents for every SBIR dollar. For all other companies, the matching rate is 1 dollar for every SBIR dollar. The matching funds may pay for additional R&D on the company's SBIR project or, alternatively, they may pay for other activities such as 16 U.S. General Accounting Office, Small Business Innovation Research Shows Success but Can Be Strengthened, GAO/RCED-92-37, Washington, DC: U.S. Government Printing Office, March 1992.
18 REVISITING THE DEPARTMENT OF DEFENSE SBIR FAST TRACK INITIATIVE BOX 1-1 Prioritizing Commercialization in the 1992 SBIR Reauthorization The Small Business Innovation Reauthorization Act of 1992 both raised the percentage of research expenditures dedicated to the SBIR Program and increased the importance of the goal of private-sector commercialization for SBIR projects. The 1992 act that reauthorized the SBIR Program listed the following objectives of the program: (A) Expand and improve the program; (B) Emphasize the programâs goal of increasing the private sectorâs commercialization of technology developed through federal R&D; (C) Increase small businessâ participation in federal R&D, and (D) Improve the federal governmentâs dissemination of information about the program. The initial goal âto stimulate technological innovationâ although not explicitly specified in the 1992 reauthorization is implicitly maintained by the SBIR Programs as being a critical element of its implementation. However, the goal of private-sector commercialization moved from being listed fourth in 1982 to second in 1992. Over the years, some DoD components have argued that these goals are in order of priority while others have suggested that these goals should be weighed on an equal basis. Still others have argued that each SBIR Program can decide for itself the priority that it can place on each of these goals independent of any input from Congress. This again emphasis the diverse processes that exist within the DoD SBIR Program. The change in the 1992 legislative priorities is reflected in the language describing the selection process. Specifically, the original language describing a SBIR Phase I proposal for selection and award was: (A) a first phase for determining, insofar as possible, the scientific and technical merit and feasibility of ideas submitted pursuant to SBIR program solicitations: (96 Stat. 218). This language was amended as follows (the added language is underlined and bolded): (A) a first phase for determining, insofar as possible, the scientific and technical merit and feasibility of ideas that appear to have commercial potential as described in subparagraph (B)(ii), submitted pursuant to SBIR program solicitations: (106 Stat. 4250).
ASSESSING THE SBIR FT AND PIIE PROGRAMS AT THE DOD 19 For a SBIR Phase II the change was much more dramatic and purposeful. The original 1982 language was: (B) a second phase to further develop the proposed ideas to meet the particular program needs, the awarding of which shall take into consideration the scientific and technical merit and feasibility evidenced by the first phase and where two or more proposals are evaluated as being of approximately equal scientific and technical merit and feasibility, special consideration shall be given to those proposals that have demonstrated third phase, non- Federal capital commitments; (96 Stat. 218) This language was changed in 1992 to read: (B) a second phase, to further develop proposal which meet particular program needs, in which awards shall be made based on the scientific and technical merit and feasibility of the proposal as evidenced by the first phase considering, among other things, the proposalâs commercial potential, as evidenced by: (i) the small business concernâs record of successfully commercializing SBIR or other research; (ii) the existence of second phase funding commitments from private sector or non-SBIR funding sources; (iii) the existence of third phase, follow-on commitments for the subject of the research; and (iv) the presence of other indicators of the commercial potential of the idea. (106 Stat. 4251) These changes reflect a mandate from the Congress to change the selection processes by increasing the importance of private-sector commercial potential. Under the 1982 legislation, ties between projects deemed to be of equal scientific and technical merit could be broken in favor of projects that were more likely to be commercially successful. The likelihood of private- sector commercialization was clearly a secondary concern. This one aspect of the SBIR Program was very purposefully changed by the Congress with the 1992 legislation, which placed private-sector commercialization on an equal footing with scientific and technical merit. However, the DoD components do not implement this is exactly the same and equal way. marketing that further the development and/or commercialization of the technology.17 17 Drawn from the DoD SBIR Web site at <http://www.dodsbir.net/fasttrack/form.html#participate>. Accessed on April 3, 2009.
