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Case Studies
INTRODUCTION
Dorothy Robyn
White House National Economic Council
Speaking as the National Economic Council official whose portfolio includes
small business and technology issues, Dr. Robyn noted that the Clinton adminis-
tration has been very supportive of the SBIR program. She recalled that President
Clinton and Vice President Gore campaigned in 1992 in support of legislation
doubling SBIR funding, and she said that the administration has consistently
backed the program's extension. She nonetheless recognizes that "there is an
increasing level of concern, resistance, [and] hostility in some of the agencies
toward SBIR." Traditionally, she pointed out, SBIR has been viewed within
some executive branch agencies as a tax on the R&D budget; over the past few
years, as the SBIR set-aside has grown but R&D budgets have not, some agency
officials who had been content to overlook the program's impact on their
resources have become increasingly concerned "about the size of the pie that
[SBIR] is taking."
Dr. Robyn expressed her own view that this development is an opportunity
rather than a problem. DoD has transformed its SBIR program, which had had
the reputation of being weak, under the leadership of Dr. Flamm, Jon Baron, and
Mr. Neal; some other agencies are moving in the same direction. When Phillip
Lader was head of the Small Business Administration and Mary Good was under
secretary of Commerce for technology, the Clinton administration started an inter-
agency effort aimed at propelling internal reform of SBIR that would "make it
62
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more driven by agency missions" and, consequently, help achieve greater buy-
in on the part of the agency officials who run it. This effort has lapsed, but Dr.
Robyn saw the current symposium as a chance to review some of the ideas that
were the basis of SBIR reform early in the Clinton administration. Cautioning
against a "SBIR love-in," she called on the symposium's participants to offer
constructive criticism as the only way to ensure progress.
RELATIONAL TECHNOLOGIES
Gary Morgenthaler
General Partner
Morgenthaler Ventures
Dr. Morgenthaler introduced himself as a past recipient of SBIR grants and
the founder of a software company spun out of University of California at
Berkeley that was formed in 1980, taken public in 1988, and sold in 1990. For
the past eight years he has been general partner of a private equity venture-capital
firm in California that mainly funds high-technology ventures. With a new $200
million fund now in formation, the firm will manage $500 million in capital. The
fund has financed about 150 companies, most of them in the fields of information
technology and health care; 34 of the last 62 firms the fund has invested in are
today public companies. "We are early-stage investors," Dr. Morgenthaler said,
"but we fund high-growth companies and we build companies that target public
markets."
Personal Lessons from SBIR
Ingres, a pioneering relational database management systems software com-
pany founded by Dr. Morgenthaler nearly two decades ago, received SBIR grants
totaling $650,000 in 1984, 1985, and 1986. It grew to 1,300 employees "from a
raw start-up" and posted $160 million in revenues before being sold; today, as a
division of a larger company, it has revenues in the range of $200 million. The
company has generally been viewed as a success, having achieved 100 times
return on initial capital and ten times overall capital invested. It has produced
three spin-out firms whose combined market capitalization has climbed above $1
billion. Boeing was a partner in implementation, and its AWACS (airborne warn-
ing and control system) program used the technology in the Gulf War, evidencing
that the technology delivered "lots of social returns as well as economic returns."
Among the lessons his company learned through its involvement with the
SBIR program, Dr. Morgenthaler includes the importance of grantsmanship: the
art of figuring out which grants will be awarded and which will not. But, he
stressed, his experience taught him that "if you delivered on your promises, the
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THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM
SBIR was fairly benevolent and provided support to the companies that really
took the program seriously."
The Role of the Venture Capital Industry
Dr. Morgenthaler noted that the venture-capital sector boasts 600 firms with
2,500 partners in North America and that its market has grown from about $4.5
billion 18 months ago to a projected $9 billion for 1998. Because "angel" inves-
tors fund ten times what venture-capital firms fund, the venture-capital sector
may in fact be viewed as the tip of the investment iceberg. Still, between 20 and
30 percent of initial public offerings (IPOs) are venture-capital backed, and the
U.S. venture-capital industry is "the envy of most countries of the world" because
of its success in creating both jobs and wealth. The Silicon Valley model is being
emulated not only in Boston, New York City, Seattle, Austin, and northern
Virginia, but in the United Kingdom, Sweden, Israel, Taiwan, and Singapore.
