SBIR at the Department of Defense (2014)

Appendix F

Selected Case Studies

To complement its review of program data, the committee commissioned case studies of 20 SBIR companies that received Phase II awards from the Department of Defense (DoD), undertaken in 2010-2012. Case studies were an important part of data collection for this study, in conjunction with other sources such as agency data, the survey, interviews with agency staff and other experts, and workshops on selected topics. The impact of SBIR funding is complex and often multifaceted, and although these other data sources provide important insights, case studies allow for an understanding of the narrative and history of recipient firms—in essence, providing context for the data collected elsewhere.

A wide range of companies were studied: They varied in size from fewer than 10 to more than 500 employees and included firms owned by women and minorities. They operated in a wide range of technical disciplines and industrial sectors. Some firms focused on military applications, and others focused on commercialization primarily through the private sector. Overall, this portfolio sought to capture many of the types of companies that participate in the SBIR program. Given the multiple variables at play, the case studies are not presented as any kind of 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 components of the awardee population. The case studies presented in this appendix have been verified by the companies that they feature and they have permitted their use and identification in this report.

ARCHITECTURE TECHNOLOGY CORPORATION INC. (ATC): SBIR CASE STUDY

Based on interview with Gene Proctor, Vice-President of Business Development October 21, 2011 Washington, DC

Architecture Technology Corporation (ATC) is a privately held company headquartered in Eden Prairie, Minnesota. It was founded in 1981 by

Dr. Kenneth Thurber—an expert on Local Area Networks (LANs)—to provide publications, seminars, and consulting to the nascent industry.

Over the course of 30 years, ATC has reinvented itself several times. The company originally provided training and seminars focused on LAN development and deployment, with the FAA as a major client. These services naturally expanded to include systems engineering services and consulting on the design and construction of computer networks.

Early work in this area included a substantial role as subcontractor to the Volpe Center in Boston, which was leading FAA’s efforts to develop next-generation traffic control systems. This led to numerous contracts with FAA: ATC has now performed more than 50 projects for the agency, ranging from terminal and tower automation to runway safety. This experience led to software development and specialty engineering services to industry leaders, such as Ford and Boeing.

As with many consulting companies, ATC determined that its work could also lead to commercial software and hardware products. Starting in 1990, the company focused on using SBIR and other funding sources to develop products. These are sold under the brand name Triticom and have received several industry awards.

Commercial sales, however, require ongoing research and development, so ATC founded a research and development (R&D) group in 1994. The group focuses on distributed computing, next-generation networking, information assurance, information management, intelligent systems, and reliable computing. ATC has received numerous SBIR awards from agencies including NSF, Defense Advanced Research Projects Agency, other DoD agencies, and NASA.

ATC further expanded its research activities with the 1999 acquisition of Odyssey Research Associates in Ithaca, New York, which is now a wholly owned subsidiary. Odyssey conducts R&D in computer security and reliable systems and has a growing practice in information management.

Several ATC-NY products funded by SBIR awards have evolved into products. These include the Online Digital Forensic Suite™, CYDEST™ (which provides simulated cyber defense training on virtualized computer networks), and the Pedigree Management and Assessment Framework™ (PMAF; which is a general-purpose, extensible system for maintaining the provenance of information that originates in disparate, distributed information management systems).

In 2001, responding to an FAA solicitation, ATC started a new focus on airport security, and in particular on airport incursions—problems posed for ground control in light of airport extensions that left significant blind spots. The system developed by ATC now sends alerts to the control tower and also flashes landing lights as a warning to pilots. The technology underpinning the system was generated through the SBIR support projects, including tools developed to support design of networks for Aegis class warships, where ATC acted as a

subcontractor for Lockheed Martin, developing a software package for simulating the operations of all weapons controllers and sensors onboard.

In 2004, ATC spun off Cyber Security Technologies to develop and market its computer forensics products, and it formed a joint venture with RichARO Enterprises in 2007 to market PMAF.

Awards

ATC has received considerable recognitions for its work, including the LAN Magazine Product of the Year Award, the U.S. Army’s 2002 SBIR Phase 2 Quality Award, and the Minnesota Entrepreneurial Award in 2002. The company is a three-time recipient of the Tibbetts Award (1998, 2000, 2007).

FAA honored ATC in 2002 for “exploring new and advanced technologies for increased runway safety in the National Airspace System” and again in 2005 for “superior support and outstanding commitment to the planning, technical oversight, and production of the FAA Final Approach Runway Occupancy Signal (FAROS) Concept of Operation video.”

Products and Commercialization

ATC has reinvented itself a number of times to adjust to changing commercial environments and opportunities. Although initially a consulting company, its development of commercial products led to the application of core technologies in new areas and to the spinoff of a subsidiary to focus on computer security issues.

Even relations with its major federal clients have changed to match changing agency strategy. Mr. Proctor noted that FAA had for most of the 1990s and 2000s used a prime-based model for services delivery. Starting in 2008, the FAA established new contracting vehicles focused on acquiring services directly from smaller companies such as ATC.

As a result, ATC has been providing a range of services to FAA, including development of Quality of Service standards, redundancy assessment, requirements development, and proposal review.

CYDEST™—A Flight Simulator for Network Defenders

ATC’s CYber DEfenSe Trainer (CYDEST) provides immersive, tactical-level exercises in computer network defense and rapid digital forensics. It aims to support “in the trenches” personnel such as network administrators, incident first responders, and digital forensics investigators.

“Free play” exercises are run in real time within a virtualized environment using real systems, real attacks, and real defensive tools. CYDEST’s training scenarios are complemented by pedagogical training materials integrated into the system.

CYDEST provides flexible training for students while reducing instructor workload. The system is available 24/7/365 from any Internet-connected location, and it automatically evaluates trainee performance, providing instructors with audit records of exercise runs. Auto-assessment also offers dynamic attack scenarios that adapt to trainees’ defensive actions.

The system provides exercises on real systems, allowing students to defend against real attacks. It dynamically responds to student actions, altering attack strategy and providing hints in order to personalize training. Scenarios are written to train for specific networks, software, and learning objectives. Student progress is slightly monitored as students use an integrated electronic lab notebook.

STAMINA—Survivable Tactical Ad Hoc Mobile Network Architectures

Several major defense platforms have called for secure and survivable ad hoc wireless tactical networks. ATC is developing a middleware to increase intrusion tolerance and survivability for mobile ad hoc networks. The technology can be applied to future mobile tactical networks, protecting them from sophisticated network and information attacks.

Spinoff Company

In 2004, ATC spun off Cyber Security Technologies Corporation (CST) to focus on software for computer investigations. CST focuses on two emerging markets: technology to enable the investigation of live, running computer systems across a network; and technology to automate the detection and analysis of peer-to-peer (P2P) client programs and associated files. The OnLine Digital Forensic Suite™ (OnLineDFS) enables network-based, real-time investigations of live, running computer systems. It is ideal for rapid incident response, compliance management and e-discovery in enterprises, and for the needs of law enforcement.

OnLine Digital Forensic Suite™ (OnLineDFS)

OnLineDFS is designed to be minimally disruptive, avoiding the often prohibitive expense of shutting down a vital server. It gathers information about the running state of the target computer that cannot be gained any other way. And it saves times, enabling a very rapid response to an intrusion.¹

No software needs to have been preloaded onto the target machines, and a web-based interface allows the investigator to connect to OnLineDFS and manage an investigation from anywhere with an Internet connection, which need not be high speed.

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¹See F. Adelstein, “Live Forensics: Diagnosing Your System Without Killing It First,” February 2006, <http://frank.notfrank.com/Papers/CACM06.pdf>. Accessed July 17, 2014.

OnLineDFS enables the rapid, forensically sound examination of a computer without disrupting the operations of the enterprise. It delivers an extensive suite of functionality for the investigation and capture of volatile and persistent data from the computer under examination.

P2P Marshal™

This is a computer forensic tool to analyze P2P usage on file system images. It automatically detects what P2P client programs were or are present, files that were downloaded or shared using each P2P client, servers with which the computer under investigation had contact, and related information.

This program appears to have particular application for law enforcement efforts to track pedophiles online.

IP and Universities

ATC has throughout its existence seen value in publishing technical documents. Dr. Thurber’s biography claims more than 60 peer-reviewed publications and 14 books on LAN-related topics.² The company has also published and distributed a book on computing architectures³ and has developed its own publishing imprint, through which it distributes Dr. Thurber’s book on building a technology company.⁴

In recent years, the company has expanded effort to patent its technologies. According to the U.S. Patent and Trademark Office (USPTO), ATC was the assignee on 15 patents as of October 2011.⁵ Mr. Proctor notes that only recently has patenting become significant, in part because software has such a short product cycle that patenting is rarely the best way to protect its value.

In fact, Mr. Proctor said that part of the increase in patenting at ATC reflects the growing importance of commercialization metrics at DoD, where patents are one of the metrics feeding into a company’s commercialization score. In addition, the company found that individual algorithms could be patented that had applications across a number of potential markets.

ATC has worked closely with a number of universities on SBIR-related projects, including the University of Minnesota, South Dakota State University, Cornell University, and Purdue University. However, although Mr. Proctor noted that ATC sees considerable utility in tapping university technical capacity,

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²Dr. Thurber biography page, <http://www.atcorp.com/About/team.html>.

³J.A.K. Baker and K.J. Thurber, Developing Computer Systems Requirements, Ithaca, NY: Digital Systems Press, 2011.

⁴K.J. Thurber, Big Wave Surfing, Edina, MN: Beaver Pond Press, 2011.

⁵See USPTO, ATC search, <http://patft.uspto.gov/netacgi/nphParser?Sect1=PTO2&Sect2=HITOFF&p=1&u=/netahtml/PTO/search-bool.html&r=0&f=S&l=50&TERM1=architecture+technology&FIELD1=ASNM&co1=AND&TERM2=&FIELD2=&d=PTXT>. Accessed October 27, 2011.

it limits and tightly controls university involvement. Specifically, ATC wants to ensure that the university has no stake in any IP developed in the course of the relationship and hires universities as subcontractors to focus on solving specific and defined technical problems.

ATC and the Primes

ATC has worked on prime-led teams in a number of projects. However, after a number of failed partnerships, the company has decided that the incentive structure at DoD is such that, in most cases, primes are likely to squeeze out smaller companies such as ATC once a contract has been awarded. As Mr. Proctor noted, “The primes are very keen to have us on the bidding teams; but not so interested in following through with actual funding for technology development or deployment afterwards.” As a result, ATC now works on teams with primes only when the prime is the subcontractor to ATC.

Mr. Proctor wondered whether primes should be required to use SBIR-funded technologies for some fixed percentage of their acquisitions contracts. In his view, the primes would never voluntarily put a small business subcontractor in the critical path of a major project.

ATC and SBIR

ATC won its first Phase I award in 1994 and its first Phase II a year later. Since then, the company has won a total of 91 Phase I and 37 Phase II awards (as of 2010), amounting to slightly more than $30 million.⁶ At the time of the interview, it expected to compete for 10-12 Phase I awards and 5-7 Phase II awards every year, and Small Business Administration (SBA) data indicates a conversion rate of about 42 percent.

Overt time, the role of SBIR at ATC has changed. Originally a source of R&D funding as the company started to develop its own products, the SBIR program is now much more directly focused on product development. Mr. Proctor observed that this also helps the company use the program as a means to train young engineers. An engineer wishing to apply for SBIR funding first needs to make the case internally that the project will result in commercial sales, then writes the proposal—which provides valuable training in and of itself. If ATC wins an award, then engineer is asked to run the project, which not only provides critical experience, but also acts as a valuable internal incentive for staff and limits the amount of management involvement.

Mr. Proctor noted a number of positive changes in the operations of the SBIR program over the past 10 years. For example, at all agencies the gap

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⁶Small Business Administration (SBA), Tech-Net SBIR/STTR awards database, <https://www.sbir.gov/past-awards>, accessed October 28, 2011.

between Phase I and Phase II has been substantially reduced, and new funding mechanisms have emerged to help companies manage the remaining gap.

Regarding the scoring of proposals, Mr. Proctor said that he thought the selection process was generally fair and that debriefs in general correctly recognized the strengths and weaknesses of a proposal. He noted that outcomes could be improved if successful proposals were also debriefed.

Mr. Proctor noted that a degree of uncertainty is inevitable when working with the SBIR program and federal agencies. For example, ATC had won a recent Phase I to network the blood supply for the Army Medical Corps. But despite considerable success—and demand from the client—funding of Phase II was diverted elsewhere.

ATC strongly supports new efforts such as the Commercialization Pilot Program and the Rapid Innovation Fund at Navy. The company is actively pursuing partnerships with primes on the latter. However, the company believes that primes must bring a program of record to the partnership and must be prepared to be the subcontractor if the team wins. Despite considerable confusion on launch (especially related to the release of key information that was hitherto classified), ATC sees programs such as these as significant opportunities to be pursued.

Finally, Mr. Proctor explained that ATC policy is to meet face to face with each TPOC at least once, even if the company has to pay for the travel to build trust and identify the real needs of the client.

SBIR Recommendations

Mr. Proctor offered a number of conclusions and suggestions based on ATC’s work in the SBIR program:

1.   Size of awards. ATC approves the shift to Phase II awards of $1 million, which provides sufficient funding to achieve solid research results. However, Mr. Proctor stressed the importance of agencies retaining funding for bridging programs such as the NSF Phase IIB, which helps companies fund full commercial markets for Phase II projects.

2.   Improving technical points of contact (TPOCs). Mr. Proctor said that variation in the quality of TPOCs is a significant issue—indeed if ATC’s TPOC was not strongly committed to a project, then there was no way to move forward to Phase III. One improvement would be to ensure that SBIR activities are part of the TPOCs’ annual job review.

3.   TPOC stability. ATC found that when the TPOC changed, the project usually failed to reach Phase III. He suggested that the agencies consider ways to reduce or eliminate this problem, which to some degree has declined since DoD sharply reduced the time line for initial topic submission to publication in a solicitation from more than 2 years to about 1 year.

Company Update:

Since 2011, ATC has successfully completed an RIF—based on multiple successful Phase II projects, we had a very successful “live fly” test series at Hanscom AFB late last month—the test team confirmed that our CSTAR software module is TRL8 and ready for transition to a tactical project (this continues to be the most problematic part of the SBIR project—finding a program of record that will support the transition).

CYBERNET SYSTEMS CORPORATION: SBIR CASE STUDY

Based on interview with Dr. Charles Jacobus, Chief Technology Officer and Co-founder September 15, 2011 By telephone

Cybernet Systems Corporation (Cybernet) is a privately held company headquartered in Ann Arbor, Michigan. Founded in 1989 by Dr. Heidi Jacobus and Dr. Charles (Chuck) Jacobus, the company has completed a large number of DoD contracts and is a certified 8(a) woman-owned small business. The company’s vision has focused on amplifying human capabilities through the application of technology.

