SBIR at the National Science Foundation (2015)

6

Insights from Case Studies and Extended Survey Responses

Case study and open-ended survey questions offer a way to better understand the numerous ways in which the Small Business Innovation Research (SBIR) program impacts small innovative companies. This chapter addresses a range of impacts and issues that were described by executives interviewed for 12 case studies, which are presented in detail in Appendix E. It supplements the case study perspectives with responses to open-ended questions by all respondents in the 2011 Survey.¹ It is important to note that the viewpoints are those of the respondents, and not necessarily the views of the committee.²

Together, the case studies and the response to the open-ended survey questions support a qualitative review that provides considerable context for the data discussed in other chapters and allows company participants to address in their own words those aspects of the SBIR that they believe are working as needed and those that require attention.

ABOUT THE CASE STUDIES

Case studies are an important part of data collected for this report, and need to be read in conjunction with other sources—agency data, the Academies survey, interviews with agency staff and other experts, and workshops on selected topics.

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¹The survey data reported in this chapter are from the 2011 Survey. The 2011 Survey covered NSF Phase I and Phase II SBIR recipients with awards FY1998 to FY2007. The survey included an open comment box where respondents could describe their company’s experience with SBIR. Appendix A describes the survey instrument, including the safeguards observed to protect the respondents.

²In some cases, these responses may reflect some misunderstandings on the part of executives about the operations of NSF SBIR program.

Given that the impact of SBIR funding is complex and often multifaceted, and given that these other data sources provide important insights, case studies allow for an understanding of the narrative and history of recipient firms; in essence, case studies provide context for the data collected elsewhere.

The case studies were selected based on multiple criteria, including number of awards overall, geographic location, firm demographics, industry sector, reported commercialization, and age of firm. Given the multiple variables at play, they are not presented as a quantitative record. Rather they provide qualitative evidence about the individual companies selected, which are, within the limited resources available, as representative as possible of the different component of the awardee population. Box 6-1 lists the 12 NSF case studies from which insights about the range of SBIR impacts are formed. These case studies are presented in full in Appendix E.

ORGANIZATION

The chapter is organized around a series of impacts by topic and a series of issues by topic. Material from the case studies and the survey comments are interwoven throughout the chapter to amplify both the impacts and the issues. Table 6-1 summarizes the principal impact and Issue topics covered qualitatively in this chapter. Within these topic areas are many subtopics. Together, these topical sections on impacts and issues provide the first wide-ranging and publicly available feedback of the NSF SBIR program directly from program recipients.

Together, these sections provide the first wide-ranging and publicly available feedback of the NSF SBIR program from program recipients.

TABLE 6-1 Summary of Impact and Issue Topics Addressed

COMPANY FORMATION AND VERY EARLY-STAGE FUNDING

It is often easy to forget that the entire SBIR program provides considerably more funding for very early stage projects than does the entire U.S. venture capital (VC) industry: in 2012, VCs provided $820 million for seed and startup projects compared with the program’s overall spending of $2.4 billion.³ This point is not well known; many are unaware that VC funding goes largely to later stage, less risky projects.

Evidence from case-study interviews and survey responses confirmed that, for many companies, the SBIR program provided the all-important seed funding that allowed the company to get started. During his case-study interview, Dr. Moslehi, President of IFOS, observed, “In its early years, IFOS was a classic Silicon Valley startup—working out of a garage. It did not really gain traction until 2000-2001 when initial Phase II SBIR awards with NASA and NSF allowed me to commit myself full time and for the company to lease its own 4,000-square-foot facility in Sunnyvale, California. SBIR funding was key to equipping the facility and hiring a dedicated founding staff.”

Similarly, Mr. Landau, founder of TG, noted during his case-study interview that because the market for assistive devices is too small to interest purely commercial funders, the SBIR program was critical for TG’s formation: “SBIR provided initial funding for company formation. The niche market for these assistive devices is not suitable for venture financing given the very small initial size of the market.” During her interview, CEO Carol Politi described the role an NSF SBIR award played in the spin out of TRX from TSI. She explained that the spin out was possible in part because TRX was able to acquire an NSF SBIR award.

Box 6-2 provides verbatim survey responses that pertain to company formation and related seed funding.

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³PriceWaterHouseCoopers MoneyTree Survey, accessed January 28, 2014, <https://www.pwcmoneytree.com/MTPublic/ns/nav.jsp?page=historical>.