Citing a recent study by Coopers & Lybrand, Dr. Morgenthaler noted that
venture-backed companies displayed annual sales growth of 38 percent as com-
pared with 3.5 percent for Fortune 500 companies. Similarly, job creation was 33
percent annually in venture-backed industry versus -3.6 percent for Fortune 500
companies; venture capitalists supported firms that had four times as many engi-
neers and scientists in management as the U.S. average. Compared with the
national average, venture-backed firms have three times the R&D intensity, four
times the R&D dollars per employee, and 2.5 times the R&D dollars per dollar of
equity. About 81 percent of the venture-capital industry's dollars go to informa-
tion technology and to health care, including biomedical devices and biotechnol-
ogy. In Dr. Morgenthaler's opinion, venture-capital firms are investing in the
types of firms and helping to create the types of jobs that will be necessary to U.S.
economic competitiveness in the coming century.
Explaining that the venture-capital industry cycles in the way other financial
services sectors do, he said that its current position at 2.5 times the peak of the
earlier cycle and seven times what the periodic low was as late as 1991
constitutes a boom. Returns have been exceptional: Venture capitalists have
delivered to the market about 1,250 IPOs during the current decade, including 20
percent of all IPOs in 1995 and 31 percent of all IPOs in 1996, even though the
venture-capital sector represents only about 10 percent of overall private equity
investment in the U.S. economy.
Economic Returns to SBIR
Focusing his comments on the area of economic rather than social returns,
Dr. Morgenthaler said that, although the SBIR funds many worthwhile programs,
"like all government programs [it] is subject to distortions and even to abuse."
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He referred to the "SBIR mills" that have received between 50 and 300 awards,
calling the figure "slightly mind-boggling" and saying that, in such cases, "tax-
payer value tends to get obscured." He then proposed that closer collaboration
between the venture-capital industry and the SBIR might benefit the program,
arguing that the venture-capital community's objectives and those of the SBIR
program overlap directly.
"My proposal is that good science may be a necessary [criterion] but is not a
sufficient criterion for evaluating SBIR grants," Dr. Morgenthaler stated.
"Growth companies need investor capital, but growth companies also need man-
agement, and if you evaluate your grants solely on the basis of good science, you
will find that these are companies that do not build viable commercial entities and
take that science to the marketplace." Venture capital, in contrast, is instrumental
in building companies: "Venture capitalists recruit senior management, includ-
ing CEOs, for these companies; they help set market strategy; they syndicate
financings; they broker corporate partnerships; and they oversee the daily hard
work of corporate governance."
But although venture capital funds development, it funds very little research,
even though many of the companies it supports are capable of doing first-class
research. SBIR plays the role of enabling small companies, including venture-
backed companies, to undertake high-risk research projects. "By placing its grants
alongside those grants from the private equity industry," Dr. Morgenthaler stated,
SBIR "maximizes the chance that excellent research will be coupled with effec-
tive management and adequate financing."
Areas for Improvement in SBIR
He then named several key issues he believes SBIR needs to address:
.
· Timing. The 18 months that can pass from an initial proposal to a Phase II
grant is, in today's context, "an eternity," during which an idea can lose
its competitive value as the market moves on.
· Social returns. Although critical, this issue is one about which the venture-
capital industry has little to say.
Peer review. Dr. Morgenthaler suggested that SBIR look to the venture-
capital industry in evaluating proposals that are not of overwhelming
social value but might still be worth supporting in and after Phase II.
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DIGITAL SYSTEM RESOURCES
Rich Carroll
President
The Need for Innovation at DoD
Mr. Carroll began by declaring his support for leaving the SBIR program
unchanged, explaining that his firm, which developed new SONAR for the U.S.
submarine fleet, has been successful under the program in its current form. He
then proposed to speak, from this admittedly "biased" position, about his per-
sonal experiences with SBIR in order to contribute one answer to the question,
"What is the story behind the story of each [SBIR] success?"