20 REVISITING THE DEPARTMENT OF DEFENSE SBIR FAST TRACK INITIATIVE This initiative drew on a 1992 scheme by the Ballistic Missile Defense Organization (BMDO) to reward applications whose technologies demonstrated commercial potential. This BMDO scheme called âco-investmentâ was effectively an informal âfast trackâ program. Under this approach, the evaluation process for Phase II proposals gave preference to applicants who could demonstrate that they would commit internal funding or that they had financial or in-kind commitments from third parties to bring the technology to market in Phase III. With that commitment, applicants received essentially continuous funding from Phase I to Phase II. In launching a broader Fast Track initiative, DoD sought to attract new firms and encourage commercialization of SBIR funded technologies throughout the Department. The principal ways in which Fast Track seeks to improve commercialization is through preferential evaluation and efforts to close the funding gap that can develop between Phase I and Phase II awards. The time lag between the conclusion of Phase I and the receipt of Phase II funds can create cash-flow problems for small firms. The Fast Track pilot sought to address the gap by providing expedited review and essentially continuous funding from Phase I to Phase II as long as applying firms can demonstrate that they have obtained third-party financing for their technology. In this context, third-party financing means that another company or government agency has agreed to invest in or purchase the SBIR firmâs technology; it can also mean that a venture capitalist has committed to invest in the firm or that other private capital is available. The expedited review process for the Phase II award is justified from the agencyâs perspective because outside funding validates the commercial promise of the technology. More broadly, the Fast Track program addresses the need to shorten government decision cycles in order to interact more effectively with small firms focused on rapidly evolving technologies. The Fast Track Implementation Cycle The first DoD solicitation for a calendar year closes in early January. Most SBIR solicitations are issued as a prerelease 45 days prior to release and released as a formal solicitation 30 days before closing. All proposals are due prior to closing. A firm may begin working on its proposal during prerelease, although there is a possibility a topic might change or be withdrawn at release. The life cycle for timely processing of an SBIR project from the FY 2001 solicitation is shown in Figure 1-2. The figure shows the prerelease and release timeframe for both the first and second solicitation of FY01. The evaluation award and execution displayed apply only to proposals resulting from
ASSESSING THE SBIR FT AND PIIE PROGRAMS AT THE DOD 21 FIGURE 1-2 The Fast Track cycle: SBIR award and execution FY 2001 cycle. Figure 1-2.eps SOURCE: Department of Defense. bitmap image the first solicitation. Firms prepare most Fast Track Phase II proposals while executing Phase I. Early submission of the Phase II proposal and prompt evaluation eliminates some of the gap that occurs in the standard SBIR program between the end of Phase I and the start of Phase II. Submission of a Fast Track proposal also results in four months of gap funding at the rate of the Phase I funding to allow efforts to continue while the Phase II proposal is being evaluated. Some Drawbacks of Fast Track As noted above, the purpose of the DoD Fast Track policy is to focus SBIR funds on those R&D projects most likely to result in viable new products that DoD and others will buy. From a firm perspective, the advantage of Fast Track is faster processing and, since third party financing is prima facie proof of commercialization potential, a higher probability of award. Fast Track does not provide additional SBIR funding or time for Phase II. The promise of Phase II under Fast Track helped attract third party funding, thereby increasing the total funding for the Phase II effort. However, Fast Track presents two significant drawbacks for firms. The first drawback is that it requires that firms obtain funding commitment prior to completing Phase I. This means that firms must seek such funding before or very early in Phase I; i.e., before technological feasibility has been demonstrated. The second drawback, which applies whenever the third-party