FUNDING OTHERWISE UNFUNDABLE PROJECTS

Commercial funding from investors or lenders is often unavailable to small or newer companies with limited track records that are working to develop products that do not yet exist and hence have no demonstrated existing market. These funding difficulties come in several flavors.

Long Timeline Research

Many survey respondents explained that their research required the investment of considerable time and resources before it would become possible to reach the market. The ongoing support for longer term projects was viewed by many as a particularly important characteristic of NSF SBIR awards. An example of a typically longer term project with the need for sustained funding is a “platform technology,” that is, a core technology that could potentially be applied to many different applications if successful. An example was provided by the ALDN case study. Dr. Bueschler (ALDN) noted that the battery technology being developed by her company could have many applications far beyond the initial opportunities being exploited in the auto industry, which itself has a relatively long horizon.

Box 6-3 provides verbatim survey responses pertaining to funding needs of research with long timelines.

Limited Market Size

For many investors, unfavorable risk/return calculations can be especially problematic when rewards are relatively small, that is, when the market served is not large. Although this issue is especially apparent for companies funded by SBIR programs at other agencies, such as NASA, which often procures a single

item for use in a space flight, it is also true for companies that serve small or specialized market segments.

The case study revealed TG to be such a company. It focuses on developing assistive technology for the blind to support navigation through public places such as museums and schools. Its founder observed, “The company would never have developed any commercial products without the SBIR funding. There is no money in the assistive technologies field for new technologies.” In a similar way, case study showed that LIM provides specialized technology with a limited market to the education sector.

Risk

Risk is a key ingredient in private-sector funding algorithms: the greater the risk, the less likely funders are to invest, other factors being the same. And developing new high-tech products is an inherently risky business: the greater the technical challenges, the greater is the technical risk; and the more disruptive the product and the less developed the existing market, the greater the market risk.

Box 6-4 provides verbatim survey responses that help explain how NSF SBIR awards reduce risk.

The SBIR program has the effect of reducing the risk of projects to levels that are acceptable to other investors. Most directly, the SBIR program does move projects further along the technological development curve. In other situations, the SBIR funding allows companies to address projects that would simply be too

risky to even contemplate. SBIR funding allows companies to move past the go/no go discontinuity by relieving some of the risk involved.

This impact is illustrated by the case study of Divergence, for which the role of SBIR funding has shifted over time. As Mr. Rapp (CEO) observed, “It is now used more for projects that are more speculative and have less data to support them, where VC funding would not be appropriate. This allows a project to mature and prove the design to both company management and reviewers to the point that it could reach product development.”

Another example of risk-reducing impact is provided by the case-study illustration of TRX—the recipient of an NSF Phase IIB award. According to Ms. Politi of TRX, NSF support was central in helping the company raise its first angel funding: the ability to point to a federal contribution that leverages the money of investors was “a huge benefit in raising outside money.” More generally, as Phase IIB requires matching funds, Ms. Politi observed that “matching programs give you a reason to reach out to people.”

TECHNOLOGY AND PRODUCT DEVELOPMENT

Many small companies have limited internal resources for research and development. Often, the SBIR program provides the funding needed to take an idea for an innovative product to the point at which it may enter the market or attract additional funding needed to do so.

Funding Core Technology Development

Box 6-5 gives verbatim survey responses explaining how SBIR awards help fund the development of core technology.

Case studies illustrate how the SBIR program plays a decisive role in the technology development efforts of many small recipient companies, which often lack the cash flow necessary to fund such technology development internally and have very limited access to outside financial resources. A case study of TSI, for example, revealed how a number of SBIR awards from both NSF and other agencies were used to develop the technologies that underpin the company’s two core products, SARSAT search and rescue and Trident ship-based monitoring. These technologies have been commercially successful, and this success, according to Dr. Blankenship (CEO), reflects the development of technologies using SBIR funding.

In other case studies, Ms. Wedding of IST notes that “IST could not do the necessary research to develop its innovative products.” At Touch Graphics, Mr. Landau observed that “the five or six Phase II awards made it possible to develop most of the TG products now on sale. These came directly from SBIR, although not always by the most direct route.” At WTRI, Dr. DiBello said that the SBIR program had been central to the development of WTRI technology and had been used to fund development of each of the WTRI products. SBIR funding helped the company develop an assessment tool that clients could complete on their own—reducing costs and improving quality. Very large scale assessments are now routine at WTRI as a result.