Referring to a copy of the DoD budget, Mr. Carroll pointed out that, although
the department's R&D allocation is down 14 percent this year, the Pentagon still
has around $36 billion to spend on R&D annually half of the federal
government's total expenditure on R&D and one-quarter of the nation's. In light
of this, he argued, no one should be shocked to learn that a DoD contractor like
his firm is a recipient of SBIR awards. "It' s very important to get innovation into
the DoD," he stated. "I think that the DoD needs innovation to protect our nation
more than our commercial sector needs innovation to improve the quality of life
in our nation."
Commercialization at DoD
The commercialization focus of the SBIR program is one area in which
Mr. Carroll's company has experienced some difficulties: It has had submissions
turned down in both Phase I and Phase II because it attempts to commercialize
only within DoD. According to proposal evaluations received from the depart-
ment, he said, his company has been deemed ineffective in commercializing its
products despite the fact that it has sold products to the DoD for $50 million per
year that were developed with the aid of the SBIR program, and despite the fact
that 50 percent of the Phase I and Phase II awards it has won have resulted in
sales. He attributed this negative judgment to a perception within the program
that "commercialization" refers only to sales to the private sector, and he recom-
mended guarding against the spread of this attitude throughout the SBIR program.
Strategies for SBIR Proposals
Mr. Carroll outlined how he goes about submitting a SBIR proposal and
attempting to commercialize it within the DoD. First, he holds "innovation focus
groups" about every two months in which "innovative people" among the
company's 200 employees come together. "We say: 'What can we do to be
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innovative, [to] come up with new ideas and more affordable ways of addressing
the needs of the DoD?"' Each idea is written up just as it would be in an SBIR
proposal and handed out to as many people as possible who might be interested in
pursuing it as a topic under SBIR. "Innovation," he explained, "really starts at
the topic."
Besides working with SBIR officials, Mr. Carroll works with participants in
other programs, noting that it is in weapons acquisition that most of the DoD
money is spent. He tries to find out who is running such programs as the F-18 jet,
the new attack submarine, and other programs that have billions of dollars
invested in them; he also tries to find out what their problems are and how tech-
nology could help solve the programs. He then attempts to interest the acquisi-
tion managers in those technologies because he knows that, "in the long run, they
are going to be the customer."
Second, Mr. Carroll bids on the topics that come out, with the firm spending
a great deal more money bidding Phase I topics than it receives in Phase I awards.
Immediately after winning a Phase I award, he tries to determine what the com-
pany should do in Phases I and II to support the acquisition managers. "I pretty
much ignore the SBIR topic for now," he stated. "It was one paragraph. It was a
good idea, and people are interested in it but, again, I'm interested in helping
the acquisition managers build these weapons systems in the most cost-effective
and affordable way."
Thus, when submitting a Phase II proposal, Mr. Carroll already knows that
there will be a client for the technology if it is developed. In the event that he has
not been able to find anyone who is interested in the technology and willing to put
money up to back it, he will not bid in Phase II: In such a case, he does not think
he will win and does not want to spend any more time on it. In some case, he has
identified a weapons acquisition manager who is interested in buying his technol-
ogy but he can not get a Phase II award because he fails to meet "some other
criteria in the program." Expressing frustration over such experiences, he called
for improvement in this aspect of the process. In Phase III, he said, it is important
that his company continue to access R&D through the DoD component interested
in the technology.
Summarizing, Mr. Carroll underscored three features of DoD's SBIR pro-
gram as being particularly important. The first is that it gives small businesses an
avenue for doing business with the agency. He said that his firm's sale of SONAR
technology to the Navy would never have occurred without the SBIR program
because no procurement has ever come out for that type of item. The second
important feature is that the program provides small firms a customer right from
the start. The third is that it gives the firm the data rights necessary to carrying a
technology forward and getting the DoD to continue to do business with the firm.
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THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM
QUANTUM ENERGY TECHNOLOGIES
John Preston
President and CEO
Rather than presenting a case study of one of the SBIR award-winning com-
panies he has started, Mr. Preston said that he was addressing the symposium in
the capacity of senior lecturer and co-director of MIT' s Entrepreneurship Center.
He expressed his desire at the outset to endorse as "absolutely right on target" the
results of the paper outlined by Dr. Lerner during the second panel. He added
that Dr. Lerner's conclusions have been corroborated by research done at MIT on
SBIR awards and on job and wealth creation in the United States.
