AN ASSESSMENT OF THE SBIR PROGRAM AT THE DEPARTMENT OF DEFENSE

Committee for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program

Policy and Global Affairs

Charles W. Wessner, Editor

NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES

THE NATIONAL ACADEMIES PRESS

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Committee for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program Policy and Global Affairs Charles W. Wessner, Editor

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THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the Councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by Contract/Grant No. DASW01-02-C-0039 between the Na - tional Academy of Sciences and U.S. Department of Defense, NASW-03003 between the National Academy of Sciences and the National Aeronautics and Space Administration, DE-AC02-02ER12259 between the National Academy of Sciences and the U.S. Depart - ment of Energy, NSFDMI-0221736 between the National Academy of Sciences and the National Science Foundation, and N01-OD-4-2139 (Task Order #99) between the National Academy of Sciences and the U.S. Department of Health and Human Services. The con - tent of this publication does not necessarily reflect the views or policies of the Department of Health and Human Services, nor does mention of trade names, commercial products, or organizations imply endorsement by the U.S. Government. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the National Aeronautics and Space Administration. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number-13: 978-0-309-10947-5 International Standard Book Number-10: 0-309-10947-7 Limited copies are available from the Policy and Global Affairs Division, National Re- search Council, 500 Fifth Street, N.W., Washington, D.C. 20001; 202-334-1529. Additional copies of this report are available from the National Academies Press, 500 Fifth Street, N.W., Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu. Copyright 2009 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Charles M. Vest is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examina - tion of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the Na - tional Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M Vest are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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Committee for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program Chair Jacques S. Gansler (NAE) Roger C. Lipitz Chair in Public Policy and Private Enterprise and Director of the Center for Public Policy and Private Enterprise School of Public Policy University of Maryland David B. Audretsch Charles E. Kolb Distinguished Professor and President Ameritech Chair of Economic Aerodyne Research, Inc. Development Henry Linsert, Jr. Director, Institute for Development CEO Strategies Columbia Biosciences Corporation Indiana University W. Clark McFadden Gene Banucci Partner Executive Chairman Dewey & LeBoeuf, LLP ATMI, Inc. Duncan T. Moore (NAE) Jon Baron Kingslake Professor of Optical Executive Director Engineering Coalition for Evidence-Based Policy University of Rochester Michael Borrus Kent Murphy Founding General Partner President and CEO X/Seed Capital Luna Innovations Gail Cassell (IOM) Linda F. Powers Vice President, Scientific Affairs and Managing Director Distinguished Lilly Research Scholar Toucan Capital Corporation for Infectious Diseases Tyrone Taylor Eli Lilly and Company President Elizabeth Downing Capitol Advisors CEO on Technology, LLC 3D Technology Laboratories Charles Trimble (NAE) M. Christina Gabriel CEO, retired Director, Innovation Economy Trimble Navigation The Heinz Endowments Patrick Windham Trevor O. Jones (NAE) President Founder and Chairman Windham Consulting Electrosonics Medical, Inc. 

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PROJECT STAFF Charles W. Wessner Sujai J. Shivakumar Study Director Senior Program Officer McAlister T. Clabaugh Adam H. Gertz Program Associate Program Associate David E. Dierksheide Jeffrey C. McCullough Program Officer Program Associate RESEARCH TEAM Zoltan Acs David H. Finifter University of Baltimore The College of William and Mary Alan Anderson Michael Fogarty Consultant University of Portland Philip A. Auerswald Robin Gaster George Mason University North Atlantic Research Robert-Allen Baker Albert N. Link Vital Strategies, LLC University of North Carolina Robert Berger Rosalie Ruegg Robert Berger Consulting, LLC TIA Consulting Grant Black Donald Siegel University of Indiana South Bend University of California at Riverside Peter Cahill Paula E. Stephan BRTRC, Inc. Georgia State University Dirk Czarnitzki Andrew Toole University of Leuven Rutgers University Julie Ann Elston Nicholas Vonortas Oregon State University George Washington University Irwin Feller American Association for the Advancement of Science i