Expansion into New Markets

There is a blurred line between core products and new applications, which often involve core technologies being applied in new ways. Still it seems worth noting that a number of interviewees and many survey respondents indicated that the SBIR program was being used to expand a company’s products and offerings beyond its first product and its core product.

In a case study of Mendel Biotechnology, Dr. Gutterson expressed his view that “SBIR is all about leveraging to build off the core Mendel platform into new areas.”

At TSI, Dr. Blankenship noted that the early SBIR awards that funded the core technology are now being supplemented by subsequent awards focused on developing new products altogether. For example, the SBIR program is now helping to fund TSI’s push into new technologies and new markets such as air-driven technology for aircraft flaps.

At Divergence, Mr. Rapp said that the role of SBIR funding had shifted. Its use has become for more speculative projects with less data to support them, for which VC funding would not be appropriate.

Survey comments also provided examples of using SBIR awards to expand into new markets. One survey respondent emphasized just how important this SBIR role has been to his company: “Over the 30 years the company has been in business the SBIR program has helped on more than one occasion to rejuvenate the company by bringing new technologies that have been the key to our long term sustainability. The sales we have achieved in the past 30 years with the help of SBIR have been in the billions, and this would not have been achieved without SBIR.”

Another survey respondent indicated that the SBIR program had funded what had become a major step forward in battery technology: “Company was acquired on basis of SBIR-funded battery technology. . . . Our SBIR-funded cathode material is in high volume production and used in commercial cells.”

Spinoffs and Acquisitions

As noted below, SBIR-funded innovations often follow a nonlinear path to the marketplace. In some cases, companies find that their innovations—especially those outside the core technology of the company—are best addressed through a spin-off.

TRX Systems is a spin-off from TSI. Its first CEO—Dr. Carol Teolis—was hired by TSI as a new PhD from the University of Maryland, and then she managed SBIR projects before entering senior TSI management. Her experience at TSI, which included complete management responsibility for a research project for the U.S. Mint, allowed her to develop an understanding of the NSF SBIR program. She successfully applied for SBIR awards for the new company, which currently has 14 employees. Dr. Blankenship believes that three TSI employees

have the potential to follow Dr. Teolis’ example and manage spin-offs if the opportunity to do so emerges.

Box 6-6 highlights verbatim survey responses which indicate that spin-offs and other similar ventures have emerged out of SBIR-funded companies.

VALIDATION EFFECTS

A case study of the SBIR-award recipient, Divergence, revealed the importance of validation effects. According to Mr. Rapp and Dr. McCarter of Divergence, the SBIR program had a huge impact on Divergence. It was particularly helpful as the company prepared to offer a B round to venture investors in 2002; SBIR awards were seen by venture investors as important factors in validating the company’s research capability. Divergence executives also observed that SBIR awards provided a significant influx of non-dilutive funds (i.e., money an entrepreneur receives that does not affect the ownership of the company), which added to the company’s attractiveness to professional investors. Mr. Rapp observed that it made life much easier when talking to investors if he could show that more than 50 percent of income and investment flows came from non-dilutive sources. Investors often find a company more attractive when they find the entrepreneur has tapped into non-dilutive sources, such as SBIR awards.

The previous case study of TRX also indicated important validation effects from receiving SBIR awards from NSF and the Department of Defense (DoD). The validation effects were said to make it easier for the company to raise additional outside capital.

Box 6-7 provides verbatim examples from survey responses of NSF SBIR awards providing validation of research efforts and technologies.

CAPACITY BUILDING—HUMAN CAPITAL

It is obvious that SBIR funding can be used in part to provide small companies with necessary equipment, but interviews and survey responses revealed that the human capital effects can be more important.

Most directly, the SBIR program allows companies to hire staff—typically approximately 2-4 full-time staff at the PhD level for a Phase II project. But SBIR has other capacity building effects as well. Box 6-8 presents verbatim survey responses to show how NSF SBIR awards contribute to capacity building.

A case study of TSI provided an account of Dr. Blankenship observation that the SBIR program has played a critical role on the human resources side. SBIR awards provided an almost perfect training ground for project managers. TSI typically hires PhD researchers soon after graduation, at which point they are technically trained but have little understanding of how to manage projects, handle clients, or work to fixed schedules. SBIR projects at TSI are treated as standalone projects and are often handed off to staff not yet ready for a major commercial project. Dr. Blankenship strongly believes that, in the course of managing one or two SBIR awards, these staff members acquire critical management skills, which can then be applied to the management of commercial projects and eventually entire product lines.