Why SBIR is Needed
Asking "Why do we need the SBIR program?," Mr. Preston reminded the
audience that, although incremental innovation occurs in the nation's large com-
panies, radical innovation does not. A study by MIT's Professor Utterback of
150 radical innovations dating from the past 100 years failed to come up with a
single case in which the radical innovation had been pioneered by a market leader.
Mr. Preston recalled Western Union's decision in the 1880s to decline Alexander
Graham Bell's offer of an exclusive license to the telephone on the grounds that
the technology lacked commercial viability, as well as similar cases in which
established firms responded to the arrival of a new technology as a threat rather
than an opportunity.
"If you look at the 'bang for the buck' that the U.S. government is getting
for the dollars that it's spending," Mr. Preston argued, "I would say that basic
research and SBIR are way, way at the top." One reason for this, which was
established in a study by David Birch that Mr. Preston described as having flaws
but that was basically accurate in its conclusions, is that 70 percent of the net new
jobs in the United States are being created by only 4 percent of the nation's com-
panies. The overlap between the characteristics of the companies that have
created the jobs and those of the companies that the SBIR program tries to finance
is extremely high.
SBIR and Time to Market
SBIR has also helped catalyze improvements that have allowed products to
get to market faster. To illustrate the importance of this, Mr. Preston turned to the
issue of innovation cycles, noting that when a radical innovation is made, it goes
through a period of rapid change that is then followed by a period of incremental
improvement. The United States is particularly good at the creative end of that
spectrum; in industries such as software that are driven by creativity, the United
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States does extremely well. However, in industries like consumer electronics that
are driven more by incremental improvement, Japan is a very strong competitor.
Over the past ten years, however, U.S. companies have recaptured 20 percent
of the global semiconductor industry "totally at the expense of the Japanese."
The reason this has occurred, Mr. Preston argued, is that as product half-lives
have shortened and the speed at which products must be brought to market has
increased, the creative component of a product in the case of integrated circuits,
for example, the microcode used to design the chip has become more important
as a function of time. He reported being told by the outgoing head of technology
for Hewlett-Packard, Joel Birnbaum, that getting to the market one month earlier
is worth more than all the engineering and development costs of a typical Hewlett-
Packard product, whereas six months changes the lifetime profitability of a prod-
uct by 33 percent.
Addressing the Technology "Funding Gap"
Mr. Preston argued that SBIR, by boosting spending at the base, may increase
the probability of technologies making it through the "funding gap" that exists in
many U.S. industries, particularly those connected with the physical sciences.
While in the United States the government spends on basic research and industry
spends on commercialization, very little investment is made on the first economic
proof of concept. Acknowledging that many would contend that this funding gap
is not real because the free market evens it out, Mr. Preston cited the export of
U.S. technology its loss of inventions made in its own laboratories to foreign
competitors and insisted that other countries are better at commercialization.
One example among many is the hard-disk drive, a product that was invented
in this country; Singapore now accounts for 70 percent of global disk drive pro-
duction. Commenting on the national technology plan of Singapore, on whose
National Science and Technology Board he has served, Mr. Preston said that
Singapore and other countries are "picking winners very openly" and investing
very heavily in the funding gap. Meanwhile, the emphasis of U.S. venture funds
has, over the past ten years, shifted to the later stages of investment. Calling the
SBIR program and the Commerce Department's Advanced Technology Program
early-stage investors, he praised them for "attacking a need at the earliest, where
it's really the deepest in the trough."
Suggestions for Changes to SBIR
One potential improvement in the SBIR program suggested by Mr. Preston is
increasing the number of Phase II awards at the expense of Phase I awards. In
attempting to finance an innovative technology, a company can either inject a
small amount of money over a long period of time or be more aggressive and
investing that money in a shorter period of time. He supported his proposal to
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THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM
consider shifting the relative weight of Phase I and Phase II investments with the
contention that companies which do very few things very well and make a few
aggressive investments outperform those which do many things in a mediocre
way.