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POLICY AND GLOBAL AFFAIRS Ad hoc Oversight Board for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program Robert M. White (NAE), Chair University Professor Emeritus Electrical and Computer Engineering Carnegie Mellon University Anita K. Jones (NAE) Mark B. Myers Lawrence R. Quarles Professor of Senior Vice President, retired Engineering and Applied Science Xerox Corporation School of Engineering and Applied Science University of Virginia ii

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Contents PREFACE xiii SUMMARY 1 1 INTRODUCTION 12 1.1 SBIR—Program Creation and Assessment, 12 1.2 SBIR Program Structure, 13 1.3 SBIR Reauthorizations, 15 1.4 Structure of the NRC Study, 16 1.5 SBIR Assessment Challenges, 17 1.6 SBIR Assessment Results, 22 2 FINDINGS AND RECOMMENDATIONS 23 3 SBIR AWARDS AT DOD 52 3.1 Introduction, 52 3.2 Number of Phase I Awards, 52 3.2.1 Phase I—Median Award Size, 54 3.2.2 Phase I—New Winners, 54 3.2.3 Phase I—The States and Regions, 56 3.2.4 Commercialization and Multiple-award Winners, 62 3.2.5 Phase I Awards—By Company, 69 3.2.6 Phase I Awards—Demographics, 70 3.2.7 Phase I Awards—By Agency and Component, 71 3.2.8 Phase I Awards—Size of Awards, 71 ix

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x CONTENTS 3.3 Phase II Awards, 71 3.3.1 Phase II—Average Size of Award, 73 3.3.2 Phase II Awards—By Company, 75 3.3.3 Phase II Awards—By State, 76 3.3.4 Phase II—Awards by Component, 81 3.4 Woman- and Minority-owned Firms, 81 4 OUTCOMES 86 4.1 Introduction, 86 4.2 Commercialization, 87 4.2.1 Background, 87 4.2.2 Proposed Commercialization Indicators and Benchmarks, 89 4.2.3 Sales and Licensing Revenues from DoD SBIR Awards, 90 4.2.4 Additional Investment, Funding, and Other Partnerships, 104 4.2.5 Additional SBIR Funding, 108 4.2.6 Sales of Equity and Other Corporate-level Activities, 109 4.2.7 Initiatives to Improve Commercialization Outcomes, 111 4.2.8 Commercialization: Conclusions, 115 4.3 Agency Mission, 116 4.3.1 Unique Benefits of SBIR at DoD, 116 4.3.2 Assessment of SBIR’s Contributions to DoD Missions, 118 4.4 Support for Small Business and for Minority- and Woman-owned Businesses, 122 4.4.1 Small Business Shares of DoD Funding, 122 4.4.2 Project-level Impacts, 122 4.4.3 Multiple-award Winners and New Firms in the Program, 126 4.4.4 Differing Uses of SBIR by Firms, 129 4.4.5 How Firms Use SBIR: Commercialization Case Study Results, 138 4.4.6 SBIR and Firm Growth, 144 4.5 SBIR and the Expansion of Knowledge, 144 4.5.1 Patents, 147 4.5.2 Scientific Publications, 150 4.5.3 SBIR and the Universities, 152 4.5.4 Inventions and Indirect Knowledge, 153 4.6 Understanding Outcomes: Empirical Findings, 154 5 PHASE III CHALLENGES AND OPPORTUNITIES 158 5.1 Characteristics of Phase III, 158 5.1.1 Congress, 159 5.2 Phase III Outcomes, 160 5.3 Phase III Opportunities and Needs, 162