Utilizing the founders’ expertise in robotics and human factors research, Cybernet has been a leader in robotics since its inception. It has provided innovative defense products in a number of areas and has applied its expertise in the health care sector.

Company formation was directly influenced by SBIR. The company was founded because Heidi Jacobus had won Phase I awards related to her PhD thesis. In 1990 Cybernet received its first Phase II award, which was sufficient to hire Chuck Jacobus and to permit a move to new premises.

The company initially focused on force feedback and human factors research, and it filed its first patents for force feedback in game controllers in 1992. By 1996, the company had 40 employees, largely PhDs, with the work closely centered on robotics, sensors, and remote applications. During this period, SBIR awards opened the door to a number of sponsors especially in DoD and NASA.

Markets and Capabilities

Cybernet’s capabilities are all oriented around the core vision of amplifying human performance through the advanced application of technology. Commercial products and services cover a range of product areas. Key milestones for the company include:

• 1996: First portable robot control stations;
• 1996: First Internet-enabled medical device;
• 1998: License/spin-off of force feedback to Immersion Corporation;
• 1998: NetMAX™ product launched—national distribution in 1999;
• 1999: Immersion initial public offering (IPO) (NASDAQ: IMMR);
• 2001: Cybernet Medical launched for MedStar product; and
• 2004: First Automated Tactical Ammunition Classification System (ATACS).

Defense

ATACS

One important product has been the Automated Tactical Ammunition Classification System (ATACS). ATACS is a tactical small arms ammunition sorter designed to completely automate the rapid sorting and inspection of loose small arms ammunition ranging from 5.56 mm to 50 calibers. ATACS operates at a rate of 12,500 rounds per hour, in contrast to traditional, time-consuming methods of hand sorting by military personnel.

ATACS was developed using existing commercial-off-the-shelf (COTS) components and the company's Projectile Identification Systems (PIDS), based on a previous SBIR award. ATACS can determine chambering dimensions to include length, width, height of primer, concentricity, bent bullet tips, dents, corrosion, and perforation in cartridge case and/or bullet.

ATACS is small and lightweight enough to cost-effectively employ in the field. Within 60 days, Cybernet quickly developed and fielded the ATACS for the U.S. Army at Camp Arifjan, Kuwait, where the product was used to reclaim serviceable ammunition through this faster, safer, and more consistent inspection process. Cybernet is currently building its sixth ATACS for Army.

This rapid delivery was made possible in part by the SBIR compete clause, which permitted the Army to sole source the contract to Cybernet based on the competition for the previous SBIR award.

LCAR

The Large Caliber Automated Resupply (LCAR) program aims to apply robotics technology to store, supply, and replace ammunition for military vehicles such as tanks on the battlefield. This product automatically loads the ammunition into the vehicles, and unloads unwanted casings or ammunition, reducing the danger associated with manual re-supply efforts in volatile situations by removing soldiers from vulnerable exposure.

This project addressed the need to automate loading in the new Future Combat Systems program. Boeing had in fact selected Cybernet as supplier when the FCS was cancelled. The design package remains relevant for future programs.

VSIL

The Virtual Systems Integration Lab is a virtual prototyping package for modeling vehicle systems and components, developed by Cybernet and Army’s Tank-Automotive Research, Development and Engineering Center (TARDEC). VSIL applies its commercial virtual-design technology—pioneered in the automotive industry—to simulate Army vehicles and perform rapid tradeoff analysis for soldier safety and operational effectiveness

This new project focuses on providing Navy with automated tools for the system test and repair of submarines, to augment the ability of system maintainers to prevent and repair system faults in a timely manner. The objective is to release war fighters from the burden of performing routine diagnostic and maintenance, allowing them to focus on the mission at hand.

Health Care

MedStar™ is a web-based system for outpatient care that collects physiological data from personal patient devices and sends the data to a web-based electronic patient and data management system. Cybernet launched the MedStar in 2001, and it has been distributed nationwide since 2006.

The system collects physiological data from patients and their in-home devices (such as scales, respirometers, pulse oximeters, glucometers and blood pressure cuffs) and records it in Cybernet’s web-based electronic patient and data management system. This provides physicians, nurses, pharmacists, and other health care professionals with immediate access to updated outpatient information, regardless of location.

MedStar appears to have particular relevance in rural communities, where specialist (or even general) medical help may be remote. For example, the MEDSTAR system has been piloted by the Oklahoma City-based INTEGRIS Rural Telemedicine Project. According to Cynthia Miller, director of the project, remote vital sign monitoring can help eliminate the distance barrier and provide nurses with more timely information. It has helped prevent unnecessary trips to the emergency room, and patient quality of life has improved.

Although other competitors have largely sealed off the Veterans Administration—a substantial potential market—Cybernet has had more success breaking into the hospital systems market, in which diversified hospitals offered the best market. MedStar helps to keep chronic but not seriously ill people out of expensive beds and lowers the cost of nursing. Many diversified hospitals run home care programs or are affiliated with preferred provider organizations (PPOs) and therefore have interests that align with Cybernet solutions.

Automated Transportation

Cybernet is also focused on addressing the federal mandate⁷ that one-third of operational ground combat vehicles be unmanned by 2015. Cybernet has converted a minivan into an autonomous ground vehicle and was one of only 35 teams worldwide invited to the National Qualifying Event for the 2007 DARPA Urban Challenge.⁸

Cybernet has developed an approach that uses COTS technology to implement an approach that can be rapidly and directly inserted into Army’s existing fleet of medium tactical trucks currently used in convoy operations.

Cybernet has contracts to build robotic forklifts. The company transitioned their DARPA Urban Challenge technology to build an automated forklift for the Army. There is a potentially significant market for this technology in mid-sized warehouses that are too big for fully manual operation and too small for installation of a fully automated materials movement system. Automated vehicles know traffic rules, and 30 meters of sensed data, which permits them to find and fetch materials. Other Army bases are interested in using the technology to handle ordnance.

Sensors and Robotics

Cybernet has been working in this area for more than 20 years. Currently available products include those based on the company’s Computer Vision system, which can be used to recognize objects (spacecraft, parts, grasp points, docking targets, or anything that can be defined by a computer aided design (CAD) drawing or description) from views taken from one or several cameras.

NetMAX Robotics focuses on product sales and commercial development of robotics, situational awareness systems, and embedded sensor products. Although the company was originally focused on networks and Linux-based software development, this Cybernet subsidiary changed direction in 2007 and has become the deployment mechanism for Cybernet technologies in robotics, sensor systems integration, and algorithm development, man-machine interface design, modeling and simulation (with focus on massive multiplayer scale simulations), and network appliances and security. Earlier work in this area included the force feedback work that eventually led to licensing by Immersion (see below).

Currently, Cybernet is working on leading edge applications in gesture recognition from video streams. One product in use today is GestureStorm™,

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⁷2001 National Defense Authorization Act.

⁸The 2007 DARPA Urban Challenge was the third in a series of competitions held by DARPA to foster the development of autonomous robotic ground vehicle technology that can execute simulated military supply missions. The 2007 competition was held in a mock urban area.

which allows TV meteorologists to control their on-air weather displays through purposeful gestures.

IP and Awards

Cybernet has developed more than 20 original devices and systems that are currently in use across a spectrum of commercial and defense clients, with more than 200 completed contracts and 31 awarded patents, with more patents pending.

In addition to its patents, Cybernet has won a number of industry and government awards. These include a Tibbetts Award in 2006, three NASA spinoff awards, the Army commercialization recognition awards, and others.

Licensing and Spinouts Strategy

Cybernet’s substantial patents portfolio has permitted the company use of licensing as a core commercialization pathway. The company’s experience also shows that commercialization with SBIR is rarely the simple linear process sometimes expected.

However, Cybernet has discovered that while Phase I is almost always necessary to find a marketing partner to enter specialty markets, those partners are, according to Dr. Jacobus, rarely prepared to pay for technology development. It is in that context that the SBIR program continues to play a key role for Cybernet—funding the technology development that can later be licensed or spun out.

For example, in the late 1990s, Cybernet and Immersion Inc. (see NAS Immersion Case Study) emerged as the two leading companies in the provision of technology for integrating force feedback into game controllers. While the two companies competed for Microsoft’s business (Microsoft was the leading game controller company at the time), the latter was able to use that competition to push down prices and limit commitments.

In 1998, Cybernet decided that it would be best to license its technology to Immersion in exchange for royalties and some equity—a decision that led Microsoft to announce an agreement with Immersion within weeks of the deal. Even though Cybernet did not directly commercialize its SBIR-supported force feedback technologies, they were eventually deployed by Immersion and are now found in a majority of mobile phone handsets as well as many game controllers. Cybernet itself benefited substantially from the subsequent Immersion IPO in 1999.

The licensing strategy adopted by Cybernet works well with the bootstrap strategy often adopted by Michigan companies, where venture or angel funding remains hard to acquire. Even though Cybernet raised $5 million in funding for its force feedback projects in the late 1990s, Dr. Jacobus sees this as the exception rather than the rule.

Cybernet’s portfolio-based strategy is quite different to the Silicon Valley/venture capital model. Dr. Jacobus likens Cybernet’s strategy to farming—where some years are better than others but no project ever really dies, in contrast to the prune-and-focus approach of the venture model.

The SBIR Program and Recommendations for Improvement

Dr. Jacobus noted that he was speaking personally, not on behalf of Cybernet.

Overall SBIR provides a critical connection between small business and the defense acquisitions programs. Small business cannot break into the defense business on its own and usually cannot reach DoD contacts without the SBIR program’s help. The program allows direct contact with government, which would otherwise view companies such as Cybernet as much too small. Thus the program offers companies a great opportunity to garner wide exposure to a number of agencies and to develop a wide range of technologies.

Dr. Jacobus noted that the program also provides real benefit to the agency. DoD laboratories have major technology transfer problems—as his work on the Army Science Board attests. Providing technically gifted people with sufficient money to maintain a small business and huge incentives to bridge the gap between lab and prototype allows these small companies to couple with DoD on a much richer basis than would ever be possible without the SBIR program. As a result, DoD gets access to a huge field of possible advanced technologies for a small price.

The SBIR program could also be credited with the development of entire industry sectors. For example, technology development primarily initiated by NASA funded everything in the force feedback industry. As a result, it is clear that game controllers would not have been developed without NASA SBIR funding. Although initial work was funded by the Army, tactile output was the result of NASA funding. Today, it is fair to say that 100 percent of game controllers, plus a considerable share of buzzers and haptic feedback on phones, has resulted from SBIR investments.

• Regarding the size of awards, Dr. Jacobus believed that results would be optimized by keeping Phase I SBIR awards as small as possible, while ensuring that funding for Phase II was sufficient to complete prototype development or a similar level of technology exploration.
• Regarding incentives for commercialization, Dr. Jacobus said that there was no need for additional incentives and pressure—in his experience, commercialization is what business people do and few companies are satisfied with simple technology development. The point of being in business is commercialization.

• However, he also noted that finding ways to better connect to the acquisition process would be a key to improving results. This for him was always the most difficult part of technology development.
• Successful connection to government initiatives especially in acquisitions would elevate the stature of SBIR program managers
• Still, Dr. Jacobus noted that it is possible—perhaps necessary—to view the parameters of success in SBIR differently than in strictly commercial development. It does not make sense to apply venture capital benchmarks to SBIR outcomes, because the circumstances and objectives are both different.
• Regarding commercialization support programs, Dr. Jacobus noted that, although he had participated in almost all of them over time, they provide limited value to experienced executives. Like any strategic planning process, they have some value, but no more than any similar exercise. However, he strongly supported activities such as the Navy Opportunity Forum, which specifically focused on connecting SBIR companies to the acquisition programs and primes.
• More generally, Dr. Jacobus said that every program office, particularly at DoD and NASA, should have an SBIR strategy. Currently, topics are usually generated by staff familiar with current programs, and hence the topics address current problems. But, by the time the Phase II has been issued and completed, those programs are in the past and the SBIR company is stranded.
• Dr. Jacobus offered two more suggestions for improving the program:

o   Allow the program offices to allocate a percentage of funding for efforts to expand outreach to small business. In his view, this would be more useful than commercialization training.

o   Allocate some SBIR funding via the primes, that is, allow the primes input into the development of topics and the selection of awards.

DANIEL H. WAGNER ASSOCIATES: SBIR CASE STUDY

Based on interview with Dr. Reynolds Monach, Vice President of Research and Development September 19, 2012 By telephone

Daniel H. Wagner Associates (“DHWA”) is a privately owned company headquartered in Exton, Pennsylvania, with an additional office in Hampton, Virginia. DHWA was founded in 1963 by Daniel H. Wagner after he

left the Burroughs Corporation. Dr. Wagner remained president and chairman of the board until 1985.

The company aimed to combine the power of mathematical theory with Dr. Wagner’s operational experience to address complex problems in DoD operations—especially in Navy. Since then, the firm has expanded to serve a wider client base, but has continued to focus on the application of quantitative methods to decision making.

These methods have been applied to many different areas of operational analysis, particularly for Navy and other sea-based organizations. DHWA developed expertise in the application of mathematics to the needs of sea-based search early on, and it has been involved in projects such as the following:

• The successful search for the H-bomb lost in the Mediterranean off the Spanish coast in 1966, when a B-52 collided with a tanker.
• The search for the USS Scorpion in 1968, an attack submarine that imploded 400 miles west of the Azores and went to the bottom at a depth of some 2000 fathoms.
• The successful search for the packet ship SS Central America sunk off the coast of South Carolina in 1857, with $400 million of gold (from California) aboard.

Strategy

Providing technical support to Navy still constitutes the core mission for the company. Overall, the company’s work for Navy constitutes about 50 percent of the total and has since the early 1990s, when the company made the decision to redirect some of its focus away from Navy. (Indeed, the company had initially been focused almost entirely on anti-submarine warfare (ASW) during its earliest years—a sub-focus within Navy).

Subsequent diversification extended to other parts of Navy, then other DoD components, and then beyond DoD. Currently, areas of interest, in addition to ASW, include mine warfare and unmanned vehicles, where data fusion is an important technology.

Today, DoD accounts for about three-quarters of DHWA revenues, and Navy alone accounts for about one-half, according to Dr. Monach.

Technology Development

DWHA’s mission focuses on solving problems for DoD, and to do that it must successfully transition the technology, which in turn requires effective partnerships with primes. In fact, DWHA has a very long history of exceptionally fruitful collaboration with several primes.

This is in part because the company understands the customer at a very deep level; it has worked with Navy for more than 50 years and has developed a deep understanding of how to meet Navy needs and requirements. This knowledge has also been applied successfully to other components in DoD and elsewhere.

One example of paths through which technical solutions emerge, expand, and then are applied to new problems and new solutions is highlighted by DWHA’s experience in mine warfare through its environmental data fusion mine countermeasures (EDFMCM) tools. The system is comprised of four components:

• an information collection tool, designed to access data in near real time from multiple sources
• polygon computational tools that resolves conflicting data and identifies “best” information
• a measurement fusion and optimization tool
• a data analysis tool, which relates geospatial data to operational needs.