22 REVISITING THE DEPARTMENT OF DEFENSE SBIR FAST TRACK INITIATIVE BOX 1-2 A Userâs Perspective of Fast Track The third-party financing requirement of Fast Track was instrumental in obtaining an SBIR Phase II award, according to AvProâs President. In a case study interview, he noted that without Fast Trackâs third-party financing requirement, his company would likely not have been able to obtain the Phase II award because of (what he considered) a ânegative response of academic reviewers to technical challenges associated with manufacturing and process innovations.â In another case study, Picolightâs President praised Fast Track as being particularly helpful in helping him secure financing from third-party investors and leverage the SBIR award into a much larger investment amount. Thus, in the case of AvPro, Fast Trackâs major significance was in obtaining SBIR funding, whereas for Picolight, Fast Trackâs major significance was in obtaining the third-party financing. The case studies can be found in Appendix D of this volume. investor is not a federal program, is that many small innovative firms are reluctant to part with equity, often demanded by private sector investors. In the first year of Fast Track, 80 percent of the third party investors were from the private sector. In the most recent four years of the program, only one third of the third party investors were from the private sector. There are also drawbacks to Fast Track from the agency viewpoint. For SBIR program managers, the Fast Track program requires extra administrative effort. Recognizing the positive value of gap funding under Fast Track, however, program managers initiated procedures for additional funding after Phase I to firms that submitted a Phase II proposal, reducing the attraction of Fast Track.18 The Phase II Enhancement Phase II Enhancement (in the Army and OSDâPhase II Plus)19 programs was initiated in 1999 as three year pilot program.20 Each component 18 The Air Force issues a nine-month Phase I but accepts Phase II proposals after six months. Other components have procedures for three or four months of bridge funding after Phase I at the rate of Phase I funding. 19 Although both Army and OSD SBIR name their Phase II Enhancement programs Phase II Plus, DoD refers to the overall program as Phase II Enhancement in their solicitations, hence this report uses the term Phase II enhancement to include all DoD components that participate. 20 Although the Phase II Enhancement program was announced in 1999 in solicitation 99.2, the first few awards were made on Phase II that had been awarded their Phase II contracts in 1997. The first Phase II Enhancement that was let on a topic contained in Solicitation 99.2 was not awarded until
ASSESSING THE SBIR FT AND PIIE PROGRAMS AT THE DOD 23 set its own rules on the potential source of third party funding, the matching rate and the maximum size of the Phase II Enhancement award. The goal of Phase II Enhancement was to concentrate SBIR funds on those R&D projects most likely to result in viable new products that DoD and others will buyâi.e., achieve the purpose of Fast Track while overcoming its drawbacks. Based on the potential demonstrated during the first year of a Phase II, a firm may be invited to submit a Phase II Enhancement proposal. If selected for a Phase II Enhancement, the Phase II contract will be modified to add additional time and funding. In contrast to Fast Track, the Phase II Enhancement offers several advantages: The Phase II Enhancement: â¢ Does not require evaluation of the Phase II proposal outside of the DoD componentâs normal evaluation process. â¢ Employs criteria established by the component to meet the priorities of the component. â¢ Allows DoD components to opt out; i.e., some components do not have a Phase II Enhancement. â¢ Provides firms extensive time to locate a third party investor since proposals are not due until late in Phase II. â¢ Emphasizes use of acquisition program offices as the third party investor â¢ Provides additional time (normally one additional year) and additional SBIR funding to the firm. â¢ Leverages acquisition program funding; i.e., an acquisition program has its R&D investment in Phase II Enhancement matched by SBIR funding, thereby achieving more with its programmed funding. ASSESSING THE FAST TRACK INITIATIVE The Initial NRC Assessment of Fast Track At the conclusion of the initial pilot period for Fast Track in 1998, the Under Secretary of Defense for Acquisition and Technology (USD (A&T)) extended the Fast Track pilot for two additional years, and directed an independent analysis of Fast Track. The Under Secretaryâs request focused on three issues: 1. Whether Fast Track projects are achieving, or appear likely to achieve, greater success in SBIR than comparable non-Fast Track projects; 2002. In general, a Phase II Enhancement awarded this year is a modification to the Phase II contract that was let two years ago.