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xi CONTENTS 5.4 Phase III Concerns, 164 5.4.1 The TRL Gap, 165 5.4.2 Risk and Risk Management, 167 5.4.3 Small Business Perspectives, 168 5.4.4 Prime Contractor Perspectives, 170 5.4.5 Program Officer Perspectives, 172 5.5 Phase III Initiatives, 174 5.6 Best Practices, 180 5.7 Recommendations, 181 5.7.1 Improving Program Officer Use of SBIR, 182 5.7.2 Roadmaps and Technology Planning, 183 5.7.3 Outreach and Matchmaking, 184 5.7.4 Integrating the Primes and SBIR, 184 5.7.5 Funding for Program Management, 185 5.7.6 Training, 185 5.7.7 Reduce Time from Topic Selection to Award, 185 5.7.8 A Flexible Approach to Other Possible Agency Initiatives and Strategies, 186 6 PROGRAM MANAGEMENT 187 6.1 Introduction, 187 6.2 Topic Generation and Procedures, 189 6.3 Pre-release, 192 6.4 Selection Procedures, 193 6.4.1 Phase I Contract Selection, 193 6.4.2 Phase II Selection Procedures, 195 6.4.3 Composition of Selection Panels, 197 6.4.4 Fairness Review, 197 6.4.5 Program Manager Role, 198 6.4.6 Resubmission Procedures and Outcomes, 198 6.5 Post-award Training and Assistance, 199 6.6 Outreach: Program Information Sources, 199 6.7 Funding Gaps and Funding Initiatives, 200 6.7.1 Reducing the Time to Contract, 200 6.7.2 SBIR Fast Track, 201 6.7.3 Phase II+ Programs, 203 6.7.4 DoD Programs for Closing the Phase I-Phase II Gap, 204 6.8 DoD SBIR Program Initiatives, 206 6.8.1 Enhanced Applicant Information and Communications, 206 6.8.2 Electronic Submission, 207 6.9 Reporting Requirements, 208 6.10 Evaluation and Assessment, 208 6.11 Administrative Funding, 209

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xii CONTENTS APPENDIXES A DoD Data Book 213 B NRC Phase II and Firm Surveys 248 C NRC Phase I Survey 272 D Case Studies 280 3e Technologies International, 281 Advanced Ceramics Research, 285 Applied Signal Technology, 290 Bihrle Applied Research, 293 Brimrose, 296 CFD Research Corporation, 301 Ciencia, 306 Custom Manufacturing & Engineering, 309 Cybernet Systems Corporation, 313 Defense Research Technologies, 323 FIRST RF Corporation, 329 Intelligent Automation, Inc., 333 Isothermal Systems Research, 338 JX Crystals, Inc., 341 JENTEK Sensors, Inc., 345 Marine Acoustics, Inc., and VoxTec International, Inc., 351 Multispectral Solutions, 355 Next Century Corporation, 360 Pearson Knowledge Technologies, 365 Physical Sciences, Inc., 370 Procedyne Corporation, 377 RLW Inc., 381 Savi Technology, 384 Scientific Research Corporation, 388 Specialty Devices, 395 Starsys Research Corporation, 399 Systems & Process Engineering Corporation (SPEC), 403 Technology Systems, 408 Thermacore International, Inc., 413 ThermoAnalytics, Inc., 417 Trident Systems, 421 ViaSat, Inc., 429 E Bibliography 437

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Preface Today’s knowledge economy is driven in large part by the nation’s capacity to innovate. One of the defining features of the U.S. economy is a high level of entrepreneurial activity. Entrepreneurs in the United States see opportuni - ties and are willing and able to take on risk to bring new welfare-enhancing, wealth-generating technologies to the market. Yet, while innovation in areas such as genomics, bioinformatics, and nanotechnology present new opportunities, converting these ideas into innovations for the market involves substantial chal - lenges.1 The American capacity for innovation can be strengthened by addressing the challenges faced by entrepreneurs. Public-private partnerships are one means to help entrepreneurs bring new ideas to market.2 The Small Business Innovation Research (SBIR) program is one of the largest examples of U.S. public-private partnerships. An underlying thesis of the program is that small businesses are a strong source of new ideas and economic growth, but that it will be difficult to find financial support for these ideas in the early stages, thus the desirability for public-private partnerships in the small business, high-technology arena to encourage innovation and to help the govern- ment achieve its missions. Founded in 1982, the SBIR program was designed to encourage small business to develop new processes and products and to provide quality research in support of the many missions of the U.S. government. By 1 See Lewis M. Branscomb, Kenneth P. Morse, Michael J. Roberts, Darin Boville, Managing Techni- cal Risk: Understanding Priate Sector Decision Making on Early Stage Technology Based Projects, Gaithersburg, MD: National Institute of Standards and Technology, 2000. 2 For a summary analysis of best practice among U.S. public-private partnerships, see National Research Council, Goernment-Industry Partnerships for the Deelopment of New Technologies: Summary Report, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2002. xiii