A case study of Divergence also found SBIR awards to be helpful to building its research team. Mr. Rapp noted that they were powerfully helpful in the recruitment of high-level scientists, because they not only provided funding for projects but also generated excitement within the company. Eight different principal investigators (PIs) have been in charge of projects at Divergence.

CRITICAL FUNDING

Many of the companies interviewed indicated that the SBIR program provided funding at critical junctures—for example, the case study of TSI reported that TSI management observed that “initially, SBIR awards had provided funding for investigator-initiated research and an important funding stream which allowed for the survival of the company during its early years focused on contract research.” Similarly, Ms. Cappo of LIM said that the company likely would not be in existence without this funding, even though SBIR awards did not directly support company foundation.

The wide range of ways in which the SBIR program provided critical funding is, however, best captured in the words of survey respondents, because this was the single impact that generated the most textual responses. See Box 6-9 for verbatim survey responses on how NSF SBIR awards constituted critical funding.

Encouraging More Internal Investment

Among the more interesting impacts mentioned by survey respondents was that SBIR awards encouraged more internal investment. One small company established a “skunk works” in a new building purchased in an industrial park in 2010. At the time of the interview, the company estimated that its investment in the skunk works had exceeded the SBIR award tenfold.

Nonlinear Development and New Markets

A considerable number of survey responses illustrated the importance of what can be termed a “nonlinear” path for product development. In many cases, companies struggled to find the right fit between their technical ideas and market needs; often the solution required re-engineering their products, adapting existing approaches, or even starting again after discovering a core technical expectation was simply wrong. Box 6-10 provides verbatim survey responses from NSF SBIR award recipients who found that the awards helped them traverse a complex path of innovation.

Case studies showed that the experiences of both Divergence and TSI illustrate this nonlinear path. At Divergence, initial work partly funded by NSF SBIR awards focused on soybeans, in partnership with Monsanto. Knowledge drawn from the project has since been applied more generally to root crop nematodes. Similarly, NSF has funded work that applies Divergence technologies to corn and sugar cane.

At TSI, the SBIR award is viewed in part as a means to acquire technical skills and know-how that are not necessarily directly commercial but can have significant uses downstream on other projects. For example, TSI won an SBIR award to build high-performance gun turrets. As part of the project, TSI built a prototype that required a high-performance gimbal. Commercially available gimbals were not suitable, so TSI learned to build its own. Although the gun turret project was not picked up for acquisition by DoD, the new gimbal know-how was later applied to coastal radar systems. Similarly, TSI learned how to build high-performance cameras, which are sold as part of its integrated systems.

AGENCY MISSION

Although it does not use the SBIR program in the same way that DoD and NASA use it to procure technology, NSF also has specific missions, such as supporting science, engineering and mathematics education and adding to the science and engineering knowledge base. The following comments by survey respondents illustrate some of the agency mission-related activities supported by the SBIR program, with an emphasis on social benefits:

• Education. “We have been able to develop a next-generation technology that is highly innovative and that offers considerable value to districts, educators, and learners in mathematics and science. We have been able to offer services related to the technology at a reduction by two thirds of the costs that districts pay otherwise.”
• Public health. “Enabled us to take software built for one client and generalize it. Resulted in important long-term benefits to health care, in cancer and public health/vaccination administration.”
• Public goods. “There are significant measurement needs to address air pollution and climate change, and the SBIR program is largely the key NSF mechanism to fund such activities. The market isn’t large—indeed it is tiny—so venture capital is unrealistic. . . . There is no way this project would have been undertaken without SBIR funding—no other viable mechanisms really exist.”
• Serving disabled populations. “It appears to be one of the few ways to fund R&D for products for people with disabilities—high societal benefit, potential to provide revenues to keep our company profitable, but not hav-

• ing the huge profit margins that attract typical private investors. . . . There would have been no support to develop this technology, which we expect will be of significant use to people with visual disabilities.”

• Linking academia and business. “The company employed several students who might have gone out of state without the funding. Also, the founders received experience that convinced them of the value of entrepreneurial endeavors, which has informed their teaching since.”
• Open source technologies. “We are an open source company providing services. The creation of technology via SBIRs builds a foundation of software technology which we service. We eschew product and licensing and focus on the larger part of the software business which is services. We are also able to make huge contributions to the research community and innovation in general because we release our technology with open source licenses. This spawns a multitude of derivative businesses, many of which are other companies.”