24 REVISITING THE DEPARTMENT OF DEFENSE SBIR FAST TRACK INITIATIVE BOX 1-3 SBIR Fast Track and the Phase II Enhancement Programs at DoDa The Fast Track Program Initiated in 1995, DoDâs Fast Track program seeks to improve commercialization by reducing significant gaps in funding between Phases I and II for SBIR projects. The time lag between the conclusion of Phase I and the receipt of Phase II can create cash flow problems for small firms. Fast Track addresses this gap by providing expedited review and essentially continuous funding from Phase I to Phase II as long as applying firms can demonstrate that they have attracted outside investors who will match Phase II funding, contingent on the project's selection for Phase II award. Projects that qualify for the Fast Track receive interim funding of $30,000 to $50,000 between Phases I and II. The Phase II Enhancement Since 2000, DoD Components have developed policies to further encourage the transition of SBIR research into DoD acquisition programs and/or the private sector. Under this policy, DoD Components provide an eligible firm with additional Phase II SBIR funding (up to $500,000) to match investment funds that the firm is able to obtain from non-SBIR sources (such as DoD acquisition programs or the private sector). Among the DoD Components, the Navy and Army focus on funding additional research and development, and the Air Force focuses on overcoming unforeseen technological barriers. All three services and the Missile Defense Agency direct their enhancement programs to transition into acquisition programs. While the Phase II Enhancement has the same objectives as Fast Track, it tries to overcome some of Fast Trackâs apparent limitations by: â¢ Lowering Administrative Overhead. It does not require evaluation of the Phase II proposal outside of the componentâs normal evaluation process. â¢ Providing More Time. Phase II Enhancement gives firms more time to locate a third party investors by extending an existing Phase II contract for up to one year. â¢ Focusing on Acquisition. Phase II Enhancement also seeks to leverage acquisition program funding to increase the level of funding available. a Drawn from the DoD SBIR Web site <http://www.acq.osd.mil/osbp/sbir/overview/index.htm>. Accessed on December 17, 2008. b This additional Phase II SBIR funding varies with each DoD component. In addition, not every component participates.
ASSESSING THE SBIR FT AND PIIE PROGRAMS AT THE DOD 25 2. Whether Fast Track projects progress at different rates than non-Fast Track projects; 3. What companies perceive as advantages and disadvantages of Fast Track participation. At the time, the National Academiesâ Committee for Government-Industry Partnerships for the Development of New Technologiesâunder the leadership of its chairman, Gordon Mooreâwas completing a review of the SBIR program, its operation, and current challenges.21 At the request of the DoD, the Moore Committee undertook a review of the operation of the SBIR program at Defense, and in particular the role played by the Fast Track Initiative.22 Given the virtual absence of academic research on the SBIR program, the Moore Committee decided to commission field research on the program with a special emphasis on the Fast Track initiative. To this end, the NRC assembled a research team to examine the SBIR program awards and the Fast Track initiative through survey research, case studies, and empirical analysis. The survey questionnaire used in this review was derived from the one used the 1992 GAO study.23 The short time frame from the solicitation for Fast Track to the completion of the survey had the expected result that most Fast Track projects had not yet completed Phase II. Implementation of the Fast Track program began with the 1996 DoD solicitations. Since Phase I and Phase II normally last 6 and 24 months respectively, and since the DoD goal for proposal evaluation and award of those two phases is 4 and 6 months respectively, completion of Phase II of an SBIR project can be expected to take at least 40 months from the closing date of the solicitation. Thus the earliest FY 2001 projects could be expected to have completed Phase II 40 months after the January 2001 closing of the first solicitation (i.e., Phase II ending in May 2004). As a result, the 2000 NRC study of Fast Track determined that only 16 percent of the 1996 Fast Track projects (most of which were awarded Phase II in 1997) had completed Phase II by the spring of 1999.24 Nonetheless, the NRCâs 2000 study of Fast Track suggested that this initiative was meeting its goals of encouraging commercialization and attracting new firms to the program. Consequently, the Moore Committee recommended that Fast Track be continued and expanded where appropriate. The Moore Committee did not recommend that Fast Track be applied to the entire SBIR 21 National Research Council, SBIR: Challenges and Opportunities, Charles W. Wessner, ed., Washington, DC: National Academy Press, 1999. 22 The resulting report, published in 2000, was at the time the largest and most thorough review of an SBIR program. National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, op. cit. 23 U.S. General Accounting Office, Small Business Innovation Research Shows Success But Can Be Strengthened, op. cit. 24 National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, op. cit., p. 59.