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xi PREFACE including qualified small businesses in the nation’s R&D (research and develop - ment) effort, SBIR grants are intended to stimulate innovative new technologies to help agencies meet the specific research and development needs of the nation in many areas, including health, the environment, and national defense. As the SBIR program approached its twentieth year of operation, the U.S. Congress asked the National Research Council to conduct a “comprehensive study of how the SBIR program has stimulated technological innovation and used small businesses to meet federal research and development needs” and to make recommendations on still further improvements to the program.3 To guide this study, the National Research Council (NRC) drew together an expert Committee that includes eminent economists, small businessmen and women, and venture capitalists, led by Dr. Jacques Gansler of the University of Maryland (formerly Undersecretary of Defense for Acquisition and Technology.) The membership of this Committee is listed in the front matter of this volume. Given the extent of “green-field research” required for this study, the Committee in turn drew on a distinguished team of researchers to, among other tasks, administer surveys and conduct case studies, and develop and analyze statistical information about the program. The membership of this research team is also listed in the front matter of this volume. This report is one of a series published by the National Academies in re - sponse to the congressional request. The series includes reports on the Small Business Innovation Research Program at the Department of Defense, the Na - tional Institutes of Health, the National Aeronautics and Space Administration, the Department of Energy, and the National Science Foundation—the 5 agencies responsible for 96 percent of the program’s operations. It includes, as well, an Overview Report that provides assessment of the program’s operations across the federal government. Other reports in the series include a summary of the 2002 conference that launched the study, and a summary of the 2005 conference on SBIR and the Phase III Challenge of Commercialization that focused on the transition issues face by program participants at the Department of Defense and NASA.4 PROJECT ANTECEDENTS The current assessment of the SBIR program follows directly from an ear- lier analysis of public-private partnerships by the National Research Council’s Board on Science, Technology, and Economic Policy (STEP). Under the direc - tion of Gordon Moore, Chairman Emeritus of Intel, the NRC Committee on Government-Industry Partnerships prepared eleven volumes reviewing the driv - 3 See the SBIR Reauthorization Act of 2000 (H.R. 5667, Section 108). 4 NationalResearch Council, SBIR: Program Diersity and Assessment Challenges, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2004. National Research Council, SBIR and the Phase III Challenge of Commercialization, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2007.

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x PREFACE ers of cooperation among industry, universities, and government; operational assessments of current programs; emerging needs at the intersection of biotech - nology and information technology; the current experience of foreign government partnerships and opportunities for international cooperation; and the changing roles of government laboratories, universities, and other research organizations in the national innovation system.5 This analysis of public-private partnerships included two published studies of the SBIR program. Drawing from expert knowledge at a 1998 workshop held at the National Academy of Sciences, the first report, The Small Business Innoa- tion Research Program: Challenges and Opportunities, examined the origins of the program and identified operational challenges critical to the program’s future effectiveness.6 The report also highlighted the relative paucity of research on the SBIR program. Following this initial report, the Department of Defense (DoD) asked the NRC to assess the Department’s Fast Track Initiative in comparison with the operation of its regular SBIR program. The resulting report, The Small Business Innoation Research Program: An Assessment of the Department of Defense Fast Track Initiatie, was the first comprehensive, external assessment of the Depart- ment of Defense’s program. The study, which involved substantial case study and survey research, found that the SBIR program was achieving its legislated goals. It also found that DoD’s Fast Track Initiative was achieving its objective of greater commercialization and recommended that the program be continued and expanded where appropriate.7 The report also recommended that the SBIR program overall would benefit from further research and analysis, a recommenda- tion subsequently adopted by the U.S. Congress. SBIR REAUTHORIZATION AND CONGRESSIONAL REQUEST FOR REVIEW As a part of the 2000 reauthorization of the SBIR program, Congress called for a review of the SBIR programs of the agencies that account collectively for 96 percent of program funding. As noted, the five agencies meeting this criterion, by size of program, are the Departments of Defense, the National Institutes of 5 For a summary of the topics covered and main lessons learned from this extensive study, see National Research Council, Goernment-Industry Partnerships for the Deelopment of New Technolo- gies: Summary Report, op. cit. 6 See National Research Council, The Small Business Innoation Research Program: Challenges and Opportunities, Charles W. Wessner, ed., Washington, DC: National Academy Press, 1999. 7 See National Research Council, The Small Business Innoation Research Program: An Assess- ment of the Department of Defense Fast Track Initiatie, Charles W. Wessner, ed., Washington, DC: National Academy Press, 2000. Given that virtually no published analytical literature existed on SBIR, this Fast Track study pioneered research in this area, developing extensive case studies and newly developed surveys.