The net result is a system that gathers data from varied sources and provides ship commanders with optimized routes through potential minefields. This outcome was, however, the result of a long period of development.

A number of early SBIR awards were used to develop environmental data fusion for mine warfare. An SBIR award from the Office of Naval Research (ONR) funded development of an optimal routing algorithm that could be used to route a ship to avoid mines. The tool was developed further so it could be tested on the Navy DDG-1000 R&D destroyer, whose sonar was designed to be able to locate mines. ONR provided additional funding, and DWHA developed tools for real-time mine avoidance.

Once this tool was in place, the submarine force wanted the tool to enable a sub to go through possibly mined areas, finding a route that could be transited with the least risk and at the greatest speed.

DHWA teamed with Applied Research Labs of the University of Texas (which provided sensor technology) and SAIC (which was the prime contractor on the Mine Warfare and Environmental Decision Aids Library (MEDAL) program focused on mine warfare planning and execution), with which DHWA had partnered for more than 20 years.

The new approach was fielded under the APM-09 technology upgrade program, where progress was evaluated. Under this program, the new technology was integrated into a testbed, and fleet operational officers were then brought in to run the operation.

The testbed offered an opportunity to compare the traditional manual model of mine avoidance with the new approach, and the latter demonstrated dramatically improved outcomes. Once performance proved out, the new approach was integrated into the standard software upgrade package that

emerged from the APM-09 program, and it will eventually be loaded into every submarine in Navy’s fleet. The APM-09 program is funded by PEO IWS 5 (Integrated Warfare Systems—Undersea Systems).

DWHA’s expertise can be applied to any area if the problem is challenging enough. Some of its work—notably on data fusion and data optimization—can be transferred with limited difficulty from DoD to other applications, or within DoD. According to Dr. Monach, the company’s core technologies are now:

• multiple hypothesis data fusion (used in many different fusion applications);
• non-Gaussian tracking (now called particle filters);
• Bayesian inference (for classification and target association);
• classical optimization (based on Brown’s algorithm—named for Scott Brown who worked at DHWA in the late 1970s); and
• genetic algorithms in naval applications.

Nongovernment applications are also important. Base technologies have been applied in several other areas:

• DWHA’s crane control subsidiary uses tracking algorithms that are also used to track submarines. Ship-loading cranes run on gantries, where operators traditionally eyeball swinging loads. DHWA applied algorithms to controls that move the crane, limiting and predicting load movements, so that the operator is no longer part of the control circuit.
• DWHA’s statistical arbitrage program tracks stock and commodity prices using algorithms transferred from DoD projects—and is also a source of technology for transfer into DoD. Both cases focus on optimal data assimilation and machine learning algorithms.

Commercialization

DHWA works primarily as a contract research house, both directly for DoD and for DoD prime contractors, using its expertise to solve technical problems for clients. Most often, this results in algorithms embedded in software tools that are freely available to U.S. government agencies, because their development was supported by government funding.

The company does in some cases develop software products for sale. These include a suite of math finance tools for retirement planning and portfolio management, an automated assessment system that provides confidence scores for DNA sequence base calls, software to support search salvage and rescue, and tools for cargo handling and crane control.

DHWA does not usually anticipate that its R&D will result in additional licensing revenues or further contracts, except insofar as further

upgrades to its tools are requested at a later date. Its business model for commercialization does not include or rely on downstream sales or licensing revenues.

These projects have been commissioned by a wide range of clients. Within DoD alone, DHWA supports the offices and programs listed in Table F-1. DHWA often works for these clients in conjunction with DoD primes, sometimes as a subcontractor and other times as the prime itself, especially on SBIR awards. Prime partners include Lockheed Martin, Northup Grumman, Boeing, General Dynamics, the Institute for Defense Analysis, and SAIC. DHWA has also partnered with NASA’s Jet Propulsion Laboratory (JPL), MIT’s Lincoln Labs, Johns Hopkins Applied Physics Laboratory (JHU/ARL), and Penn State’s Applied Research Laboratory (PSU/ARL).

TABLE F-1 DoD Office Clients

SOURCE: Daniel H. Wagner Associates.

DHWA also serves an array of clients outside DoD, including other federal agencies such as NIH and DoE and private-sector clients in the biotech, finance, information technology, and transportation sectors.

Other Awards

DHWA has been recognized many times for the quality of its research and the impact of its activities. The company won a SBIR Tibbetts award in 1999, a SBIR Phase 2 Excellence Award in 1997, citations and awards from the Navy and the Defense Logistics Agency, as well as recognition from the Military Operations Research Society and the Operations Research Society American.

Working with Prime Contractors

Although many SBIR companies report difficulties in working with primes at DoD, DHWA has a long record of working with them successfully. Some of its relationships go back more than 20 years—for example, with SAIC, and more than 15 years with Lockheed Martin Mission Systems and Training (MST) - Owego. Dr. Monach observed that, in many cases, the prime knows that DWHA has certain capabilities and will seek to bring the company into a project, or alternatively, DWHA will identify a prime that would be an effective partner for pursuing a particular opportunity.

A review of DHWA’s projects shows that almost all are completed on behalf of DoD via contracts from primes (see Table F-2). This effective cooperative arrangement seems driven in part by the lack of competing interests. Other SBIR companies have complained that primes partner with them to acquire technology and then freeze them out of larger contracts.

DWHA provides highly specialized services that, from the perspective of primes, are too small (in dollars)or too difficult to develop given the very high degree of technical knowledge required, but also, and critically, do not lead to large follow-on contracts. There is no Phase III goldmine at the end of the road.

So the incentives under which DHWA partners with primes are very different from those that dominate most other partnerships between primes and SBIR companies There is almost no overlap in terms of markets; DHWA provides unique services that the prime has no interest in replicating; DHWA has its own extensive relationships with DoD and especially Navy; and there is no downstream contract that could be a cause of contention. In addition, DHWA itself has no interest in competing in any of the prime’s areas of competence.

Another example of successful links with primes is in the Navy antisubmarine warfare helicopter program, for which DHWA developed an acoustic mission planner that was integrated into the program via a subcontract from Lockheed Martin. Rather than develop the data search and optimization

capabilities of the type needed, Lockheed Martin prefers instead to partner with DHWA.

The partnership between DHWA and Lockheed Martin has successfully passed the evaluation stage on this project, and Navy is now requesting more advanced capabilities. The system currently works on a single helicopter, but Navy seeks to optimize the program for 2-4 helicopters doing the same job. DHWA anticipates that the system will be implemented in Navy helicopters in 2016, which will constitute the next major phase of this project.

And as with its partnerships with SAIC on sea mines and Lockheed Martin on helicopters, DHWA is working with Northrop Grumman on unmanned autonomous vehicles, to which it has sold one software system outright.

Uses of SBIR

According to the DHWA web site, the company has won a total of 119 Phase I awards and 48 Phase II awards. The SBA TechNet database shows 104 Phase I awards and 37 Phase II awards since the first award in 1983, providing a total of about $26 million in SBIR funding over the time period.

The bulk of DHWA’s SBIR work has been on DoD awards, and more than one-half of these has been for Navy (see Table F-3). DHWA uses SBIR primarily to conduct R&D needed to develop solution to problems specified by DoD agencies.

One example of the complex way this works in practice comes from DHWA’s work on managing autonomous vehicles in a Navy program. For the past 4 years, DHWA has been included in the Navy’s Trident Warrior program. Sponsored by the Navy Warfare Development Command, Trident Warrior is an annual fleet experiment focused on gaining insights to improve future capability investments. DHWA has been included in projects working on unmanned vehicles, a program of growing complexity. In 2011 the program tested a four-vehicle autonomous group, using DHWA data fusion technology to manage the vehicles. DHWA demonstrated a number of significant new capabilities, including the ability to direct a unit using only data from sensors located on other units.

DHWA has also been working on a DARPA initiative to build unmanned surface vehicles to track diesel submarines. A Phase I award from DARPA funded preliminary data fusion, optimal tracking, and optimal reacquisition work. This was followed by three separate Phase II contracts, looking at data fusion using only passive sensors and at optimal navigation and search in very high sea states.

According to Dr. Monach, SBIR funding is used to take projects to the TRL 6-7 level, typically proving quantitatively that there are good technical reasons to adopt a selected technical approach, based on real-world data. This is

TABLE F-2 Projects and Primes

SOURCE: Daniel H. Wagner Associates.

a very different approach from hardware-oriented companies, which in general find it difficult to move projects beyond TRL-4 with SBIR Phase II funding.

DHWA typically does not seek to provide significant input into the SBIR topic development process, preferring to find opportunities among topics included in the solicitation, with a particular focus on topics that seemed ripe for transition. The company’s long experience with the SBIR program at DoD and particularly with Navy has given the company a good feel for what will transition, according to Dr. Monach.

In general, DHWA has not had significant problems with TPOC turnover at DoD. Often, the author of the original topic moved on during the process, which required efforts from DWHA to develop a new champion or at least educate the responsible officer about the topic, but DWHA believes this can be achieved effectively.

TABLE F-3 DHWA DoD SBIR Awards by Phase and Component

SOURCE: SBA TechNet database, accessed September 19, 2012.

SBIR Program Recommendations

DHWA considers the Navy Opportunity Forum to be very useful and participates every year. The forum provides a critical opportunity to get the company’s technologies and capabilities in front of many potential high-yield customers, mostly connected to Navy, but Air Force, Army, and even private-sector buyers are also present. This is the only trade show used by DHWA. Dr. Monach noted that neither Army nor Air Force offer any equivalent opportunity or forum.

Dr. Monach observed that CCR is a fairly useful way to monitor commercial outcomes from SBIR projects and that with the transition to electronic records it is not especially burdensome. DHWA uses the process in part as a way to track its own outcomes for a particular project.

DHWA’s company commercialization index is relatively low—in the 60s. Dr. Monach explained that this does not reflect the company’s very successful record in transitioning technology and solutions into the Services. He argued that the company has in effect been penalized for its business model, which does not impose further charges on the government for actuations—the standard model for SBIR companies. The CCR—and company commercialization score in particular—primarily measures downstream dollars, not successful transitions.

Dr. Monach suggested that an additional metric reflecting the number of successful transitions would be helpful and would correct the current unbalanced approach.

Overall, Dr. Monach said that SBIR funding levels were acceptable and that reporting did not impose an undue burden. His company did not use the Dawnbreaker service, so he could not comments on that kind of support. It had, however, used a state of Virginia course on writing SBIR proposals, which was useful. He noted that Virginia does a good job of supporting SBIR applicants.

FETCH TECHNOLOGIES: SBIR CASE STUDY

Based on interview with Mr. Robert Landes, Former CEO February 9, 2012 Los Angeles

Fetch Technologies (“Fetch”) was founded in 1999 by two faculty members from the University of Southern California Information Sciences Institute, Dr. Steve Minton and Dr. Craig Knoblock. The company was formed to address the need for scalable ways to accurately extract information from web pages and from what is sometimes called the Deep Web—databases that are connected to the web but that contain information that must be requested via a web form.

Fetch aimed to develop and commercialize the artificial intelligence (AI) technology to enables organizations of all sizes to access, aggregate, and use real-time 2eb data. Fetch technology is designed to connect millions of websites, to gather data for a myriad of applications, including competitive intelligence, news aggregation, data analysis, and background screening.

Most of the technology was developed in conjunction with SBIR funding, with support from several DoD agencies including DARPA, as well as NSF.

Fetch and its intellectual property assets were sold to Connotate, a Boston-area company, at the end of 2011.

Fetch Technology

Fetch technology automatically aggregates, normalizes, and integrates online data for delivery to the customer in various formats. Its focus is to provide an automated service that acquires and aggregates data and to present it in formats designed for the use of the customer, who can then focus on data analysis and interpretation rather than data acquisition.

The technologies developed at Fetch fit well with the growing need to manage rapidly expanding data flows within the organization. According to a recent IDC Inc. report,⁹ world information flows double every 2 years, while the annual cost of managing it has fallen by more than 85 percent since 1985, in part because of technologies like those developed and deployed at Fetch.

Fetch works through intelligent agents—software-driven online bots that constantly update data streams and utilize machine learning technology to adapt to changing data sources. Fetch has developed a library of existing software agents, as well as tools for users to adapt or customize alembics to their specific needs and requirements. These agents can identify specific page elements, even if they are not displayed, using a common format or similar location on the page.

Commercialization

There appears to be something of a contradiction, or at least tension, in the commercialization record at Fetch. Fetch has been highly successful in the deployment of its technologies. Mr. Landes observed that not only was Fetch the technology engine behind major data retrieval applications such as Factiva at Dow Jones and the news operation at Nexus-Lexis, but also it has become the dominant technology in use in the $11 billion criminal records retrieval business. According to Mike Horowitz, Fetch product manager, the company has developed software agents that can address more than 200 sites relevant to

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⁹IDC, Digital Universe 2011, “Extracting Value from Chaos,” <http://www.emc.com/leadership/programs/digital-universe.htm>.

criminal back ground checks.¹⁰ Fetch claims that its technology was used for more than 280,000 background checks during the seasonal hiring season in 2010.¹¹ In March 2011, the company announced a strategic partnership with S&J Associates, a leading wholesale provider of in-person court records searches.¹²

Indeed, according to the company, Fetch set a record in new and renewal business in the second quarter of 2010, signing deals with O’Reilly Auto Parts, i-Hire, SNL Financial, HireRight, Shopzilla, BurrellesLuce, Zvents, and Geosemble, among others. Fetch also powers the data retrieval engine for SpatialMatch®, an effort designed to help traditional realtors compete directly with the technologies deployed through new data-intensive startups such as Zillow and Trulia.

The tension between technology development and deployment and commercialization has been an ongoing challenge at Fetch. Mr. Landes was recruited as CEO in 2005 with the objective of transforming successful technologies into a fast-growing business.

The company made significant moves toward further commercialization in 2011. In February 2011, it was reported that the company had raised $4.6 million in a B series venture capital round.¹³ And in March, xEconomy reported that Fetch had signed a development agreement with In-Q-Tel, the venture capital arm of the intelligence community.

Yet, while technology deployment continued to grow rapidly, financial returns to investors did not grow at nearly the same pace. Indeed, long-term prospects for the company were sufficiently uncertain that at the end of 2011 Fetch was sold to Connotate, a Boston-area data mining company, in what appears to be a primarily non-cash equity swap that left Fetch investors with cash losses.

Universities and Academics

Fetch was founded by academics and claims that, despite its commercial activities, it maintains a strong commitment to academic research. Fetch Labs—an in-house research facility—focuses on the theoretical frontiers of information extraction, information integration, and data analytics.