Finally, Mr. Preston cautioned against distributing SBIR awards geographi-
cally for political reasons; he said that the awards should go to areas where
"clusters of excellence," as defined by the Harvard Business School's Michael
Porter, are going to support the building of innovative companies. Taking an
example from Dr. Porter's work, he pointed to the fact that Holland controls 70
percent of the cut flowers sold in Europe and ships flowers to Disney World in
Florida on a daily basis. To grow flowers, Mr. Preston observed, "you need sun,
rain, and land and Holland has only one out of three, rain. So why are the
Dutch shipping flowers to Disney World?" The answer, he argued, is that the
country has a cluster of companies, along with expertise which supports them,
that enables it to be far more competitive globally than one would expect.
DISCUSSANT
Lance Davis
Department of Defense
Dr. Davis, deputy director of the DoD office that runs a part of the agency's
SBIR program, opened his remarks by stating that he would outline some of the
challenges inherent in the way SBIR tends to be perceived by participating
agencies.
Background on SBIR Program Changes
Because DoD's budget for research, development, testing, and evaluation
(RDT&E) is used as the basis for calculating its SBIR budget, in FY 1997 the
agency's SBIR budget was $537 million, whereas its Small Business Technology
Transfer (STTR) program budget totaled $30 million. Concurring in the widely
expressed judgment that the department's SBIR program is much improved,
Dr. Davis stated that improvement dates to the tenure of Anita Jones as director
of Defense Research and Engineering, when the office decided to improve its
interaction with small business by looking at small business as if the latter were a
customer. Some current features of the program among them, the Fast Track
pilot, the posting of topics on the World Wide Web, and the opportunity for a
potential proposer to speak with the author of a topic prior to submitting a solici-
tation had their beginnings in focus groups conducted with representatives of
small business in different parts of the country. Although praising Mr. Baron,
Mr. Neal, and Mr. Hill for contributing to the program's improvement, Dr. Davis
stressed that there are in fact eight separate programs within the DoD' s decentral
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ized SBIR framework and praised the program managers at the various services
and agencies within the department for making the program work.
DoD Selection Criteria
Dr. Davis pointed to an emphasis within the department's SBIR programs on
two selection criteria: (1) whether the technology has dual-use application, which
is expected to maximize the possibility of commercialization in the long run; and
(2) whether a company has a commercialization plan or there is at least an
indication that the applicant can commercialize the technology, either for the
defense or the private-sector market. "It's not that easy for all small businesses to
make a living in the defense business, because the market is relatively small [and]
the number of platforms we are building today is relatively small," he said, so
"there' s some bias on our part to look at technologies that we think can also be
commercialized in the private sector." If technology is not commercialized in the
private sector, it is unlikely to remain available to the department, an eventuality
that would call into question the value of developing it in the first place.
Future Challenges
Dr. Davis concluded his remarks by pointing to three problems:
.
.
Program size. The SBIR "tax," as it is defined by DoD' s comptroller and
thus perceived within the department, is 2.5 percent not only of the
agency's science and technology activities but of the overall RDT&E
budget. When program managers of weapons platforms, whose activities
are far removed from research, discover that 2.5 percent of their budgets
is going to SBIR, he said, "we have a tremendous amount of push-back
from those program managers." Stating a personal view, he cautioned
that any campaign to enlarge SBIR significantly would occasion vigorous
resistance from the program managers "because they think the tax is
becoming too big."
Funding mechanism. Dr. Davis advocated finding another way to fund
SBIR, even as he acknowledged the suggestion's limited practicality: If
the program were supported by a yearly appropriation, the department
itself would cut it. Noting that "constituencies on [Capitol] Hill have
discovered that a taxed program is a marvelous stealth program because
you do not have to justify it every year, you only have to renew it every
four or five or ten years," he recounted that there was a call last year for a
"tax" to support manufacturing technology and that there has been discus-
sion of a similar scheme to fund dual-use technology within the depart-
ment. "You are going to come to the ridiculous situation in which 130
percent of your science and technology budget is fixed for something and
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.
you have no flexibility," he predicted. He added: "One of the things the
Department wants to be able to do is to respond to technology challenges,
and if we have too many things that box us in, it's going to be a problem."