Universities and the SBIR Program

Although the Small Business Technology Transfer (STTR) program is specifically aimed at increasing connections between universities and small companies, the SBIR program can have similar effects. An example is provided by the case study of IFOS, whose staff worked with practitioners and surgeons at Stanford University medical school, in cardiology, radiology, and oncology. Through its Stanford connections, the company moved on to partner with several local medical devices companies, which will manage U.S. Food and Drug Administration (FDA) market testing and industry-specific marketing.

A connection may also be increased in some cases between NSF SBIR award recipients and non-university types of research institutes. The Divergence case study revealed that Divergence “has had a close relationship with the Donald Danforth Plant Science Center since 2001. Divergence’s laboratories are located next to the Danforth Center, and Divergence collaborates with multiple Danforth investigators, utilizes core laboratories in analytical chemistry and microscopy, and has received joint research grants with the Center.”

Survey comments, listed in Box 6-11, suggest that such connections can benefit both sides. For universities, the SBIR program offers a pathway into the commercial world that is otherwise difficult to find, given the very early stage of most university-developed technologies. In addition, companies find that access to university facilities and researchers can provide specialized inputs that are otherwise difficult to find, attract, and fund.

PROGRAM OPERATIONS

Program Directors

One the most distinctive features of the NSF SBIR program is the close connection between program directors and awardees. In the Divergence case study, Dr. McCarter said that “some program officers have been very flexible—indeed, NSF has been especially so over the years, and has been very strong on personal contact between funding officers and PIs.” Divergence executives stressed how important it was for the funding officer to maintain close relations with the PI and company management so that he or she could fully understand the project and therefore provide active support as needed.

Similarly, ALDN reported working with NSF to be very easy, with close connections to program managers and limited auditing requirements. At LIM, Ms. Cappo viewed NSF grant administration as highly professional. She said that the NSF program manager provided pre-application advice and early feedback on applications and that the NSF team was highly supportive and focused on ensuring the project’s success. Dr. DiBello at WTRI said that the initial NSF SBIR award in 2000 was successful in part because the NSF program officer was familiar with the relevant academic work. At TG, Mr. Landau observed that an important partnership with Exceptional Teaching (ET) in California was in fact

engineered by the NSF program director, whose hands-on approach generated additional business for the company and led to a successful connection in which neither party was initially interested.

Box 6-12 provides verbatim survey responses on the topic of NSF Program Directors. These comments support the view that the NSF model of professional program management appears to have strong support among recipient companies.

At the same time, not all reported experiences with NSF Program Managers were positive. One interviewee explained that some interactions were positive, but overall the company’s experience with NSF program directors varied. Some program directors, such as its first, were very helpful, believing their mission to be aiding the company. Others were significantly less helpful and displayed little understanding of how small companies worked with their customers. The reported negative experience was in some cases a problem, especially in relation to the oral defense part of the application process for Phase IIB.

Business Training and Commercialization Support

Case-study interviewees rarely made comments about training, but a few did. Dr. Bueschler (ALDN) expressed appreciation for the NSF training. Dr. Gutterson (Mendel) said that Mendel found Foresight’s support to be useful. Ms. Politi (TRX) observed that through NSF, TRX received commercialization support from LARTA, whose process was especially helpful in relation to a new collaborative mapping initiative.

Mr. Rapp (Divergence) participated in training programs at both Dawnbreaker and LARTA and rated both as useful in helping inexperienced scientists and engineers understand and prepare for the business world. However, in his view, the strong encouragement to participate taxed the company’s executive resources. At the time of the interview, Divergence was looking at world markets for corn seed

treatment. Generic business plans were of no use—in fact, the company hired an industry insider with more than 30 years of experience as a consultant. Mr. Rapp noted that his management team had more than 120 years of business experience, and hence the pressure to participate in “training” was not helpful.

Two survey respondents indicated that the prohibition on using SBIR funding for marketing remained a significant barrier. One noted that, because marketing expenses are not allowed in government overhead calculations, a company whose main business is reliant on government funding will eventually find that it does not have the financial resources to conduct commercial marketing or advertising.

ISSUES IN PROGRAM MANAGEMENT

Over Focus on Commercialization and the Venture Capital Model

There is an undeniable tension between the program’s Congressional dual mandates to support the commercialization of federally funded programs and to stimulate technological innovation. If innovation concerns turning ideas into products for a market, commercialization concerns realizing that market opportunity. All SBIR programs try to balance both these legislative objectives.