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xi PREFACE Health, the National Aeronautics and Space Administration, the Department of Energy, and the National Science Foundation. HR 5667 directed the NRC to evaluate the quality of SBIR research and evaluate the SBIR program’s value to the agency mission. It called for an as - sessment of the extent to which SBIR projects achieve some measure of com- mercialization, as well as an evaluation of the program’s overall economic and noneconomic benefits. It also called for additional analysis as required to support specific recommendations on areas such as measuring outcomes for agency strat - egy and performance, increasing federal procurement of technologies produced by small business, and overall improvements to the SBIR program. ACKNOWLEDGMENTS On behalf of the National Academies, we express our appreciation and rec- ognition for the insights, experiences, and perspectives made available by the participants of the conferences and meetings, as well as by survey respondents and case study interviewees who participated over the course of this study. We are also very much in debt to officials from the leading departments and agen - cies. Among the many who provided assistance to this complex study, we are especially in debt to Kesh Narayanan, Joseph Hennessey, and Ritchie Coryell of the National Science Foundation; Michael Caccuitto, Victor Ciardello, and John Williams of the Department of Defense; Robert Berger and later Larry James of the Department of Energy; Carl Ray and Paul Mexcur of NASA; and Jo Anne Goodnight and Kathleen Shino of the National Institutes of Health. The Committee’s research team deserves major recognition for their role in the preparation of this report. Special thanks are due to Dr. Robin Gaster who stepped in to lead the DoD research team. Without his enormous energy, persis - tence, and productivity, this report would not have been completed. The DoD report and project as a whole are in debt to Peter Cahill, who made available his unparalleled knowledge of the program and its data. The important contributions made by Dr. Irwin Feller, who provided early, insightful, draft of the DoD study and conducted a large number of case studies are gratefully acknowledged. Paul Fowler also provided a valuable empirical perspective. Dr. Zoltan Acs carried out a number of case studies and contributed his valuable insights on the challenge of early-stage finance for innovative small businesses. Sujai Shivakumar also merits thanks for his careful review, edits, analysis, and written contributions, which were essential for the preparation of this report. Without collective efforts of these individuals, amidst many other competing priorities, it would not have been possible to prepare this report. NATIONAL RESEARCH COUNCIL REVIEW This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures ap-

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xii PREFACE proved by the National Academies’ Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the process. We wish to thank the following individuals for their review of this report: Robert Barnhill, Arizona State University; William Bonvillian, Massachusetts Institute of Technology; Bronwyn Hall, University of California, Berkeley; and Heidi Jacobus, Cybernet Systems Corporation. Although the reviewers listed above have provided many constructive com- ments and suggestions, they were not asked to endorse the conclusions or recom- mendations, nor did they see the final draft of the report before its release. The review of this report was overseen by Robert Frosch, Harvard University, and Robert White, Carnegie Mellon University. Appointed by the National Acad - emies, they were responsible for making certain that an independent examina - tion of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring Committee and the institution. Jacques S. Gansler Charles W. Wessner

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