SBIR and the Evolution of Fetch

Between 2001 and 2010, Fetch received 19 Phase I awards and 13 Phase II awards, primarily from DoD, but also from NSF and NASA, which shows a high conversion rate. For the SBIR program as a whole, on average

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¹⁰Stephen E. Arnold, Interview with Mike Horowitz, July 14, 2010.

¹¹Fetch Technologies press release, January 4, 2011.

¹²S&J press release, March 16, 2011.

¹³<http://www.socaltech.com/fetch_technologies_raises__4.6m/s-0034091.html>.

about half of Phase I awards receive Phase II awards, so Fetch was especially successful in completing the feasibility stage of its projects.

According to Mr. Landes, the SBIR program was pivotal in providing the funding needed to develop Fetch’s technology. Each of the major technical innovations at Fetch could be linked directly or indirectly to the steady flow of SBIR funding between 2001 and 2010. Yet at the same time, the company’s original orientation toward research continued to be fueled by the ready acquisition of more SBIR awards. Mr. Landes believes that the continuing flow of research funding undermined efforts to re-focus the company on commercial outcomes and partially contributed to the eventual sale of the company and its technology. Mr. Landes stressed that, in his view, this should not be seen as a

fault of the program; rather, it was management’s inability to successfully resolve an inherent contradiction within the company that led to its sale.

GINER INC. AND GINER ELECTROCHEMICAL SYSTEMS:¹⁴ SBIR CASE STUDY

Based on interview with Dr. Cortney Mittelsteadt, Vice-President, Technology

Giner Inc. is a privately held, minority-owned business headquartered in Newton, Massachusetts. It was founded by José Giner in 1973. The company specializes in electrochemical research, with expertise in electrolyzers, fuel cells, capacitors, and sensors. The company currently has about 55 employees, 14 of whom have PhDs.

In the 1980s, Giner focused on contracts to build electrolyzers for unmanned aerospace vehicles (UAVs), which provided the company with a new technical platform and with increased experience in government contracting. By the early 1990s, Giner had begun to develop fuel cell technologies. This resulted a decade later (in 2000) in the creation of a joint venture, Giner Electrochemical Systems, LLC (GES) with General Motors (GM). GES aimed to accelerate the development of fuel cell vehicles, which Giner continues to believe is the future of automotive transportation. GM took a 30 percent stake in the joint venture and continues to provide considerable research funding through an annual research contract. In exchange, GM owns all the intellectual property generated by GES in relation to transportation and stationary applications.

GM’s contribution was substantial—the research contract peaked at about $4 million annually, which for some years accounted for 70 percent of Giner’s revenues. However, a reduction in the GM contract and the rapid expansion of Giner’s other business reduced GM’s share to less than 10 percent of revenues in 2010.

In 2010, Giner bought out GM’s share at least in part to better position the company for outside investment. Giner’s new business strategy focuses on increasingly attractive opportunities in commercial markets. This reflects a fundamental shift in position as a contract R&D house to a company focused on manufacturing and selling commercial products.

Giner continues to be profitable, with revenues and profits growing substantially since 2006. This revenue growth is almost entirely fueled by the expansion of commercial product sales, which increased from about $700,000 in 2006 to $6 million in 2010.

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¹⁴Collectively referred to as “Giner” below.

Markets and Revenues

Giner divides its markets into six broad categories:

• Sea. Giner technologies provide oxygen generators for nuclear submarines and electrolyzer stacks to Treadwell Corp., which develops complete systems for deployment to Navy.
• Space. Giner technologies are suited to the demands of space. The company was selected as a vendor by Lockheed Martin for work on the ISIS space program for NASA.
• Laboratory hydrogen. Giner products generate hydrogen onsite for laboratories, obviating the need for costly and potentially hazardous storage and transportation. These products are resold by three major original equipment manufacturers (OEM) that handle all sales and service. Giner sees a major opportunity to erode the market share of delivered hydrogen, currently at about 96 percent of the market.
• Tracking sensors. Giner sensors detect alcohol for use in personal tracking devices, primarily within the criminal justice system. Giner is the sole supplier for BI, the largest U.S. monitoring supplier to the industry.
• Health care. Giner has developed a localized oxygen delivery system that can help to speed recovery from wounds. This is being deployed through an industry startup.
• Contract research. This research still accounts for about two-thirds of company revenues, with GM in turn providing a declining share of contract research funding (now less than 10 percent). Giner typically bids on 5 to 10 federal agency contracts per year, and it has strong relationships with DoD, DoE, NASA, and DARPA.

Typically, different sectors require different capabilities: spaceborne technologies focus on reducing weight and power consumption and seaborne technologies used in nuclear submarines focus on reliability, because weight and power are not constraints.

Giner serves both the public and private sectors and has substantial sales to primes in the United States and internationally. In addition to GM, Giner has relationships with the following types of private-sector companies:

• aerospace companies
• defense contractors
• medical device manufacturers
• other product-based companies

Giner undertakes government-sponsored work for various federal agencies, including all branches of DoD, DoE, NASA, NIH, Environmental Protection Agency (EPA), and DHS.

IP and Publications

Giner personnel publish extensively in leading journals and make presentations at technical meetings in the United States and abroad. They hold more than 100 U.S. patents in the field of electrochemistry. Key individuals have received awards for scientific excellence and for solving difficult problems for government and industry.

Technologies

Giner is a world leader in the advancement of electrochemical and proton-exchange membrane (PEM)-based technologies, providing R&D services for a wide variety of electrochemical applications. This core technology has been applied to an increasing range of related technologies and applications.

Giner technologies are based on common components, such as membranes, catalytic electrodes, electrically conductive bipolar current collectors that also distribute and control fluid flow, thin solid bipolar plate separation plates, and other individual cell and overall system components. Improvements made in one technology or product can be readily transferred to other areas.

Power Generation

Growing interest in hydrogen-based power has created opportunities for Giner, which has considerable expertise in hydrogen electrolysis and in fuel cells. Hydrogen (H2) generators produce pure hydrogen fuel from water and electric power at efficiencies approaching 90 percent (HHV basis). With private- and public-sector partners (DoE, General Motors, National Renewable Energy Laboratory, and Parker), Giner is working to improve efficiency, costs, reliability, and durability of PEM technology.

Although the basic technology is well known, the challenge is to ensure that these devices offer real value to customers and end users. Superior energy efficiency and reliability are not in and of themselves sufficient unless product costs are competitive with internal combustion engines and other energy technologies (such as batteries). Giner’s core competency in proton exchange membrane and membrane electrode assembly technology allow the company to address this challenge.

Several Giner technologies focus on the hydrogen economy:

• Hydrogen generators allow the manufacture of hydrogen at high pressure while minimizing reliability issues associated with mechanical gas compressors.

• Lightweight electrolyzers (originally developed for aerospace applications) could be used for home garage hydrogen generators, recharging fuel tanks overnight. Unmanned high-altitude aircraft and airships with long mission durations over fixed targets (persistence) have increased interest in the development of closed systems to build regenerative fuel cells (RFCs). These low-mass, high-energy RFCs offer advantages over batteries, because RFCs can repeatedly undergo near 100 percent charge and discharge cycles.
• RFC technology is also a potential multiplier for wind and solar power, because it helps match customer needs and power generation profiles.

Fixed and Portable Chemical Production

Useful chemicals can be made by electrolysis and electrosynthesis. In some cases, on-site manufacturing is critically important, especially where it is either difficult or dangerous to transport the chemicals (e.g., in geographical areas where the transportation infrastructure is poor). Giner has built portable systems that can make a number of materials on site, including chlorine, ozone, hydrogen peroxide, and sodium hypochlorite.

Giner claims to be the world’s leading supplier of laboratory hydrogen (H2) generators. Dr. Mittelsteadt identified this as an area of substantial opportunity for Giner, because 96 percent of laboratories still generate their hydrogen offsite.

Oxygen generation has also been a particular focus. Water electrolyzers produce oxygen for applications such as breathing air maintenance in submarines and manned space missions, and Giner has commercialized submarine electrolyzer stacks and continues to improve the technology. Giner supplies PEM electrolyzer stacks to the Navy’s Seawolf-class submarine fleet through a partnership with the Treadwell Corporation. Producing gas at high pressure eliminates the need for gas compressors, which can be bulky, troublesome, costly, dirty, and noisy. Giner is supplying next-generation LPE (low pressure electrolyzer) stacks for the retrofit of all Ohio-class submarines and for the replacement of oxygen generation plant (OGP) stacks on-board the Seawolf class, in due course.

Giner is also working with NASA and prime contractors to adapt PEM technology to living and working in a vacuum, where power consumption is a key factor. Electrolyzer efficiency has been used to provide sufficient oxygen for all tasks, including the oxygen for extravehicular activities (EVAs) at an expenditure of less than 250 watts per crew member.

Rapid Sensitive Electrochemical Detection

The ability to sense trace gases and environmental pollutants has widespread application in the workplace, the wider environment, and in homeland security. Giner’s sensors and electronics can detect a wide variety of

chemicals including hydrogen, carbon monoxide, hydrazine, and trace metals such as arsenic and cadmium.

Many of its sensors use its patented thick-film technology with working, counter, and reference electrodes printed directly onto a substrate. Selection of electrode materials and potentiostatic control allows the selective detection and measurement of gaseous and dissolved species, in some cases to the part-per-billion level. Again, this technology represents an effort to build a platform with applications in many areas.

Short- and Long-Duration Energy Storage

Giner is currently developing different types of energy storage devices (capacitors, lithium batteries, regenerative fuel cells). Stored energy using these devices can be delivered over time periods that range from fractions of a second (capacitors) to hours (regenerative fuel cells).

Electrochemical Sensor Technology

Human skin, the largest organ of the body, can transport water, oxygen, carbon dioxide, and alcohol. Giner’s patented electrochemical sensor technology measures the alcohol that passes through the skin and correlates that measurement to blood alcohol levels. This provides a passive, non-invasive method of determining alcohol consumption.

Detection of alcohol is important in criminal justice probation and parole monitoring, as well as in the prevention of alcohol abuse in those who perform critical jobs.

Giner has also developed a prototype neonatal carbon dioxide (CO₂) transdermal sensor for use with newborn babies.

Membrane Electrode Assemblies

Membrane electrode assemblies (MEAs) are the heart of PEM fuel cells and electrolyzers. MEAs are either 3, 5, or 7 layers:

• 3 layer: Cathode and anode laminated to a PEM
• 5 layer: Gas-diffusion layers laminated to 3-layer MEA
• 7 layer: Flow-fields laminated to a 5-layer MEA

Giner manufactures MEAs to customer specifications for research, development, and specialty commercial applications.

Giner and SBIR

Giner has consistency won SBIR awards since the mid-1990s, with 186 Phase I and 77 Phase II awards through 2010, totaling about $62.5 million over 25 years, according to the SBA Tech-Net database.

In 2010 SBIR awards accounted for just under $4 million in Giner revenues, about 30 percent of total company revenues.

According to Dr. Mittelsteadt, Giner has become more strategic and selective in deciding which SBIR opportunities to pursue—reflecting the shift toward commercial products and manufacturing. In his view, “Giner only makes money when it makes things”—the research itself is a platform, not a result.

Dr. Mittelsteadt noted that the SBIR program has over the years contributed in many ways to the core technologies developed at Giner, and therefore its effects can be traced to many of the company’s current products, such as the ISIS technology used at NASA. He noted that this synergy with commercial products was increasingly important, because the size of markets, for example, at NASA, did not justify the company’s efforts. For example, Giner developed a hydrazine sensor for NASA that was successful in determining air quality safety after launch. However, NASA needed only a total of 12 units, and there was no other relevant application for this specific sensor.

SBIR Recommendations and Comments

Dr. Mittelsteadt expressed strong support for efforts aimed at ensuring that any company applying for SBIR funding actually meets the agency’s needs, which reduces costs and increases efficiency for the agency and the company. For example, he approved of the DoE pre-submission notice, which encouraged potential applicants to submit a 2- to 3-page white paper outlining possible research for prior review by agency staff. He believed that this useful initiative could be more widely applied to the SBIR program. At Giner, no SBIR proposals were prepared before the company had contacted the agency point of contact and ensured that the company’s technical approach would be welcomed.

Similarly, Dr. Mittelsteadt noted that the ability to request clarification during the proposal review would likely improve outcomes for both agency and company, by reducing the potential for random responses.

Again, the SBIR program could adopt the DoE approach to broad area announcements (BAAs). DoE BAAs encourage submission of a 5-page white paper and then provides applicants with an opportunity to respond to criticisms and concerns. This more iterative approach seems more in keeping with modern approaches to technology development.

Dr. Mittelsteadt is particularly concerned by recent changes in the application process at NASA, which requires completed line-item descriptions for all items to be purchased during the SBIR award. Given that the award is a research project, where outcomes are by definition not known and course

corrections almost inevitable, such false precision simply adds burden to the company at no benefit to the agency.

IROBOT: SBIR CASE STUDY

Based on interview with Joseph Dyer, Chief Strategy Officer Thomas Frost, Vice President of Strategy Bob Kahout, Vice President of Research September 12, 2012 Bedford, MA

iRobot is a publicly traded company (NASDAQ: IRBT) headquartered in Bedford, Massachusetts. It was founded in 1990 by Rodney Brooks, Colin Angle, and Helen Greiner, all of whom had previously worked in MIT’s Artificial Intelligence Lab. The company was for several years primarily a research-focused organization, whose revenues came from grants and contracts. One significant source of funding during this period was SBIR awards from several agencies, although primarily DoD components. The SBA TechNet database indicates that iRobot received 19 Phase I and 10 Phase II awards from 2001 to 2008; company records indicate additional awards prior to 2001.

According to Mr. Frost, the company pursued a range of technologies using SBIR awards during the late 1990s. In 1998 the company received a DARPA research contract, which helped fund development of the technology that led to the PackBot, one of iRobot’s first commercial application.

iRobot had at the time several other commercial opportunities—one of which was pursued in parallel and led to a consumer product—the Roomba. Still, successful development of the PackBot turned out to be an inflection point for the company. After 2001, the conflict in Afghanistan generated immediate demand for remote-controlled devices to scout for troops within buildings and to address improvised explosive devices (IEDs). The invasion of Iraq in 2003, and the guerilla war that followed, further expanded the need for robotic devices.

This confluence of technology development and rapidly growing demand was addressed through additional post-SBIR funding from DARPA and through purchases of early products through the new Rapid Equipping Force (REF), an Army organization set up in November 2002 to dramatically accelerate acquisition of COTS and government off-the-shelf (GOTS) technologies.

The iRobot PackBot is a good example of the REF approach: it addressed a clear and growing need, was at an appropriate stage of technology readiness, and was certified for sole source acquisition as a result of the SBIR award (although there is no evidence that sole sourcing played any role at this point).