At NSF, the SBIR program is heavily focused on the commercialization of funded technologies. As Dr. Kesh Narayanan, a former director of NSF’s Industrial Innovation and Partnerships Program has noted, “the “I” in SBIR is all about Innovation: There are several other innovation research models at NSF; however, SBIR is the only one dedicated to ‘for profit’ small businesses. The majority of NSF investment for advancing fundamental research is via investments in academia.”⁴

Yet as the discussion of commercialization and metrics has shown (Chapter 4), commercialization is not a simple concept. It requires an extended view, because many technologies bear fruit only after many years of effort. It also requires a nuanced view, because commercialization for small businesses is often highly nonlinear.

Among the numerous concerns raised by interviewees, those about NSF’s approach to commercialization were raised most often and most strenuously. Some case-study interviewees and survey respondents expressed concern that NSF has adopted an overly narrow view of commercialization and one that fails to adapt to the nuances of commercialization in the small business world. As a result, these interviewees and respondents say, NSF is viewing projects through a narrow lens based on commercialization models from the venture capital (VC) world—a world that several interviewees are determined to avoid if at all possible.

Box 6-13 gives verbatim survey responses pertaining to NSF’s SBIR commercialization focus.

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⁴Correspondence, May 26, 2015.

In the case study of IFOS, Dr. Moslehi of IFOS noted that some NSF program directors do not entirely appreciate the challenges involved in developing highly innovative technologies for emerging markets. Unlike other agencies, which have an end use in mind related to their own needs and are therefore happy with a working system for their use, NSF struggles to demonstrate a wider impact and consequently expects broader commercial success. Dr. Moslehi explained that this is often unrealistic, considering that venture-backed companies are often funded with tens of millions of dollars to succeed commercially. A $1 million program cannot expect the same results.

Similarly, Dr. Wijmans (MTR) said that he thought NSF is too focused on the VC funding model. He recommended the DoE model as being more realistic—anticipating the need for a demonstration phase after Phase II, which is often funded directly by DoE.

Dr. DiBello of WTRI thought that NSF’s SBIR program has changed over the years. When WTRI received its initial awards around 2000, the program was focused on very innovative ideas with potential for significant commercial success. Dr. DiBello described a shift in the program focus toward expecting a project to be innovative as well as far along the commercialization path, even before the start of the first Phase I award. It is not much of an exaggeration, according to Dr. DiBello, to suggest that NSF is seeking projects that are more or less ready for Phase IIB at the time of Phase I. NSF now wants a much more completed idea for Phase I than is reasonable.

Dr. DiBello, of also noted that the NSF focus on encouraging firms to acquire VC funding is itself possibly misplaced. WTRI’s experience in fixing broken companies indicates that many of them received VC funding too early, at too high a price.

This new focus seems to influence selection in a number of ways. For example, Dr. McCarter (Divergence) claimed that some applications were dismissed simply because they involved the biotech sector, where regulatory timelines impose significant delays, which pushed the projects out of the timeframe for commercialization that was acceptable to NSF. The rejection of these applications led to indefinite delays on projects that the company believes have a potentially powerful range of applications.

While maintaining a balance between commercialization and innovation is challenging, there is also quantitative evidence to suggest that NSF is now focusing on projects that can reach the market quite quickly; internal statistics suggest that more than 70 percent of all projects have reached the market but also that projects with substantial commercial scale remain scarce.

It seems reasonable to suggest that NSF review its objectives and metrics in this area.

Application and Selection Procedures

Many interviewees complimented NSF selection procedures. Most interviewees had no significant complaints, and IST was particularly positive about the feedback received on its applications. Ms. Wedding said that NSF utilized a substantial number of reviewers even for Phase I applications and provided both a summary review and individual reviewer comments.

However, several companies indicated that selection and review continued to generate possibly unnecessary concern. It is always difficult to produce a completely accurate and objective review, and as noted above NSF was commended by some companies for utilizing outside reviewers. However, on the basis of interviewee comments, there appears to be an appetite among the recipient base for mechanisms to address what they consider as inappropriate or inexplicable rejections. Two such suggested mechanisms are resubmission and rebuttal.

Companies such as Divergence and IST see substantial value in allowing applicants to improve their applications in response to review and resubmit them. These companies pointed out that the National Institutes of Health (NIH) allows resubmissions, and noted that such an approach could work at NSF and other agencies. IST also noted that this mechanism could be especially helpful when proposals are rejected for administrative reasons.

