An Assessment of the SBIR Program at the Department of Defense (2009) / Chapter Skim
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From page 87... ...
to increase private sector commercialization derived from Federal research and development."2 4.2 COMMERCIALIZATION 4.2.1 Background Bringing new technologies developed under the research supported by SBIR awards to the marketplace has been a central objective of the SBIR program since its inception. The program's initiation in the early 1980s in part reflected a concern that American investment in research was not being transformed adequately into products that could generate greater wealth, more employment, and increased competitiveness.
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From page 88... ...
It also fails to provide any guidance on how to evaluate the scale of commercialization, an important element in assessing the degree to which SBIR programs successfully encourage commercialization. The metrics for assessing commercialization can also be elusive.
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From page 89... ...
The law indicates that commercialization "may also involve non –SBIR, government –funded production contracts with a federal agency…."10 Moreover, Phase III funding comes via a wide variety of mechanisms. Firms receive modifications to add Phase III federal R&D funding to Phase II SBIR contracts, they have won production contracts or R&D contracts competitively, sold to prime contractors, received additional private sector funding, and sold products commercially.
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From page 90... ...
13 Interviews with SBIR program coordinators at DoD, NIH, NSF, and DoE. 14 Pete Linsett, CEO, Martek Inc.
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From page 91... ...
As noted above, Phase III activities within DoD are a primary form of commercialization for DoD SBIR projects. These activities are considered in section 4.3 below (mission support)
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From page 93... ...
This difference in part reflects the number of recent awardees whose products have yet to be commercially introduced or fully exploited commercially. Reported aggregate and average sales data up through the survey date of May 2005 are therefore only a partial estimate of the total commercial impact of the 920 awards covered by the Phase II UNEDITED PROOFS
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From page 96... ...
This very high concentration confirms the view that from the perspective of sales, the SBIR program at DoD generates a few major winners, rather than a more widely dispersed range of more modest successes. This is similar to commercial outcomes from early stage R&D programs.
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From page 97... ...
17 John Williams, U.S. Navy SBIR Program Manager.
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Most successful project start UNEDITED PROOFS
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From page 100... ...
They are harder to reach as time goes on because small businesses regularly cease operations, are acquired, merge, or lose staff with knowledge of SBIR awards. o Success is self reported.
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From page 103... ...
38 Prime contractors for DoD or NASA 12 NASA 1 Other federal agencies 1 State or local governments 1 Export Markets 11 Other 16 100 SOURCE: NRC Survey. While the fact that half of sales went either to DoD or DoD/NASA prime contractors is not surprising, the balance between the two is somewhat at odds with comments made by many interviewees and speakers at the NRC Phase III conference.
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From page 106... ...
One possible hypothesis for explaining this difference, based on discussions at the NRC Phase III Conference and with case study companies, might be that acquisitions officers are more comfortable engaging with larger and presumably more stable companies that will likely have a longer track record (all other things being equal)
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From page 107... ...
4.2.3.6 Employment Effects 4.2.3.6.1 Employment effects Employment analysis provides another method for identifying commercial success; it also offers another indication of support for small business. The median size of company receiving SBIR awards at DoD is relatively small – far lower than the 500 employee limit imposed by the SBA (as shown in Table 4-8)
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From page 110... ...
4.2.4 Additional Investment, Funding, and Other Partnerships Post-SBIR investment in a company is a powerful validation that its work is of value. About 53 percent of DoD respondents said that they had received some additional funding related to the surveyed project, other than further SBIR awards.
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From page 111... ...
College or Universities 0.2% State or Local Government 0.8% Personal Funds 1.9% Private Investment from Foreign Investment 2.1% Private Investment from Other Domestic Private Company 7.2% Private Investment from Other Private Equity 9.7% Your Ow n Company 11.4% Private Investment from US Venture Capital 21.3% Non-SBIR Federal Funds 45.4% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% FIGURE 4-8 Sources of additional DoD SBIR company funding. SOURCE: NRC Survey.
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From page 113... ...
4.2.4.2 SBIR Impact on Further Investment The NRC Survey also sought additional information about the impact of the SBIR program on company efforts to attract third party funding. Some case study companies mentioned that SBIR awards can have a "halo effect," acting as a form of validation for external inventors.29 Case study interviews provided mixed views on this perception.
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From page 114... ...
56.5 percent of respondents report no additional related SBIR awards at all, although small businesses reported that it takes multiple awards (often complementary) to build a product for effective sale.
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From page 116... ...
GE and Invitrogen are other examples of companies that have made a number of acquisitions among SBIR-funded companies.33 Arguably this is a powerful validation of the value expected by some SBIR awards and the opportunity represented by the technologies developed through the program. It also underscores the difficulties small companies face in developing a product set independently.
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From page 118... ...
The DoD Office of Small and Disadvantaged Business Utilization (SADBU) SBIR Program Manager also emphasized the importance of the commercial sector, on the assumption that commercially attractive SBIR topics and awards would widen the downstream market for the technology as well as attract private sector investment, thus reducing the cost of the technology and making it more affordable for DoD.