According to Mr. Frost, REF demand for the PackBot was a pivotal point in the company's transition from being a research-focused organization to a manufacturing and production company. Demand from other DoD components grew after the PackBot was validated by its use in Afghanistan and Iraq, and the company had to ramp up production to meet demand. Reliable and rapidly growing funding from the defense side of the company supported this transition and helped the company prepare for its IPO in 2004. Since inception, iRobot has sold more than 4,500 tactical military robots.¹⁵

The development of civilian robots continued in parallel, and the first Roomba entered the market in September 2002. The Roomba family has proved to be an enormous commercial success, with more than 7 million units sold.¹⁶

More recently, the company’s focus has further evolved, as the balance of sales has increasingly shifted to the civil side. However, it is clear that funding from DoD and other federal agencies continues to support a range of iRobot research activities, some of which results in improvements to civilian products.

Overall, government sector sales have accounted for slightly more than one-third of total revenues in each of the three most recent fiscal years at the time of this interview, while international sales have grown from about one-third to more than 45 percent over the same period. Within limits imposed by International Traffic in Arms Regulations (ITAR), iRobot has sold tactical robots to governments in more than 15 countries, including the United Kingdom, France, Germany, Sweden, Norway, Italy, Israel, Australia, Republic of Korea, Singapore, Bosnia, Lithuania, Qatar, Taiwan, South Africa, and Canada.¹⁷

Revenues (it would be best if we could specify revenues of which year) have grown by 88 percent since 2007, and net income shifted from a small operating loss in 2007 to profits of more than $50 million in 2011. The latter was a positive year for both the home and industrial robot divisions, with the former growing revenues by 31.5 percent and the latter by 8.9 percent.¹⁸ At the same time, R&D remains a prime focus for iRobot, which spent more than $36 million (about 7.8 percent of revenues) on R&D in 2011.¹⁹

Products

iRobot products are clustered around two basic platforms: the PackBot and its successors, and the Roomba.

The PackBot family now includes four models—the PackBot 510, two small unmanned ground vehicle (SUGV) multi-purpose ground robots, the 110

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¹⁵iRobot, 10K submitted to Securities and Exchange Commission, Annual Report 2011, p. 3.

¹⁶iRobot, ibid.

¹⁷iRobot, op.cit. p. 8.

¹⁸iRobot Consolidated Accounts, op.cit., pp. 35-36.

¹⁹iRobot Consolidated Accounts, op.cit., p. 27.

FirstLook small, light, throwable robot, and the 710 Warrior multi-purpose robot capable of carrying heavy payloads. All of these robots share a number of common platform components. Using iRobot’s patented flipper technology, these robots can climb stairs, navigate rubble, and penetrate otherwise inaccessible areas. Tactical robots cost between $20,000 and $350,000, depending on capability and options. PackBots have been extensively deployed in Afghanistan and Iraq, where they are used to scout dangerous areas and to handle IEDs.

The PackBot is designed for multiple configurations, so orders are customized for specific mission needs. SUGVs are lightweight backpackable robots configured to fit into the current model of Army backpacks. More than 300 were delivered for use in Afghanistan in 2011. Ongoing contracts with DoD are supporting continuing design improvement.²⁰ For example, the Advanced Inflatable Robotics (AIR) research prototypes include a modified PackBot with an inflatable manipulator arm and a fully inflatable “hexabot” that walks on six legs. These were, according to Chris Jones, Director for Research Advancement at iRobot, developed under research initiatives which provided $650,000 from DARPA’s Maximum Mobility and Manipulation (M3) Program (launched in 2011).²¹

The PackBot 510 line can be configured to serve five sets of users:

• infantry
• explosive ordnance device
• hazmat technicians
• first responders
• combat engineers

On the consumer side, the Roomba was introduced in 2002 and has sold more than 7 million units to (please specify date). It uses two motorized wheels, which are governed by a set of sensors including a mechanical sensor in the front, an infrared sensor on top, infrared “cliff sensors” along the bottom to avoid sharp drops, as well as acoustic-based dirt sensors. These all operate with the iRobot proprietary command software. More recent versions of the Roomba include HEPA filtering systems, as well as scheduling capabilities.

Intellectual Property

Since 2001, iRobot has been the assignee on 130 patents granted by the USPTO.²²

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²⁰iRobot op.cit., p. 6.

²¹S. Gallagher, Here come the inflate-a-bots: iRobot’s AIR blow up bot prototypes, ARS Technica, August 22, 2012.

²²USPTO, iRobot assignee search, accessed September 14, 2012.

Strategy

iRobot was originally an R&D organization, largely performing contract research. With the emerging demand for the PackBot in the early 2000s, the company underwent a profound change of direction to become a product company with the two primary lines of business described above. Mr. Frost noted that this transition was a long and wrenching process and that the company struggled for a number of years to successfully complete the strategic shift.

Once completed, the company faced a second shift in the late 2000s, because it outgrew the SBIR program, which had funded a significant amount of company research. iRobot purchased a second SBIR-winning company, Nekton Research, which subsequently found it difficult to cope with the loss of SBIR funding, because its technology was not sufficiently advanced to attract alternatives.²³

Current strategy is focused on extending the capabilities of the two main platforms, building a growing number of robots with specialized capabilities or developing modules that can create specialized capabilities within existing lines. Recent products have included under-water robots and pool- and gutter-cleaning robots.

iRobot is seeking strategic partners to utilize iRobot technology in new market segments. In 2011, for example, it signed a partnership agreement with InTouch Health to work in the telemedicine sector.²⁴ According to iRobot, its main platforms are designed with open interfaces that permit third-source development, and its 2011 annual report indicates that encouraging a community of third-party developers is one of iRobot’s current strategic priorities.

This strategy has led the company to develop iRobot Create, in which the vacuum cleaner motor is replaced by a “cargo bay” for mounting devices such as TV cameras, lasers, and other robotic parts. It can then be used as the mobile base for completely new robots.²⁵ iRobot views these efforts in particular as creating a pathway into the education sector.

iRobot and SBIR

Between 2004 and 2007—when iRobot graduated from the program—the company received 14 Phase I and 10 Phase II awards, which reflects a high conversion rate (the average is approximately 50 percent). SBA’s TechNet database reports that iRobot received about $8.5 million in SBIR funding

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²³According to SBA TechNet database, Nekton won 19 Phase I and 9 Phase II awards between 1989 and 2006, from NASA, DOE, DoD, HHS, and DOC. SBA TechNet database, accessed September 14, 2012.

²⁴iRobot, op.cit., p. 7.

²⁵For examples of alternative uses for iRobot products, see <http://www.irobot.com/hrd_right_rail/create_rr/create_fam/createFam_rr_projects.html>.

between 2001 and 2007. It does not appear that earlier awards are included in the SBA database (which iRobot confirms as accurate).

Mr. Frost observed that, although only PackBot turned out to be a commercial success, SBIR support for all of its technologies in the mid to late 1990s was critically important in helping the company develop expertise in a range of areas.

Admiral Dyer noted that the sole source capacity attached to SBIR awards was excellent in theory but was not much used by the Services in practice. iRobot had not been able to use sole source, to his recollection.

Recommendations

Admiral Dyer observed that the “Valley of Death” is getting wider, presenting greater challenges to small innovative firms such as iRobot. He also said that despite some improvements, most DoD R&D staff still considers the SBIR program to be a tax.

He strongly recommended that funding be focused on helping companies actually reach full-scale commercialization, through the provision of considerably more Phase III resources. The program has a strong track record in helping companies develop promising technologies, but most of the technologies do not result in commercially successful products in large part because funding for the critical transition to a commercial product was not available.

He also observed that, in his experience (he previously served as a Navy program officer with responsibilities for SBIR), most successes were achieved by companies from among the larger SBIR recipients. Small companies rarely had the in-house expertise to commercialize effectively. He thus believed that in some ways Congressional plus-ups are the best available tool for funding the work that will actually move projects to market and create substantial numbers of jobs.

Admiral Dyer does not support cutting off SBIR funding when a firm reaches 500 employees. These are the firms most likely to commercialize, and the Services (and other SBIR agencies) would be well advised to find ways to fund innovative firms that reach this level of growth and development. He noted that the impact on Nekton (see above) had been substantial—in the end, it had not been able to adjust effectively to the switch away from SBIR funding streams. This has made iRobot reluctant to buy another company like Nekton. Therefore, SBA should consider raising the 500-employee limit.

MAYFLOWER COMMUNICATIONS INC.: SBIR CASE STUDY²⁶

Based on interview with Dr. Triveni Upadhyay, CEO and co-founder September 20, 2011 Burlington, MA

Mayflower Communications Inc. (“Mayflower”) is a privately owned company headquartered in Burlington, Massachusetts. It was founded in 1986 by prominent researchers from the Draper Laboratories, focused on developing cost-effective solutions for high-performance affordable radio navigation and digital anti-jam technologies for government and commercial markets. The researchers left primarily because Draper was positioned to work on a sole source basis with government partners, while they preferred to compete for contracts in the R&D environment.

Initially, Mayflower hoped to find a niche transposing defense-oriented GPS technologies into the commercial sector. Mayflower completed some early work for NASA and for the Federal Aviation Adminstration (FAA). However, despite conversations with auto makers such as GM and other potential clients, in the early 1990s Mayflower determined that the best markets for its products were in fact within DoD.

Mayflower’s focus in wireless communication is to provide wired performance with wireless ubiquity. Toward this end, Mayflower develops smart radio, wired-equivalent access, and versatile network technologies and has a diverse patent portfolio in its core areas of radio navigation, digital anti-jam, and wireless communication technology. A number of Mayflower patented technologies have been reduced to practice in its products.

In 2000, Mayflower spun off Envoy Networks, Inc., with $7 million in initial funding from leading venture capitalists and industry (including Texas Instruments).²⁷ Envoy Networks focused on developing and marketing third generation (3G) commercial mobile cellular technology and products, and it developed patented technology to enhance the capacity and coverage of wireless cellular networks for both voice and data. It was subsequently acquired by Texas Instruments, Inc. in 2002 for an undisclosed price.²⁸

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²⁶Material for this case study was compiled from the interview with Dr. Updhyay or the Mayflower Communications web site, accessed September 26, 2011, unless otherwise stated.

²⁷<http://www.thefreelibrary.com/Envoy+Networks,+Inc.+Raises+$7+Million+in+First+Round+Financing+to…-a062124259>.

²⁸<http://www.ti.com/corp/docs/investor/compinfo/acquisitions.shtml>.

Technology

As a technology-focused company, Mayflower claims a number of industry leading innovations. These include the following:

• developing and demonstrating a low-cost, embedded data link capability in its GPS receiver
• building a low-cost, low-power GPS Anti-Jam solution
• developing a compact digital antenna solution that leapfrogged legacy large radio frequency (RF) antenna solutions
• developing an integrated temporal and spatial filter solution that robustly extends the capability of an antenna nulling solution beyond its degree of freedom

Mayflower also participated (in the 1990s) in the U.S. delegation helping to develop the International Civil Aeronautics Organization (ICAO) standards for Aeronautical Mobile Satellite Communications.

In a teaming arrangement with Alliant Technologies, Inc. (ATK) (a Fortune 500 company), Mayflower was involved in the Ballistic Trajectory Extended Range Munitions (BTERM II) Demonstration Program. Mayflower provided its GPS antenna AJ electronics to ATK/Draper for use in Navy BTERM II projectiles.²⁹

Mayflower also developed and applied its GPS/anti-jam technology to the Navy’s Guidance Integrated Fuze (GIF) Demonstration Program and is developing miniaturized anti-jam antenna electronics and a single-chip SAASM GPS receiver for use in the GIF guidance electronics unit.

Anti-Jam Module

Mayflower’s anti-jam GPS GEU offers a powerful, high-performance, small-size, low-cost solution for precision-guided munitions. Production cost is decreased by using commercially available components, miniaturizing the enhanced GPS receiver and anti-jam module unit, and using “accelerometers only” inertial navigation systems without including the more expensive gun-hard gyroscope that is not available commercially. This GPS anti-jam technology addresses multiple wideband jammers for gun-launched rolling projectiles by utilizing a conformal antenna.

The GIF program seeks to replace the existing NATO standard fuze on existing stockpiled Army, Navy, and Marine Corp ammunition with a low-cost, fuze-sized module.³⁰

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²⁹BTERM II is an alternative to the extended-range, gun-launched projectile and to the Extended Range Guided Munitions program.

³⁰<http://www.dodsbir.net/SuccessStories/display_story.asp?id=SS00000432>.

The anti-jam module uses patented digital signal processing algorithms (temporal and spatial processing) to protect against different kinds of jammers and provides protection against multiple jammers. It can work with up to four antennas and has been successfully tested on a railgun to withstand more than 8,000 Gs of shock. Cost is reduced because the module can connect to any COTS GPS receiver through a conventional RF interface. It requires limited power, is 3.15 inches in diameter, and weighs 53 grams.

Low-Power Anti-Jam Module

Mayflower’s low-power anti-jam module is designed around the company’s proprietary semiconductor chips and connects to Mayflower GPS receivers with digital or RF interface. It can connect to any COTS GPS receiver through conventional RF interface. It requires less than half the power of Mayflower’s anti-Jam module.

Integrated GPS C/A-Anti-Jam

This product combines Mayflower’s anti-Jam solution with high-performance C/A code GPS receiver. It is targeted at applications that require a GPS receiver and anti-Jam solution but have limited space and power resources.

Customers

Mayflower serves both government and private sector markets.

Government

Mayflower has served a range of government clients, including:

• Navy: SPAWAR, NAVSEA, and NAVAIR commands and Naval Surface Warfare Center and Office of Naval Research
• Army: CECOM, Army Aviation & Missile Systems Command, and SMDC
• Air Force: AFRLs in Dayton, Ohio, and Rome New York, Philips Laboratory, Space Flight Test Center, 746th Test Squadron, GPS Wing
• JPRS: JTRS JPEO, San Diego, CA
• Department of Transportation
• Federal Aviation Administration
• NASA: Johnson Space Center, Marshall Space Flight Center, Jet Propulsion Laboratory

Industrial Customers

Dr. Upadhyay noted that, although Mayflower has a number of large industrial companies as customers, relations with primes to a considerable degree depend on whether the latter were primarily acting as systems integrators or as technology developers. Raytheon, for example, partnered as a systems integrator with Mayflower on some early contracts, but it discovered after buying Magnavox that it had acquired its own capabilities in GPS and was therefore less inclined to pursue partnerships with companies such as Mayflower in that area.

Intellectual Property

In 2010, Mayflower received a patent for its Antijam Filter System and Method for High Fidelity High Data Rate Wireless Communication. This technology filters interferences so that clean filtered signals are subsequently processed for data extraction using widely available wireless communication technologies. The anti-jam filter is especially effective when the number of receiver antennas exceeds those of the transmitter. Overall, according to USPTO, Mayflower has received four patents.