Several companies expressed a wish for mechanisms that would allow companies to rebut misinformed comments in reviews. Mr. Rapp (Divergence) said that one recent NSF reviewer completely misunderstood and therefore torpedoed a Divergence proposal. Reviewer comments included five misstatements and one

or two complete misunderstandings. In contrast, Mr. Rapp observed that the U.S. Department of Agriculture (USDA) already uses a system whereby the program officer emails Divergence a list of up to 10 questions arising from review. This gives the company an opportunity to make its case in more detail and to eliminate misunderstandings.

Similarly, IST strongly supported the idea of providing companies with the opportunity to respond to reviewer comments within the framework of the selection process. Ms. Wedding observed that the former Advanced Technology Program (ATP) application process provided that opportunity, by providing companies with a preliminary review and follow-up questions.

Interviewees made other comments and suggestions:

• Splitting commercial and scientific review. In its case study, Divergence saw the need for this separation on a recent NIH application, for which review comments were ill-informed about commercial opportunities. USDA is implementing a split review structure.
• Electronic submission through FastLane. Interviewees were not enthusiastic about FastLane. One survey respondent noted, “The FastLane process is not well designed for SBIR. Formatting can be very time-consuming, and as FastLane is used for all NSF applications, there are additional sections that are not relevant to SBIR applications. At a minimum, FastLane should identify application elements that are mandatory/ not permitted for SBIR.”
• Better focus on proposed budgets. Budgets are often an afterthought, and Mr. Landau (TG) observed that reviewers rarely pay attention to budgets (NSF and other agencies for which he has reviewed proposals).

Funding Gaps

Data regarding funding gaps are considered in more detail in Chapter 4. The survey data and case studies indicate that funding gaps between Phase I and Phase II remain an issue for many companies. Ms. Cappo of LIM explained that the company experienced a significant gap (about 1 year) between Phase I and Phase II, which presented a substantial problem for the company, even though it was able to fund project staff through other work. Ms. Cappo stated that these gaps and lags should be addressed, given the importance of stable funding for small companies.

Dr. Blankenship at TSI confirmed that the gap between Phase I and Phase II is a serious problem for many smaller companies, although TSI had reached a stage of maturity and scale where it could easily manage the gap with other revenue streams.

Funding Levels

Several interviewees commented on the funding levels for awards (interviews were conducted prior to the recent changes through the reauthorization legislation).

Dr. Bueschler (ALDN) said that the one-size-fits-all funding model is not efficient. For Phase I, $100,000-$150,000 is usually more than enough to achieve proof of concept. However, in some cases, this amount could be an order of magnitude too small—for example, at ALDN some projects would have required $80,000-$100,000 in external testing, so they could not be funded through SBIR Phase I and were dropped. However, for other projects the funding provided was twice the amount needed (e.g., for some software projects). More flexibility rather than more money was needed, in her view.

Mr. Landau at TG also advocated for more flexibility in funding and in timelines. Increased flexibility in these areas would permit TG to return to NSF for further SBIR funding.

At IST, Ms. Wedding did not believe it good policy to focus on more funding for a smaller number of awards. She said that $150,000 is reasonable for Phase I, and $500,000 is reasonable for Phase II. She observed that it was probably better to give smaller awards to more projects. Larger awards would lead to additional focus on hot topics.

Other Issues

Interviewees raised several additional issues in relation to the NSF SBIR program. Some of these are noted below:

• Venture funding participation. Dr. Moslehi (IFOS) stated that small businesses that have successfully obtained traditional VC funding should not be allowed to participate in the SBIR/STTR programs. He felt that federal funds should not be used to protect the interests of financial players. He also noted that the commercialization prospects of a well-funded company should not be compared to one that is bootstrapped (growing organically) and that it is a need of SBIR funding to reduce technology risks.
• Partnerships. Dr. Moslehi (IFOS) also stated that NSF should focus additional attention on industry-university partnerships organized around long-term, high-risk, high-reward projects with the potential for substantial commercialization.
• Multiple annual application deadlines. Dr. Gutterson (Mendel) strongly endorsed the need for multiple deadlines; he said that a single annual deadline was no longer sufficient given the rapidly accelerating speed of technical change. Although NSF has multiple annual deadlines, each division within NSF has only a single deadline, so for a given technology only a single funding window is likely to be available. This point was also

• raised by other interviewees. Ms. Cappo (LIM) said that given the speed with which market conditions change, a single annual deadline seems unnecessarily inflexible; Mr. Rapp (Divergence) recommended that NSF should—like most other agencies—provide more than one annual opportunity or deadline for each topic.