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From page 119... ...
The case studies and surveys constituted what was clearly the largest independent assessment of the SBIR program at the Department of Defense, the study was nonetheless constrained by the limitations of the case-study approach and the size of the survey sample. The study nevertheless represents the largest external review of the Fast Track Program and SBIR undertaken until the current review.
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From page 120... ...
Instead, multiple indicators, and multiple metrics within those indicators, are needed to develop a broad assessment of commercialization within the DoD SBIR program. This assessment supports the view that there has been considerable effort to bring SBIR projects at DoD to the market, with some substantial success.
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From page 121... ...
within the DoD SBIR portfolio; thus private sector R&D should be expected to produce comparatively higher success rates. However, as we shall see in the chapters on program management and Phase III, there are still considerable barriers to SBIR awardees achieving success within the DoD acquisition system itself – which represents an area of significant potential improvement.
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From page 122... ...
. According to DoD SBIR program officials, SBIR has also proven an important and successful means of attracting the interest of small, high-technology firms to address specific R&D and operational needs where the potential market is too small to attract the interest of large defense contractors or venture backed firms.
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From page 123... ...
Survey responses from 397 SBIR technical monitors or Technical Points of Contact (TPOC) indicate that they perceive of DoD SBIR projects' research to be of high quality - on average close to the quality estimated for non-SBIR awards.46 On a ten-point scale, where 10 represented the best research ever produced in the research unit/office in which the TPOC was located, SBIR awards received a mean score of 6.95.
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From page 124... ...
The Navy considers the Phase III reported in the DD350 its primary tool for such purposes, emphasizing once again the stress laid on active insertion into weapons programs by the services as the core metric of success from the agency perspective. However, the other Services have not emphasized the DD350 to the same degree, and there are substantial inter-service differences in the extent to which the DD350 reporting system actually captures program outcomes.48 Of special concern to DoD SBIR program officials is that the CCR does not fully capture the program's mission benefits and that undue use of commercialization measures will undercut core processes of technological development.
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From page 125... ...
in conjunction with the DoD Small and Disadvantaged Business Utilization Office (SADBU) SBIR Program Manager, contracted BRTRC, a technology research firm, to study the commercialization of DoD SBIR awards.
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From page 126... ...
Moreover, since the content of success stories tends to focus on technological performance and sales, it is unlikely that many of the other benefits of the DoD SBIR program are fully accounted for, e.g. firm knowledge effects.
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From page 127... ...
Interviews with DoD officials indicate that the primary reason for this absence is the lack of internal budget, staff, and expertise to systemically monitor, document, and assess the contribution of the SBIR program to its mission objectives. DoD program managers note that they are legislatively required to use all appropriated SBIR funds for awards to firms, and are explicitly prohibited (by Title 15, Chapter 14A)
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From page 128... ...
4.4.1 Small business shares of DoD funding Data from DoD show that for all contracts (not just SBIR) , small business direct awards have for the past 15 years been approximately equal to the subcontracts to small business reported by the prime contractors (see Figure 4-9)
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From page 129... ...
4.4.2 Project level impacts A basic question concerning any "intervention" is whether the observed outcome would have occurred in the absence of the intervention. In terms of the SBIR program, this question generally relates to whether or not an R&D project would have been undertaken by a firm in the absence of an award, and if so, what affect the award had on the size, scope, or final characteristics of the project.
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From page 131... ...
For existing firms with ongoing R&D or production activities, the primary value of the SBIR program was that SBIR topics indicate a well-funded potential market for the firm's technology.55 In effect, technology-intensive firms may be seen as constantly searching for potential applications for their core technologies. At any point in time, there are more technology paths to pursue than resources allow.
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From page 132... ...
There is therefore little doubt that the SBIR awards had, in the vast majority of cases a significant, often decisive, impact on the company's ability to undertake the research supported by the work. 56 This last response presumably reflects the narrowing of an R&D concept to mesh with the scope of the topic solicitation announcement.
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From page 133... ...
4.4.3 Multiple award winners and new firms in the program Some critics argue that the DoD SBIR program tends to favor "established" small firms with well-developed ties to decision-makers in the funding stream. In a certain sense, this is entirely natural.
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57 Comments by John Williams, Navy SBIR Program Manager, at Navy Opportunity Forum, September 2005. 58 The substantial percentage of new entrants each year was revealed in the 2000 NRC survey.
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These data make clear that the DoD SBIR program is open to new entrants, with a significant percentage of new entrants for both Phase I and Phase II.
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From page 136... ...
One critical question is whether these firms do more than just win awards: do they provide good value to DoD and do they help the DoD SBIR program meet the Congressionally mandated objectives? This is a harder question to answer than it appears.
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From page 137... ...
By its 3-phase structure, the SBIR program suffers from an implicit linear myth, namely that a single grant for a single project is sufficient to fully develop a technology and drive long-term growth of the company. In practice, a single grant is often not sufficient to commercialize a product.