Awards and Recognition

Mayflower was SBA’s 1998 Graduate of the Year. Mayflower’s current and past customers include DoD (Air Force, Army, and Navy), Department of Transportation (Federal Aviation Administration), NASA, and numerous industrial customers. GPS Wing (GPSW) designated Mayflower as an Authorized SAASM P(Y) Code GPS Receiver Developer, one of the seven companies (and the only small business) to be so recognized.

TABLE F-4 Mayflower Communications Patents

SOURCE: U.S. Patent and Trademark Office online database, accessed September 26, 2011.

Mayflower and SBIR

Over much of its history, Mayflower has relied more on commercial contracts than the SBIR program for revenue. This approach is reflected in the funding stream from SBIR, which reached $2 million in only one year prior to 2008, averaging approximately $700,000.

Since 2008, Mayflower has been especially successful. Not only did it receive more than $10 million in SBIR funding in 2008-2010, but also it succeeded in transitioning 9 of its 10 2007-2010 Phase I awards into Phase II—a remarkably high success rate, which suggests that DoD customers are increasingly appreciative of the technology being developed at Mayflower.

According to Dr. Upadhyay, more than one-half of the recent growth at Mayflower is attributable to its success with SBIR projects. Dr. Upadhyay noted that the SBIR program provides a critical pathway for small businesses, because it offers a route through which small companies can talk directly to DoD staff and betters positions the companies in discussions with primes. This positional strength helped Mayflower develop positive relationships with a number of large companies working with DoD, notably Boeing and BAE Systems, as well as with Draper Laboratories. As a consequence, Mayflower has become a company that sells products, not technologies—a much more desirable strategic position in his view.

Recommendations for Improving the SBIR Program

Dr. Upadhyay identified the need for improvement in the role and operations of the TPOC from the defense services. In his opinion, many TPOCs “do not have their heart in it.” Often, the TPOC assigned to manage an SBIR award is not involved in the design of the topic. Overall, there are poor linkages among the originator of the topic, those who approved and edited the topic, and those who managed its implementation, especially beyond Phase II. Overall, Dr. Upadhyay divided TPOC’s into three groups: those from research backgrounds, those from the acquisitions programs, and those who are part of the DoD bureaucracy. He suggested two ways in which these issues might be resolved.

1)   DoD could assign a second TPOC to an award, whose job would be to connect the award to the DoD acquisitions process. This would engage acquisitions and would ensure that DoD maximizes its return on its SBIR investment.

2)   SBIR legislation could be adjusted to permit the use of 5 percent of SBIR funding—currently provided to the company— to the TPOC to manage the award (e.g., travel to the company site) and become more deeply involved with the company.

MICROCOSM INC.: SBIR CASE STUDY

Based on interview with Dr. Jim Wertz, President Ms. Alice Wertz, Chief Financial Officer Hawthorne, CA

Established in 1984, Microcosm is a small business specializing in reducing space mission cost. The company started as part of Ithaco, Inc. (now part of BF Goodrich) before going independent. During the 1980s, Microcosm worked primarily as a subcontractor to the primes on space-related projects. However, by the late 1980s this work began to dry up, as primes began to take the work in-house.

At about this time, Microcosm discovered the SBIR program, which in the company’s view had the huge advantage of permitting it to act as its own prime, connecting directly to customers in the government. A run of five successful SBIR projects starting in 1993, which all converted to Phase II, helped to fund development of the company’s core technologies.

Since then, Microcosm has slowly built up its technical capacity by providing a range of space-related products and services, while continuing to improve its core low-cost launch technology. The latter is now at or close to deployment across a range of launch profiles.

The family of products includes two suborbital vehicles and a series of progressively heavier duty configurations, using a multi-module launch architecture. Total vehicle costs range from less than $200,000 to about $29 million for the largest vehicles, which are capable of lifting 13,000 lbs to low Earth orbit. This exceeds an order of magnitude cost improvement compared to existing launch capacities in use at NASA.

Given the difficulties in funding innovative concepts such as Scorpius® and the new NanoEye micro-scale observation satellite, that any small company might experience, Microcosm generates ongoing revenue through its Space Systems Division, which serves the industry’s needs in mission and systems engineering and in space orbit and attitude systems.

Technology and Core Capacity

According to Dr. Wertz, Microcosm has always focused on cost containment and cost reduction. For much of its history, this meant that the company worked to some degree at cross-purposes with the mainstream of the industry, where the need for success in launching payloads was much more important than any cost considerations.

Dr. Wertz believes that the industry, in recent years, has increasingly valued the approach adopted at Microcosm, and he anticipates that with increasing cost pressures—and the advent of a commercial space sector—

opportunities for Microcosm will continue to expand. Microcosm has worked in a number of areas related to reducing space mission cost:

• Autonomous Orbit Control. Microcosm has developed and flown algorithms for fuel-optimal precision orbit maintenance. The code can be used as a ground-based tool or can fly on-board to provide fully autonomous orbit control.
• Attitude Determination and Control Systems (ADCS). Microcosm designs, analyzes, integrates, and tests complete attitude determination and control systems. Its tools—such as AttSim—support efficient development of ADCS systems for gravity gradient, zero momentum, momentum biased, or thruster controlled systems.
• Constellation Design and Management. Microcosm is a world leader in this segment, with a particular focus on systems- and mission-level analytics, pragmatic solutions that work on-orbit, and cost-reduction mechanisms. Dr. Wertz edited the current standard text, Orbit and Constellation Design and Management. Autonomous on-board orbit control, described above can dramatically reduce the complexity, cost, and risk of constellation design and management.
• Formation Flying. Microcosm has recently extended the current state-of-the-art in formation flying by developing dynamic models based on a linearized state transition matrix methodology.
• Autonomous Rendezvous and Docking. Microcosm’s work supports development of autonomous rendezvous and docking (AR&D) guidance, navigation, and control systems.

Currently, the Launch Systems Division of Microcosm is developing the Scorpius^® family of ultra-low-cost launch vehicles. These vehicles offer the potential for an order-of- magnitude reduction in the cost of launching payloads to low Earth orbit (LEO).

Once these launch vehicles are in full operation, Microcosm estimates that projected recurring launch costs will be approximately $5 million for the smaller Sprite (1000 lb payload) and $29 million for the much larger Exodus capable of delivering 13,000 lbs to LEO. The Scorpius^® project is primarily funded by Air Force, though a suborbital target vehicle was developed, but as yet not flown for the Missile Defense Agency.

Microcosm’s Space Systems Division focuses on space mission architecting, mission and systems engineering, and related orbit and attitude analysis services. The company claims to have unparalleled experience in space mission engineering among small companies and even among larger companies. The division has worked with almost all small-spacecraft prime contractors, and it has worked on mission and systems engineering for many large commercial and government programs, including Iridium, GPS, Teledesic, and Discover II. These projects cover a range of system engineering areas, such as spacecraft,

navigation, attitude, and orbit control systems design and performance analyses, on-board autonomy, orbit and constellation design, coverage analysis, mission utility assessment, and cost estimation.

Products

Although much of Microcosm’s work takes the form of contracts for helping to manage different aspects of space missions, the company has developed a number of products that it sells to the industry. These include the following:

• Microcosm has more than one dozen contracts, four patents, and several commercial and flight software systems in the area of autonomous navigation and on-board orbit control, a core capability. The company has similar expertise in attitude determination and across the range of mission management and applications.
• The company also developed and patented the Microcosm Orbit Control Kit (OCK), an onboard software system that autonomously maintains the spacecraft in a pre-defined (or adjustable) station-keeping box. The OCK uses sensing, control, and computing hardware already on board most spacecraft and typically requires less propellant than orbit maintenance done from the ground.

Recent developments of particular significance revolve around the use of composite materials for fuel tanks and, in the case of NanoEye, for creating a unibody spacecraft structure, which is also the propellant tank.

By using composite materials and combining the propellant tank with the structure, Microcosm can reduce the weight of the spacecraft very significantly. For spacecraft, weight is the principal driver of cost.

The Scorpius^® high-level propellant tank exceeds current requirements in several areas. The cost is less than $275 per ft³, the weight is less than 1.6 lb/ft³ at 600 psi, and it meets life cycle, strength, and reliability thresholds. Microcosm believes this approach will deliver an order-of-magnitude reduction in tank cost. The all-composite fuel tank has been successfully flown on the Microcosm SR-XM-1 launch vehicle and on a Garvey Spacecraft Corp. rocket.

Publications and Knowledge Transfer

Unusual for a small business, Microcosm is responsible for a number of key textbooks on space mission engineering. The company created and published Space Mission Analysis and Design (SMAD), a 1,000-page text and practical reference work in mission design and concept exploration. Originally developed for the Air Force, the text is, according to Microcosm, the most widely used book in astronautics. It includes substantial work directly relevant

to low-cost space mission engineering provided by Microcosm personnel. These efforts are directly in line with the Congressional mission for SBIR.

Microcosm also published Reducing Space Mission Cost (RSMC), a follow-on to SMAD that discusses spacecraft design, construction, testing, launch, and mission operations. It addresses both traditional and radical cost reduction methods and describes 11 case study missions in detail. Microcosm publications also include:

• Space Mission Engineering: The New SMAD (Space Technology Library, Vol. 28, J.R. Wertz, D.F. Everett, and J.J. Puschell, eds., 2011)
• Reducing Space Mission Cost (Space Technology Library, J.R. Wertz, ed., 1996)
• Spacecraft Attitude Determination and Control (ISBN: 9027712042, J.R. Wertz, ed., 1994)
• Orbit and Constellation Design and Management (Space Technology Library, J.R. Wertz, 2001)
• Mission Geometry; Orbit and Constellation Design and Management—Spacecraft Orbit and Attitude Systems (Space Technology Library, Vol. 13, J.R. Wertz, 2001)
• Reinventing SMAD—Methods for Dramatically Reducing Space Mission Cost and Schedule, in preparation.

Microcosm also provides two training workshops on “Space Mission Engineering” and “Reducing Space Mission Cost.”

Microcosm and SBIR

Microcosm has received 48 Phase I and 25 Phase II awards, totaling approximately $24 million.³¹ The company is a strong proponent of the SBIR program and has used SBIR funding to start almost all of its major technology initiatives, according to Dr. Wertz. He also said that, with success rates above normal, the company is well regarded within the program.

Aside from its own SBIR awards, Microcosm has been very active in the local SBIR community in Los Angeles. The company is on the board of the local small business economic development council, and has guided a number of local companies into the SBIR program.

However, Microcosm raised a number of issues, which it believes has seriously negative effects on the development and take-up of technologies through the SBIR program.

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³¹SBA Tech-Net database, accessed February 25, 2012.

DoD Contracting Process

Microcosm executives agreed that overall the contracting process is fundamentally broken because it does not effectively support agency objectives. The Obama Administration made an early decision to exclude non-government employees from handling contracts, but had insufficient employees to replace them.

In addition, contracts have become much more burdensome. For example, a recent Phase I contract at DoD included clauses requiring Microcosm to implement procedures to inform employees that they are not permitted to text while driving.

Task order contracts, which are more common, add dramatically to costs for the small business. For example, a recent contract assigned a prime contractor as the owner of the contract—requiring them to be paid a fee for managing the contract, that the prime contractor do some portion of the work, and that they retain review responsibilities over the project. Moreover, subcontractors are not permitted to order supplies through a task order contract—they must order all material and must put all Microcosm subcontractors under contract to the prime, which makes the management needed to get the work done both awkward and challenging. Some DoD officials have limited understanding of the process. They do not, for example, see the difficulties caused by requiring small businesses to operate as subcontractors to primes.

Payment Structure

Microcosm executives noted that the significant mismatch between the cash flow needs of small companies and the rigid payment structures of the federal agencies is a perennial problem. There are significant differences between the agencies: NASA, for example, disburses funding in thirds against progress, but the Army pays equal amounts monthly. Army’s payment structure leads to significant problems when expensive pieces of equipment must be purchased or expensive testing is required. Dr. Wertz points out that recent SBIRs have had a payment structure with no up-front payment, small fixed payments well into the program, and a large final payment at the end—i.e., the small business is effectively financing the federal government.

Indeed, Dr. Wertz observed that NASA Centers require cash payment for testing and equipment use, which can lead to delays. For one Microcosm project, important design decisions had to be delayed until testing could be completed much later than was optimal, because the company had to accumulate sufficient funds to pay for the relevant design optimization.

Rigid payment structures also mean that projects are essentially fixed cost, with no billing against hours permitted, despite attracting all the bureaucratic problems of rate-based contracts (see below). For some agencies, this problem is magnified in Phase II. For Microcosm projects, the Army was

not prepared to commit to a second year of SBIR funding even for Phase II awards, which introduced significant uncertainty in company hiring decisions. Even for Phase II enhancements, which for Microcosm is usually focused on prototype development, equal payments are mandatory and have the effect of slowing development significantly.

Contracting Officers and TPOCs

Contracting officers (COs) are under enormous pressure, as the volume of contracts have increased and the number of COs has not, according to Dr. Wertz. Many COs have little understanding of the SBIR program, and rules regarding SBIR Phase III awards are almost universally ignored.

Some TPOCs have been very helpful. One TPOC at Kirkland Air Force Base worked to resolve problems for the company and went out of his way to be helpful. However, he was the exception rather than the rule. Most TPOCs are confronted by incentives that lead them to pay little attention to their SBIR projects.

NANOCOMP TECHNOLOGIES INC. (NCTI): SBIR CASE STUDY³²

Based on interview with Peter Antoinette, CEO Michael Gurau, CEI Community Ventures (investor) September 19, 2011³³ Concord, NH

Nanocomp Technologies Inc. (NCTI) is a privately held company headquartered in Merrimack, New Hampshire. It was formed in 2004 by three founders—then-CTO David Lashmore (the inventor), President and CEO Peter Antoinette (the business leader) and Bob Dean, owner and President of Synergy Innovations, a technology innovation laboratory in Lebanon NH. The company currently employs about 77people and is located in a 100,000 ft. sq. state of the art manufacturing facility at its headquarters.

What Are Carbon Nanotubes and How Are They Made?

Carbon nanotubes (CNTs) are a special form of carbon related to graphite, a hexagonal lattice of carbon, which is commonly found in pencils, lubricants, and even contacts in electric motors. CNTs differ from ordinary graphite because the carbon atoms are formed into a different completed

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³²All factual information in this case study is drawn from the interview and from other material made available by NCTI, unless otherwise referenced.

³³Some factual information updated August 2014 by Mr. Gurau.

structure. In graphite the atoms form long, flat, parallel planes, while CNTs are usually a single sheet formed from a layer of pure graphite rolled into seamless cylindrical hollow fibers, with a diameter of 1 to 10 nanometers and lengths generally tens of microns long. Hence most CNTs have a high aspect ratio—they are hundreds or thousands of times longer than they are wide.

Since not long after the discovery of carbon Buckyballs in 1985, it has been clear that CNTs have extraordinary properties.