• Phase I–Phase II transition. In different ways, two companies noted the need to emphasize the importance of the Phase I–Phase II transition. Mr. Landau (TG) expressed concerned about firms that won numerous Phase I awards but failed to convert them into Phase II awards. Dr. Blankenship (TSI) underscored the importance of focusing closely on converting Phase I awards: TSI typically matches a Phase I award with internal company money equivalent to about 50 percent of the award to ensure a good result and a strong case for a Phase II award.
• Paperwork. Mr. Rapp (Divergence) noted that NSF requires more detailed reporting than most agencies, including time reporting by individuals and a financial report that identifies funds spent on each category.
• Partnership and business development funding. Dr. Bueschler (ALDN) stated that support for partnering is a somewhat neglected part of the SBIR program. ALDN, for example, partnered with A123 on batteries, but the latter has become more focused on immediate needs rather than on longer term development. The ALDN platform is generic for all battery materials, and Dr. Bueschler is actively seeking partners, for example, at the University of Colorado and from offshoots. Even a small amount of funding to support partnering might make a difference and would have been especially important during the company’s years when dollars were scarce.
• Phase IIB matching funds. In particular, IST sees the need for more flexibility on when the company must acquire matching funds. Currently, funding has to be obtained during the exact 18-month period from the start of the Phase II award—the last point of reasonable application for Phase IIB. She does not believe that many companies could start on a new project and reach an investable point so quickly. At a minimum, NSF should accept matching funds acquired during the period after the start of Phase I.
• Reviewers and reviews. Dr. DiBello (WTRI) expressed concern about the consistency of quality and qualifications of reviewers; some reviewers did not seem to have the background to follow the proposal details but others did an exemplary job and offered important insights, even if critical of the proposal. This was primarily a problem with Phase I review; in her experience, Phase II reviews separated commercial from technical review and, as a result, the reviews were higher quality. In addition, Dr. DiBello expressed concern about possible conflicts of interest because Phase I reviews at NSF do not disclose panel memberships.⁵

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⁵It should be noted that all reviewers must sign a non-conflict of interest form.

• Award timelines. Mr. Landau (TG) sees an increasingly poor fit between the timeline for a completed SBIR project and the faster moving markets in which TG operates. He pointed out that the time from Phase I application to Phase II completion is on the order of 3-4 years, which is much too long for commercial applications in his market sector.

  Dr. Moslehi (IFOS) noted that NSF sometimes has unrealistic expectations for its awards and tends to treat all technologies as though they can be commercialized on the same timeline and with the same resources. This approach is not viable. As a result, he believes that NSF is no longer a good source of funding for certain businesses working on challenging emerging technologies. In contrast, Dr. Bueschler (ALDN) observed that people take the time allowed, so shorter timelines are preferable because they force companies to think about what could reasonably be accomplished within a more constrained Phase I.

  Divergence offered a slightly different perspective, recommending that program managers have the flexibility to adapt projects to changing technical realities. Mr. Rapp (Divergence) observed that grant applications require the company to look ahead to where the project might be 12 months in the future. Often, several of the specific milestones to be addressed under a proposed award have been completed by the time funding arrives. It is therefore critical that program officers and technical points of contact (TPOCs) have flexibility to work with PIs to adjust objectives, perhaps by adding more advanced milestones.

• Topics. Several interviewees expressed concern that the topics at NSF are becoming increasingly narrow and that important and potentially transformative ideas are being excluded by this narrow technical framework. Ms. Cappo (LIM) said that NSF focuses too much on a limited market—NSF SBIR topics in her area, for example, have become increasingly focused on testing and electronic student records (which are not topics of interest to LIM). However, interviews with NSF staff suggested that concern may reflect a misunderstanding of NSF topics. Overall Dr. Moslehi (IFOS) was concerned that SBIR programs do not adequately distinguish between emerging and non-emerging technologies, between areas where incremental improvements could be marketed and others that are potentially transformative, but where there are limited markets in the short term.

Dr. Gutterson (Mendel) said that he would like to see more broad topics so that firms could decide which technologies fit the agency’s requirements. Ms. Cappo (LIM) said that broader topics would be very welcome and would support a wider range of innovation. Dr. Wijmans (MTR) said that MTR was adapting to the narrow technical band for NSF awards and was therefore focused on development of novel or improved materials, because that appears to be critical for success in the NSF SBIR competition.