Administrative expenses. Citing the value to a SBIR awardee of being
able to speak with the program manager overseeing its project and even to
have the manager visit, Dr. Davis pointed out that, because SBIR funds
are not allowed to go to administrative expenses, SBIR program activities
must compete for overhead funds with all other research activities. "As a
result," he said, "the amount of attention that a project director in a labo-
ratory can spend with a SBIR contract awardee is not as great as it should
be." If the SBIR program is to be expanded, it would be worth consider-
ing returning to the previous practice of allowing some portion of admin-
istrative expense to come from the SBIR budget. Simply increasing the
tax would not do much to solve this problem, because "as gigantic as the
DOD RDT&E budget is, every single dollar has a constituency; so if you
take it from one place, it comes from another place, [and] it's just going to
be a constant battle."
DISCUSSANT
Richard Russell
House Committee on Science
First Encounters with SBIR
Mr. Russell suggested that recounting how he first came into contact with
SBIR might illustrate how congressional staff can come to perceive a program.
"Whenever we are trying to fund a program through an authorization, we obvi-
ously have to calculate how much money is actually required to fund whatever
R&D project we are planning on doing," he said. "I was merrily jotting down
some numbers for some legislation when someone informed me that I had to put
aside a little extra. This additional program that I knew nothing about, SBIR,
actually would strip out part of the money that was going to what at the time was
a very valuable R&D program."
Although this story is not meant to reflect on the value of either the SBIR
program or the projects it funds, it does illustrate that SBIR is viewed as a tax by
people who would otherwise get money that goes into it. This means that SBIR is
competing with R&D in all the agencies that contribute to the program. Mr.
Russell advised that it is important to keep both of these characteristics of SBIR
in mind when discussing either how the program is to be judged or whether it
makes sense to increase the rate at which it is funded from general R&D allot-
ments.
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Measuring SBIR Results
Also to be kept in mind is that part of the difficulty in assessing SBIR or any
other R&D program and a difficulty with which the Technology Subcommittee
has been struggling a great deal recently is measuring results. Over the past 18
months, as the Government Performance and Results Act has taken hold, every
R&D agency has told the panel that it can not possibly conform with the require-
ments of the act as written because of R&D's long-term, speculative nature.)
The committee, in discussion with the agencies, has found ways to try to measure
what success really is in terms of R&D, although it is not yet certain whether they
will work. Although SBIR is no different from any other R&D program in this
regard, it is different in that it has a dual function, which makes measuring its
success somewhat more complicated: SBIR looks at commercialization as an end
while at the same time trying to provide benefit to the agencies that fund it by
contributing to their own R&D missions. "Oftentimes, if you are talking about
strict commercialization as a measure of success," he observed, "the individual
agency that is engaged in funding that SBIR grant may not view that end success
as being particularly relevant to its individual needs and its individual mission."
Noting that the process of reauthorizing the SBIR program is in the initial
planning stages, Mr. Russell told the audience that hearings on the subject are
likely to be held toward the end of the present congressional session as a "warm
up" for the reauthorization, which is to take place in the next Congress. Offering
an indication of what may happen, he recalled that the STTR program was reau-
thorized last year with minor changes and with no increase in the set-aside. "SBIR
is a much bigger program," he noted, "and will probably have a lot more interest
associated with it just because of the dollar value. But at a billion dollars, that's
a significant chunk of R&D funding, and coming from the committee that's
charged with overseeing at least all the civilian R&D funding for the federal
government, it's a responsibility that I know all our members are going to take
very, very seriously. The R&D pot, if you look at both defense and civilian, is
just not growing that quickly, and so we have to make sure that we are spending
the R&D money as well as possible."
DISCUSSION
Mr. Baron of the DoD asked the panelists to elaborate on the possible
mechanics of increased cooperation between the venture-capital community and
the SBIR program. Mr. Preston responded that the peer-review system SBIR that
the uses in evaluating technology may be superior to the evaluation practices of
~ Committee on Science, Engineering, and Public Policy, 1995, Evaluating Federal Research Pro
grams: Research and the Government Performance and Results Act. Washington, D.C.: National
Academy Press.
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THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM
venture capitalists who tend to look at more than a half-dozen business plans each
week. On the other hand, he asked, "What venture capitalist would ever, even in
their wildest dreams, conceive of investing in a company without interviewing
the CEO and the management team and looking at what their track record is, at
what the probability of success of those people is in building the business?"