• Strength. In 2000, a multiwalled carbon nanotube was tested to have a tensile strength of 63 gigapascals (GPa); equivalent to a breaking strain of 6,422 kilograms on a cable 1 mm thick. ³⁴ It has been established that single- and multi-walled nanotubes can produce materials with unmatched toughness³⁵
• Electrical conductivity. In theory, metallic nanotubes are extremely good conductors of electricity; they can, for example, carry an electric current at a density more than 1,000 times greater than copper.³⁶
• Thermal conductivity. Nanotubes are good conductors of heat along the direction of the tube, comparable to copper,³⁷ but are also good insulators laterally to the axis.
• Low weight. Finally, CNTs are extremely lightweight in comparison to materials that they might replace—notably copper in wiring, steel in structural applications, and shielding.

Clearly, CNTs have enormous potential.

Challenges of Commercializing CNTs

The promise of CNTs has been limited by three core challenges:

1)   Material limitations. Commercially available CNTs are generally short—usually tens of microns long. Short tubes exhibit CNT characteristics to a reduced degree, which makes materials using them less competitive for many applications.

2)   Material format. Commercially available CNTs are generally available only in powder formats. This is a substantial disadvantage—as with most powders, these can be difficult to incorporate into final

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³⁴M-F. Yu, O. Lourie, M.J. Dyer, K. Moloni, T.F. Kelly, R.S. Ruoff, Strength and breaking mechanism of multiwalled carbon nanotubes under tensile oad, Science 287(5453):637-640, January 28, 2000.

³⁵A.B. Dalton, et al., Super-tough carbon-nanotube fibres, Nature 423(4):703, 2003.

³⁶S. Hong, S. Myung, Nanotube electronics: A flexible approach to obility, Nature Nanotechnology 2(4):207-208, 2007. Metallic nanotubes can carry an electric current density of 4 × 109 A/cm2, which is more than 1,000 times greater than those of metals such as copper.

³⁷D. Mann, Q. Wang, K. Goodson, H. Dai, _Thermal conductance of an individual single-wall carbon nanotube above room temperature, Nano Letters 6(1):96-100, 2005.

      manufactured goods. Most final applications for CNTs will require that they be incorporated into formats that are more useful to end users—cables, mats, sprays, etc.

3)   Health and safety. Working with powder—particularly CNT fibers of this short length-- involves substantial health and safety challenges, both for the workforce and for potential users of products based on powder form CNTs. A number of studies have shown that CNTs are potentially harmful to human health; CNTs at the short length that the vast majority of manufacturers produce can in some cases cross membrane barriers,³⁸ while the shape of CNTs is somewhat similar to asbestos.³⁹ Final products made from traditional powdery nanotubes may tend to have poor bulk properties, exhibiting less than optimal strength and conductivity.

4)   Cost. Inefficiencies in the manufacturing process—and the very low volumes currently being generated—mean that the cost per unit for CNTs is orders of magnitude higher than for materials whose manufacturing was optimized decades ago, such as aluminum or copper. According to NCTI, significant amounts of impurities are usually generated in CNT manufacture, and hence extensive and expensive post-growth purification is usually needed to remove these impurities.

NCTI Technology⁴⁰

NCTI sees its competitive advantage in four areas:

1)   The length of its nanotubes

2)   A unique integrated manufacturing process

3)   Safety

4)   Capacity to develop intermediate products

NCTI has developed methods to continuously produce very long, pure, carbon nanotubes, in the millimeter range of length, at high growth rates. These CNTs have an aspect ratio measured not in the hundreds or even thousands, but almost one million. And longer nanotubes mean greater strength, higher conductivity, easier handling, and greater product safety.

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³⁸J. Kolosnjaj, H. Szwarc, F Moussa, Toxicity studies of carbon nanotubes, Advances in Experimental Medicine and Biology 620:181-204, 2007.

³⁹C.A. Poland, R. Duffin, I. Kinloch, A. Maynard, W.A.H. Wallace, A. Seaton, V. Stone, S. Brown, et al., Carbon nanotubes introduced into the abdominal cavity of mice show asbestos-like pathogenicity in a pilot study, Nature Nanotechnology 3(7):423, 2008.

⁴⁰Descriptions of NCTI technologies and products are derived from material provided by NCTI. These claims have not been independently verified (although a search found no evidence to the contrary).

At the same time, NCTI’s process produces very pure materials that do not require post-growth purification. High initial purity, combined with high output production rates hold the promise of achieving excellent process economics and product affordability as the process is scaled.

Moreover, as noted above, CNTs have not until now been provided in commercially attractive formats. The NCTI process fabricates its nanotubes into structurally strong and electro-thermally conductive fibers, yarns, and sheets.

Yarns have been plied on commercial wire braiding machines to produce CNT wires ranging from 33 gauge to 22 gauge or lower.

It is also possible to impregnate CNT rolls on commercial equipment with a wide variety of commercial resins including Bismaleimide toughened epoxy (BMI) and the cyanate ester family.

The material can be further doped to increase electrical conductivity, to enable conductor and electromagnetic interference (EMI) shielding applications that require high conductivity.

Taken together, these advances mean that some of the advantages of CNTs identified in the laboratory are now being delivered at commercially significant scale—and which can therefore be used to address a range of potential markets.

• High Strength—NCTI’s spun conductive yarns exhibit breaking strengths up to 2.1 GPa expressed and fracture toughness that is higher than products such as Kevlar® or Twaron®. CNT sheets have breaking strengths, without binders, that range from 500 MPa to 1.2 GPa depending upon tube orientation. For reference, aluminum breaks at 500 MPa, carbon steel breaks around 1 GPa.
• Electrical Conductivity—NCTI yarns and sheets carry more current than copper and are more conductive than copper at high frequencies. Therefore, they can be used as a substitute for copper or other metal braid in single or multiple conductor shielded cable. Weight savings here may range from 30 to 50 percent.
• Thermal Conductivity—NCTI products can transfer more heat than copper or silver on a per weight basis.
• Thermoelectric behavior—NCTI products demonstrate a Seebeck coefficient of greater than 60 μV/ºK and power greater than 1 watt/gram.
• Extremely Lightweight—NCTI products are less than half the weight of aluminum.

NCTI’s sheets and yarn articles are composed of a continuous mesh of long bundles of nanotubes that connect to one another to form long, interlaced fibers. As a result, these materials have high integrity, which in turn sharply limits CNT release during processing. NCTI sheets and yarns have been crushed, cut, torn, sanded, ripped, and twisted while being monitored by the

most sophisticated detection equipment available. In no case were any CNTs released to the environment.

It should be noted also that NCTI has developed a manufacturing process that is carbon-negative, being based primarily on bio-fuels as a source of energy for production furnaces; uses iron as a catalyst in place of the potentially more toxic catalysts such as cobalt or molybdenum used in many CNT production platforms; and is operated as an entirely sealed closed-loop process.

Finally, NCTI has been delivering product to customers for some years; in 2009 it announced that it had delivered a 10 km cable to a Fortune 100 client. To date, The Company has delivered more than 2 million meters of its conductive yarn to commercial and government customers.

Business Strategy

NCTI is seeking to position itself as the provider of a unique class of “intermediate inputs”—products where CNT materials have been worked into an intermediate product that is then sold to a company that incorporates it into a final product.

In pursuing this strategy, NCTI has created value-added components such as conductive cables, thermal straps, EMI shielding “skins,” and high strength sheets or yarns for incorporation into final end-user products.

Currently, NCTI is focused on demonstrating the efficacy of its technologies in a range of applications. Most recently, in August 2011 NCTI sheets were used to provide EMS shielding on the June spacecraft. NCTI material was used as a surface layer on several critical components of the flight system’s attitude control motor struts and the main engine housing. The Juno spacecraft will travel through Jupiter’s extremely strong radiation belts,” and NCTI offered an alternative to traditional aluminum foil typically bonded to the surface of composites. By including CNT sheet layers during fabrication of the composite, Lockheed was able to integrate electrostatic discharge (ESD) protection directly onto the structure.

The Juno mission could be an important inflection point for NCTI: not only did it mean that NCTI’s core technology was now space qualified against the rigorous standards set by NASA in support of a very important space mission, but also NCTI showed that it could be a reliable partner to a prime contractor, supporting its business strategy as a provider of intermediate inputs.

Over the medium term, NCTI expects to explore opportunities in an increasingly varied range of sectors and applications, beginning with very high-value/high-margin opportunities. These are clustered in aerospace, where the electrical and low-weight characteristics of NCTI products are especially competitive. With the cost per pound of launch to orbit at $20,000 or more, any weight reduction for space-based applications is immediately attractive even at relatively low volumes and high production costs. The Company’s sheets are presently qualified and being bid in large government (special forces) ballistic

armor applications in which these sheets enable lighter, thinner and higher performance personal armor protection.

NCTI sees particular opportunities in areas where at least two of its core competitive advantages in electrical conductivity, tensile strength, and low weight can come into play.

NCTI has also successfully developed important connections to prime contractors, an area where small SBIR companies can have difficulty. The company has worked with Lockheed Martin on the Juno project, and Northrup Grumman is now a subcontractor to NCTI, which is acting as the prime for the Air Force Research Library (AFRL) SBIR contracts.

Nanocomp and SBIR

Unlike many companies that use the SBIR program as the first pump-priming funding to start the company, NCTI is positioned to use the program to fund critical development work along the transition from batch to mass production.

In 2010, NCTI won an oversized Phase II award of more than $4.5 million from the AFRL to “Scale Up Production, Optimize Properties of Large-Format Carbon Nanotube Sheets for Future Use in Manned and Unmanned Aircraft.”⁴¹ The award is designed to support NCTI’s work on developing replacements for metal-based EMI shielding and electrostatic discharge ESD components on manned and unmanned aircraft. The Phase II award will support NCTI’s work to optimize CNT functional properties for shielding requirements and to scale up production volume while reducing the cost of finished CNT-based pre-pregged products. Northrop Grumman Aerospace Systems and Cytec Engineered Materials will act as subcontractor to NCTI in this Phase II contract.

The Phase II AFRL award builds upon successful demonstration under Phase I that large-format CNT sheets can meet the functional requirements of EMI shielding, as well as withstand the industrial stresses involved in pre-pregging, a process that prepares the material for direct insertion into aircraft manufacturing systems. This research has been officially designated by Ashton Carter, Under Secretary of Defense for Acquisition, as a “critical SBIR program,” which helps to explain the very large size of the award.

According to Mr. Antoinette, even though the SBIR awards have come later in the technology development process than is sometimes the case, they have provided critical validation for the company and for its technology, which has helped in discussions with prime contractors and customers and in attracting investors. Michael Gurau of Community Ventures, who led the Series A round in 2006, observed that these awards would be important when NCTI sought further funding to expand production. He noted that this validation is especially useful in sectors such as materials and defense, where venture funding is scarce,

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⁴¹See <http://www.sbir.gov/sbirsearch/detail/7699> for the full award abstract and details.

and is becoming increasingly important overall as early stage venture capital appears to be entering a “death spiral.”

Mr. Antionette also observed that the SBIR program should be viewed as one of several related ways in which government works with small companies such as NCTI to support the development and commercialization of innovative technologies. In NCTI’s case, this support has resulted in world-leading technology. Much of this funding has been on the basis of shared risk, because government funding does not cover the full cost of development. It is also usually on the basis of highly competitive funding competitions such as SBIR, which ensures that the government is awarding contracts to high-quality producers.

Mr. Antionette said that companies like the SBIR program because, even though the success rate for applications is quite low, it is regarded as a fair competition and successful companies receive numerous benefits.

Other Government Support

NCTI has successfully attracted attention and financial support from a range of U.S. government agencies and programs beyond SBIR:

• Army. In 2004, NCTI received $2 million from Army’s Natick Soldier Systems Center.
• NASA. The Juno space mission in 2011 potentially marks an important inflection point for the company.
• Army/ManTech. Funded through Army’s Manufacturing Technology Program (ManTech), NCTI will work in partnership with Northrop Grumman to develop manufacturing best practices for a next generation of CNT cabling and tapes, intended for near-term insertion into aircraft as a replacement for conventional copper-based wires and cables.
• DoD certification. DoD, through its Title III Defense Production Act, has designated NCTI's products as “critical to national defense.” To date, the Company has been awarded $25M in TIII funding to scale its manufacturing capacity.

Together with the SBIR awards discussed above, NCTI has received continuous government funding for the past 4-5 years. This funding complemented the A round of financing closed in 2006 and enabled subsequent venture capital financing rounds in 2009 and 2011. This funding has been especially important because there are limited opportunities to attract outside investment for products that are based in materials science and focused initially on defense markets.

NAVSYS: SBIR CASE STUDY

Based on interview with Dr. Alison Brown, CEO and Co-founder September 13, 2011 Washington, DC

NAVSYS Corporation (NAVSYS) is a privately held company headquartered in Colorado Springs, Colorado. Founded by in 1986 by Dr. Alison Brown, the company “uses advanced technology and novel system architectures to improve on conventional GPS equipment and methods for specific market applications.”⁴² The company now employs 35 staff, up from 31 in 2009, and had revenues of more than $6 million in 2010, up by over two-thirds from 2007.

Dr. Brown started NAVSYS after leaving Litton Industries in California when her husband got a teaching job at the Air Force Academy, and the company has continued to leverage Dr. Brown’s early experience at Litton working with GPS and inertial technology.

The company’s first contract was to build a translator to receive and relay the GPS signal from a ground station at Vandenberg Air Force Base in California.

This line of business was extended, and NAVSYS grew rapidly after the French conglomerate Dassault Group hired it to develop a GPS system for a missile test range on the west coast of France. Subsequent contracts from the Federal Aviation Administration and the Japanese government were acquired, focusing on making the GPS system more reliable and accurate for civilian aviation.

NAVSYS also developed cell phone technology in partnership with the Colorado Department of Transportation and the Colorado State Patrol, winning a grant from the Federal Highway Administration aimed at developing systems that would permit emergency dispatchers to determine the location of emergency calls from cell phones.

Business Model

NAVSYS has focused primarily on licensing its technology for use in larger systems, primarily in the defense sector. The company has also been successful in acquiring Phase III contracts from DoD.

NAVSYS entered a period of severe crisis in 2007. SBIR awards had led NAVSYS to develop technology that used GPS to improve the accuracy of “smart bombs.” The company had expanded to 50 employees in anticipation of a Phase III contract, but the Air Force instead awarded the contract (and the

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⁴²Annual Report, 2010.

technology) to Boeing. NAVSYS was forced to lay off one-half of its workforce in 2007, and Dr. Brown mortgaged her house and other assets to generate the $1.5 million in cash NAVSYS needed to survive. According to Dr. Brown, “It was a blatant example of how Air Force Space Command didn’t follow (Federal) rules designed to protect technology developed by small business. We appealed to the deputy undersecretary of defense, the Small Business Administration and (former U.S.) Sen. (Wayne) Allard and got the decision reversed, but it nearly put us out of business.” A loan from First National Bank of Monument—guaranteed by Dr. Brown—has now been largely repaid. According to the 2010 annual report, only $250,000 is now owed.