26 REVISITING THE DEPARTMENT OF DEFENSE SBIR FAST TRACK INITIATIVE program at DoD. To do so, they argued, might put at risk other goals, such as research and concept development. Following the NRC recommendations, the Under Secretary of Defense A&T made Fast Track a permanent part of DoD in 2001. The 2000 study of Fast Track at DoD also drew attention to the importance of additional research to validate these results over time, noting that âcontinued research on the impact of the Fast Track Program is required.â25 The Current Fast Track Update This 2008 update of Fast Track coincides with the NRCâs comprehensive study of SBIR, as mandated under Section 108 of the 2000 SBIR reauthorization legislation. As a part of this comprehensive assessment, NRC is examining the SBIR programs at the Department of Defense, the National Institutes of Health, the National Aeronautics and Space Administration, the Department of Energy, and the National Science Foundation, which are the five largest SBIR programs. This comprehensive assessment, published in 2008, focuses on the quality of the research projects being conducted under the SBIR program, the commercialization of that research, and the SBIR contribution to accomplishing agency missions.26 Although much broader based than the 1999 review, the 2008 NRC study, âCapitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program,â employs similar case study and empirical analysis as well as survey questionnaires that are based on those used by the NRC in its 2000 report. Capitalizing on this ongoing assessment, DoD in 2006 requested the NRC to conduct a follow up assessment of its SBIR Phase II Enhancement programs. This report, thus, includes a survey that draws on and refines the methodology developed in a 1999 study of Fast Track to capture a second snapshot of the contributions of the program. Areas for Future Research While this study addresses the Committeeâs Statement of Task, some of the NRC reviewers identified additional areas of analysis and inquiry that are potentially fruitful, but were beyond the scope of this study. These topics, some of which may be explored in subsequent analyses by the National Research Council, include: 25 Ibid, p. 38. 26 The National Research Council has published an assessment of the SBIR program at each of the five major agencies. See for example, National Research Council, An Assessment of SBIR at the Department of Defense, op. cit. The NRC has also published an overview report of the program. See National Research Council, An Assessment of the SBIR Program, op. cit.
ASSESSING THE SBIR FT AND PIIE PROGRAMS AT THE DOD 27 â¢ Analysis of whether the funding gap between Phase I and Phase II has changed over the years. â¢ Analysis of SBIR commercialization. o Analysis of how DoD acquisition programs support SBIR Phase III efforts, including interviews of DoD managers for their perspectives on Fast Track and Phase II Enhancement. o Comparison of commercialization rates of Fast Track and Phase II Enhancement projects to the overall DoD SBIR commercialization rate. o Micro-level analysis of the implementation and outcomes of Fast Track and Phase II Enhancement programs at different DoD components. â¢ Statistical Analysis. o Statistical analysis of the survey response data. o Multivariate analysis of whether firms that received high levels of SBIR funding before their IPO showed higher sales or employment growth. o Correlation of firms winning multiple Phase I awards and their participation in Fast Track.