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From page 138... ...
4.4.4 Differing uses of SBIR by firms The expansive scope of the NRC study and its use of multiple methods provide an opportunity to place conventional measures of commercialization, such as sales, within the larger context of firm formation, business strategy, and long-term growth. Earlier assessments have contained typologies of the several different types of firms participating in the SBIR program.60 These typologies are especially useful for extending the analysis beyond the focus on "young, high-technology firms" to the more diverse array of small, high-technology firms that actually participate in the SBIR program.
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From page 139... ...
This is especially true for the relatively narrow, regulatory constrained defense market. Finally, firms also credit the entrepreneurial behavior of selected SBIR program managers as having catalyzed the firm's formation.
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From page 140... ...
They describe themselves as refugees from former firms that had grown too large and bureaucratic, or as exiles from small firms that had shelved development of a technology they strongly believed in.63 Responses to the NRC Firm Survey indicate that almost 25 percent of firms were founded entirely or in part as a result of SBIR awards. TABLE 4-15 Company Founded Because of SBIR Program?
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From page 141... ...
In his view, one of the primary benefits of the SBIR program is that it is seen as forcing firms to "think out of the box", while simultaneously providing innovators with access to users. Lalezari reports writing about 12 SBIR proposals during the firm's first year of operation.
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From page 142... ...
may come from SBIR awards. These awards may in part come from multiple Federal agencies.
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From page 143... ...
Trident began submitting SBIR proposals around 1986, submitting four unsuccessful proposals before winning an award. It views the SBIR program as one of the few available contract mechanisms that provide "size appropriate competition" opportunities for small firms to compete for DoD's R&D and procurement contracts.
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From page 144... ...
Even where the venture capital community has expressed interest, not all SBIR awardees are eager to enter into an agreement lest they be required to relinquish ownership and control. The basic motivation for starting a firm for several of the founders included in this study and the stylized workings of the start-up/venture capital markets diverge at this point.
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From page 145... ...
For example, PSI's SBIR-funded development of sensor technology to detect methane gas leaks has been sold to gas utilities. In general, sales to the private sector are largely based on technologies developed for DoD under SBIR awards – a classic case of spin-out development.
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From page 146... ...
For some more established firms, SBIR awards help augment existing product lines and broaden R&D portfolios. SBIR topics both focus a firm's attention on potential new uses for its technologies and expertise, and provide the incentive needed for the firm's management to devote resources to the agency's R&D priorities rather than to other uses.
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From page 147... ...
SBIR awards accounted for nearly all of ACR's revenues by 1992, but by 2005 only 15-20 percent of its sales were projected to come from STTR/SBIR. Drawing in part on the advanced research being done at the University of Michigan and its own expertise in both advanced ceramics and manufacturing, ACR developed a general purpose technology for converting AutoCAD drawings first into machine-readable code, and then to direct generation of ceramic, composite, and metal parts.
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From page 148... ...
A series of case studies were conducted to flesh out these varied approaches to the program. They explore the workings of the SBIR program, how SBIR awards enter into the business history and strategy of a firm, and the process of technological innovation at the firm level.
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From page 149... ...
Founders reported mortgaging their homes, drawing down their children's college savings accounts, and foregoing salary for extended periods of time. At this point in the development process, prospects for venture capital funding were nil.
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From page 150... ...
Their business strategy is not necessarily to pursue SBIR awards, but to address the specific, sometimes "one-off," research, testing, and evaluation needs of one or more Services and agencies. As noted above, earlier reductions in DoD 6.2 funding had led Services and agencies to turn to the SBIR program to undertake R&D projects that were deleted or delayed as a result of budget cutbacks.
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From page 151... ...
It involves the direct expenditure of funds for staff time, as well as the allocation of the firm's limited pool of researchers to pursuing SBIR awards rather than alternative contracts. Firms with DoD awards often have received awards from at least one other agency (NASA being the most frequently cited couplet)
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From page 152... ...
Indeed, some of the strongest statements on behalf of the program emanate from firms who are no longer eligible for the program or whose growth and current prosperity is based on DoD awards made a decade ago or more. Looking back, these now-successful firms credit the DoD SBIR program with providing critical infusions of funds in their formative period.
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From page 153... ...
Some are too new, too small, or too early in the product development process to have elicited any interest from investors in the venture capital community, hence the importance of SBIR awards as a validation of the technology and, indirectly, of the firm's potential. 4.4.6 SBIR and firm growth Estimates about the effect of the SBIR program as a whole (and individual projects in particular)
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From page 155... ...
72 These data indicate the tendency of firms which have received DoD SBIR awards, to patent, not the number of patents exclusively tied to DoD only awards. Some number of these reported patents are likely attributable to SBIR/STTR awards from other agencies.
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From page 156... ...
73 Examples include number of patents per million dollars of sales, or number of patents per number of SBIR awards, to gauge the effectiveness of the SBIR program across agencies. 74 The Night Vision Corp.
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