Synergy is thus possible between the technological expertise of SBIR program
managers and the strengths of venture capitalists, who "can be really good at
assessing people and understanding their probability of success whereas the
DoD, I think, is by definition almost unable to make those assessments."
Reacting to the same question, Dr. Morgenthaler pointed out that certain
R&D investments that offer social return, such as those in defense and pollution
control, are not typically the targets of venture-capital investment. He suggested
that greater collaboration might be possible in areas such as information technol-
ogy and health care and that this collaboration could take several forms. The
"simplest and most straightforward" would be in evaluating whether Phase II
grants should be awarded based on some inquiry into the potential for commer-
cial success of the awardee company. He agreed with Mr. Preston that it is
important to establish whether the managers involved have a track record of devel-
oping successful commercial enterprises and whether people involved with the
company as directors or investors have experience in building successful compa-
nies. He proposed these concerns, which are of importance to venture capitalists,
as criteria upon which SBIR awards would in part be judged.
Mr. Carroll commented that if he can not find either a partner outside the
SBIR program or a potential customer for the technology to join his company in
investing in Phase II of a SBIR award, his company generally does not make a
Phase II bid because it views the prospects for commercialization as too uncertain.
Dr. Wessner asked whether different criteria for success should be used in
the different agencies that participate in the SBIR program, what an appropriate
rate of success for the overall program would be, and whether the success rate
should differ according to the agency.
Mr. Preston observed that one criterion for success for the DoD is whether an
award will allow purchase of systems at a lower price than if the systems had
been custom-made. In general, however, the metrics for success are just now
being developed for "SBIR-type" programs, with Dr. Lerner's paper being the
first of any significance in analyzing the long-term economic benefits of SBIR.
A second problem in answering the question, he added, is that "the economic
benefit is longer than the election cycle for people in power in Washington."
Looking at the long-term health of the economy would persuade the observer that
SBIR offers a very productive investment, but comparing its productivity with
that of other investments that the government might make is difficult. Because a
key aspect of the program is that it is investing in technologies before industry is
fully willing to jump in and after basic research funds would typically run out,
Mr. Preston suggested that an indication of success might be whether the United
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States is capturing more benefit from the technologies it develops internally and
thus reducing its export of technologies.
Tom Goldberg with GHO asked whether the panelists were suggesting that
because investors can make money in electronics and biotechnology, the govern-
ment should confine its support to environmental and defense technologies. He
commented that the United States has invested heavily in environmental tech-
nologies but, because we have no mechanism to certify their efficacy, we export
those technologies to Europe and Asia, only to reimport them. Wondering
whether that is "altogether bad," he asked whether U.S. investors should be
placing money with those clients abroad that buy the technologies.
Dr. Morgenthaler responded by stressing Dr. Lerner's point that the success
of the SBIR program in promoting job and wealth creation has been "collocated
with the centers of entrepreneurial activity" and by stating that a critical mass of
entrepreneurial excellence and managerial talent is required for that success. "I
view venture capital as a catalytic agent," he said, "and I think you should view
the SBIR program in the same way: as a catalytic agent." He encouraged manag-
ing programs that are focused on social return, such as those in defense technol-
ogy or pollution control, under criteria different from those applied to programs
that are more likely to draw private investment. For programs focused on eco-
nomic returns, "by leveraging off of the dynamics of the private equity industry,
the greatest social good will be achieved."
Mr. Preston praised the question as recognizing that the funding gap does not
apply to all industries but is more severe in the energy and environmental fields
than in the information or biotechnology sectors where venture capitalists are
investing very heavily. Because the SBIR distributed its funds generally, in all
areas of interest to the government, it tends to capture more of the emerging
industries rather than just reinforcing the industries that experience very little
funding gap.
David Speser of Foresight Science & Technology, Inc., asked Dr. Morgenthaler
whether dual-use technologies, or technologies that are adaptable to several areas,
might not be more appealing to venture capital because they enlarge beyond the
government the sphere of clients for a product. Dr. Morgenthaler, answering in
the affirmative, observed that the government is increasingly focused on dual use
and that its procurement requirements are increasingly focused on commercial
off-the-shelf products. Small companies are not ignoring the government market-
place but can not really restrict themselves to it for a variety of reasons.
Representative terms from entire chapter:
panel iii