Since the 2007 crisis, NAVSYS has refocused to some extent away from military and toward commercial markets. Technologies developed at NAVSYS include tools for use in police helicopters to keep cameras trained on suspects and to test telecommunications equipment. After the controversy over the 2007 Boeing contract (see below), NAVSYS has continued to receive Phase III funding from DoD, and the move into civilian markets has offset sagging revenue in 2011 due to delays in military contracts as a result of the federal budget impasse in Congress.

Dr. Brown expects to double the size of NAVSYS, both in employees and revenue, by licensing technology it developed to incorporate location information into digital photos and developing lightweight, inexpensive but secure GPS receivers for military personnel.

She also wants to transition ownership of the company to an employee stock ownership plan that now owns about 4 percent of its stock.

Technologies and Products

NAVSYS has developed a number of commercial products and services primarily based on the GPS technologies developed with support from SBIR funding. NAVSYS products fall into three main groups:

• GPS receiver products
• GPS/Inertial products. The GPS/Inertial InterNav contract with FLIR Systems generates significant licensing revenue streams and continuing product sales; NAVSYS is now seeking similar relationships in other markets for GPS/Inertial software
• Simulator products

GPS Inertial Video System (GI-Eye)

The GI-Eye system consists of a low-cost, tactical-quality inertial unit integrated with a GPS receiver and a digital video camera. The key element is however the proprietary software developed by NAVSYS. This system is used to extract precise target coordinates from video imagery without requiring any

known data points for georegistration. It records the precise location and attitude of the video images, so that the extraction of feature location data is simplified and streamlined. Commercial applications for this system also exist in the Geographic Information System (GIS) and digital mapping industries in speeding the collection of geographic data and attribute coordinates. GI-Eye is currently the most important commercial product developed by NAVSYS, which received more than $500,000 in licensing revenue from this product in FY2010.

Targeting systems have been developed for both commercial and government applications, including the National Geospatial-Intelligence Agency and Office of Naval Research and FLIR Systems’ Star SAFIRE airborne electrooptic imaging system. The tools can be used for stabilized thermal, low-light, and television imaging systems designed for surveillance and reconnaissance aboard airplanes, helicopters, and UAVs.

GI-Eye technology has been extended to other products at NAVSYS, including the InterNav GPS system, which allows images to remain centered on a specific target location as the aircraft maneuvers, reducing jitter and operator loading.

Software Defined Radio

Joint Tactical Radio System (JTRS) radios⁴³ require GPS position and time for networking and waveform initialization. NAVSYS uses a “GPS-Lite” solution to provide software to reduce power requirements and weight.

POSCOMM⁴⁴Software Defined Radio

POSCOMM technology provides GPS-like signals broadcast within the industrial, scientific, and medical radio band (ISM) that can be used for navigation by software-defined radios equipped with POSCOMM software. NAVSYS believes this technology has potential to meet the need for an indoor positioning system to support first responders and also military operations in urban terrain.

TIDGET®

The base TIDGET sensor is a low-cost device that can be used for locating vehicles and other objects when combined with a communications data link. The device is much simpler than a conventional GPS receiver, which reduces costs, increases response times, and requires less power drain.

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⁴³The Joint Tactical Radio System (JTRS) is planned to be the next-generation voice-and-data radio used by the U.S. military in field operations after 2010.

⁴⁴Positioning and Software Communications defined radio.

TIDGET has been used for a wide range of applications, such as tracking radiosondes, sonobuoys, dropsondes, air-deployed pallets, and even buffalo, tapirs, and penguins.

NAMATH Tactical Control Station (TCS)

The NAMATH TCS was developed under a Phase III SBIR contract to improve GPS accuracy for the Air Force Small Diameter Bomb (SDB) and was transitioned into operational use in late 2006. According to Lt. Gen. Frank G. Klotz, then Vice Commander of Headquarters Air Force Space Command, now the Air Force Assistant Vice Chief of Staff, “Talon NAMATH ensures the most up-to-date GPS data possible is provided directly to the cockpits of aircraft carrying out attacks against enemy targets. When employed with the Air Force's newest precision weapon, the small diameter bomb, this capability makes strikes more precise, and therefore more effective, while at the same time limiting collateral damage.”⁴⁵

TALON NAMATH: Illustrating The Procurement Challenge for SBIR Companies

The Talon Namath system was very successful technically—delivering more than initially expected, according to Dr. Brown. The system was lauded by senior Air Force staff, including Lt. Gen. Frank G. Klotz, then Vice Commander of Headquarters Air Force Space Command (SMC), and General Kevin P. Chilton, then the four-star Commander of Air Force Space Command and now Commander of United States Strategic Command. The latter noted, “The small-diameter bomb, which was a dream just a few years ago, now is actually out in the field used in combat, flying off F15Es. To bring that small-yield weapon, you've got to be really precise. It's linked very tightly to our GPS constellation. We've got folks who have figured out a way to make sure when that bomb comes off the [F-15E], it has the best signal possible through a system called Talon NAMATH.”

Yet on the commercial side, matters have been different. After successfully completing Phase I contract with AFRL, the Air Force TENCAP Command awarded NAVSYS a Phase III in 2005. The work proceeded rapidly and AF TENCAP declared the system “provisionally operational in December 2006.” In fact, the program was accelerated to meet the needs of war fighters. In 2008, NAVSYS became the first small company to receive the Association for Enterprise Integration (AFEI) award for Excellence in Enterprise Integration.

Normal procedure at that point would be for the Air Force either to award a contract for further development to NAVSYS or to include the company in a larger team developing and applying the system. Instead, Air Force awarded the contract to Boeing, as part of the Zero Age Message & Data Service

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⁴⁵Speech to the National Defense Industrial Association (NDIA), February 2007.

(ZMDS) contract in April 2007. NAVSYS was not included on the Boeing team, and SMC failed to notify the SBA of this departure from normal procedures as required by law. NAVSYS appealed through both the Air Force and eventually to SBA, which issued a stop work order with which Air Force complied. A year later, Air Force provided a formal response to the order and work restarted.

Air Force Space Command finally notified Air Force Air Combat Command (ACC) that flies the F-15E and uses the Small Diameter Bomb that it needed to take responsibility for the Talon NAMATH program. However, the GPS funding remained as part of the SMC budget, according to Dr. Brown, so operational progress has been limited.

SBIR Awards

NAVSYS won its first SBIR award from the Air Force in 1989. Since then, it has won a total of 119 awards, primarily from DoD but also from NSF, NASA, the Department of Transportation, and the Department of Commerce. On average, NAVSYS received about $1.5 million in SBIR awards annually. Over the past 5 years, SBIR funding as a percentage of contract revenue has held steady, averaging just less than 30 percent.

IP and Knowledge Effects

NAVSYS has published widely on GPS-related technologies. As of mid-2011, more than 165 technical papers were available on the NAVSYS web site.

SBIR Issues and Recommendations

Dr. Brown emphasized that the problems NAVSYS experienced with Talon Namath have implications far beyond the immediate issue. Not only is DoD at risk of failing to acquire the best technologies, but also there are long-term implications for small high-tech companies who are a key part of the military supply base. Effectively, if there is no path into procurement or if the path is considerably higher risk than necessary, then, in Dr. Brown’s view, there is no long-term business model for NAVSYS or companies like it in serving the military. In particular, it makes it more difficult if not impossible for companies to become less dependent on SBIR funding.

Dr. Brown also noted that Phase III funding has become more difficult to acquire. In the past, NAVSYS has used Congressional plus-ups to fund further development, but these are now very rare.

In addition, Dr. Brown has observed wide variations even within the Services with regard to their use of small business in general and SBIR in particular. She believes for example that less than 2 percent of SMC contracts by value are with small business.

Dr. Brown was a lead on an industry study that reviewed the DoD acquisition process. The study determined that the vertically integrated model for the primes developed during the Cold War has led to significant dysfunctions, and primes continue to compete with suppliers. For example, subcontractors are almost always prohibited from making any contact with the final DoD customer.

Vertical integration, according to Dr. Brown, leads to obvious conflicts of interests throughout the procurement process, because prime contractors are effectively in the position of making decisions about whether to fund their own projects and research or those of smaller competitors. In areas where the SBIR program was especially successful—notably some parts of Navy—a more competitive support base had been encouraged.

Dr. Brown also noted that there are significant problems related to intellectual property and data rights, which are the life blood of small firms—the value that can be used to generate ongoing revenue. Yet despite clear evidence that problems are growing—notably through violations by agency staff—there has never been a prosecution on this basis. In effect, although the nominal data rights are well designed, in practice they are not sufficiently protected by the agencies, especially at DoD.

Overall, Dr. Brown strongly supports the SBIR program and believes that the problems identified above are much broader than the SBIR program, which could in fact play a leading role in solving them.

NIELSEN ENGINEERING & RESEARCH: SBIR CASE STUDY

Based on interview with Mr. Michael Mendenhall, President and CEO February 13, 2012 Santa Clara, CA

Nielsen Engineering & Research (NEAR) was founded in 1966. According to Mr. Mendenhall, NEAR was at the time one of five to six similar companies focused on aerodynamics R&D and problem solving. That niche, however, was too small to permit much growth, and during the 1970s NEAR expanded its areas of competence (and staffing) to provide much wider ranging technical solutions.

In the late 1960s through the early 1980s the company successfully acquired a number of sole source contracts from NASA and DoD, focused on solving problems identified by the staff at NASA Centers and DoD agencies. This strategic focus ended during the 1980s when NASA and DoD became increasingly reluctant to offer sole source contracts. The company contracted and refocused on more commercial work.

The company made a comfortable living providing aerospace R&D and technical services to a wide range of clients (see below) throughout the 1990s up until the financial crisis in 2007.

Since 2008, the company has been going through a challenging time. Not only have traditional commercial clients faced the need to scale back some activities, but also SBIR success has become much less consistent. Mr. Mendenhall observed that this was partly because appropriate topics appear to come up less often and partly because the nature of the SBIR program is changing in ways that do not suit companies such as NEAR.

Today, NEAR is fundamentally a technology service provider in the broad field of fluid mechanics, primarily for aerospace. NEAR states that “the basic philosophy has been to attempt to solve relevant technical problems using the best technology available in the fluid mechanics world, whether or not it has been developed by NEAR.” It currently has six full-time and three part-time engineers and scientists specializing in fluid mechanics and computational methods.

Key Capabilities

NEAR’s mission is to develop and acquire knowledge of fluid mechanics and to transfer this knowledge to the aerodynamics industry by consulting and software licensing. Analytical services are available to customers who require data for evaluating new ideas, for supporting wind tunnel and flight tests, and for FAA certification efforts. In addition, NEAR’s R&D and resources can support customers who need help with creating new products or enhancing systems/processes.

NEAR has over the years developed or acquired a range of analysis tools for aerodynamics and hydrodynamics, including computational fluid dynamics, engineering-level numerical methods, custom-designed analytical software, laboratory and wind tunnel testing, and hardware development and evaluation. These services cover the following technical areas:

• Aerodynamic Design and Analysis
• Advanced Computational Fluid Dynamics
• Knowledge Management Systems
• Reduced-Order Modeling
• Flow-Related Sensors
• Aerodynamic Hardware Solutions

Awards and Recognition

Since 1980, NEAR engineers have received nine NASA awards for “the creative development of a technical innovation.” NEAR staff members have served on more than 20 technical committees and government-organized

review boards, such as the American Institute of Aeronautics and Astronautics, the Naval Aeroballistic Advisory Committee, and NASA Peer Review Committees. NEAR has received several recent leadership and achievement awards from the NASA Engineering and Safety Center for work on special projects.

Clients

NEAR has been in business for more than 45 years and has collected a formidable collection of clients in the United States (both commercial and government) as well as internationally. Domestic clients include almost all of the prime contractors working in aerospace, including the following:

• ATK
• Space Exploration Technologies (Space X)
• United Technologies Aerospace Systems
• Bell Helicopter
• Boeing Military Airplane
• General Dynamics, Electric Boat Division
• Goodyear Aerospace Company
• Integrated Systems, Inc.
• Lockheed Georgia Company and Lockheed-Martin, Missiles and Fire Control
• Loral Vought Systems
• Martin Marietta
• McDonnell-Douglas Aircraft Corporation
• Orbital Sciences Corporation
• Raytheon Missile Systems
• Rockwell International
• United Technologies Research Center
• Westinghouse Electric Corporation U.S. government clients include the following:
• Air Force Office of Scientific Research
• Air Force Systems Command
• Air Force, Wright Aeronautical Laboratories
• Army Redstone Arsenal
• Army Research Office
• Army Research and Development Command
• Department of Energy
• NAWC Weapons Division, China Lake
• NASA Ames Research Center
• NASA Armstrong Flight Research Center
• NASA Langley Research Center

• NASA Marshall Space Flight Center
• NASA Glenn Research Center
• National Science Foundation
• Naval Air Systems Command
• Naval Sea Systems Command
• Naval Coastal Systems Center
• Office of Naval Research

NEAR has worked for universities, including Johns Hopkins University Applied Physics Laboratory and the Massachusetts Institute of Technology Lincoln Laboratory. NEAR also serves a wide range of international clients, in countries including Korea, Germany, the UK, Brazil, the Netherlands, Spain, Japan, Norway, France, Turkey, India, and Singapore

NEAR and SBIR

NEAR has received approximately 75 Phase I and 39 Phase II awards totaling approximately $26 million. The company has served almost all branches and components of DoD that issue SBIR awards.

Mr. Mendenhall observed that one of the biggest challenges for SBIR companies has been the DoD contracting and auditing systems. In recent years, DCAA appeared to respond to a recent critical report from GAO by failing large numbers of small businesses—an approach that Mr. Mendenhall described as being a drastic over-reaction. He believes that NEAR’s experience with DCCA was not untypical. Because DCAA refused to explain specifically why NEAR failed an audit, the company had to guess at corrective actions until approval could be obtained. In his view, this effort to maintain a completely arm’s length relationship was little short of ridiculous—and had enormous negative consequences for the company. While NEAR was in failed audit status it was not able to receive new contracts. This situation was corrected without serious financial implications.

Moreover, communications with DCAA were extremely slow—it took the agency 18 months to complete routine audits that a CPA could complete for a normal small business in a few weeks at most. For NEAR, this meant an 8-month delay in the receipt of Phase II funding, during which NEAR would have had to lay off staff had two engineers not moved on to other opportunities. Currently, DCAA is more than five years behind in their audits of NEAR accounts.

Mr. Mendenhall also observed that contracting can generate problems. In part, SBIR funding can be too back-loaded to support the kind of front-end activities required for a successful project. In addition, Phase II awards can generate uncertainty because they could be canceled midcourse, which is more likely if the TPOC changes.

Mr. Mendenhall recommended that all SBIR awards be treated as fixed price contracts to address the difficulties involved in pricing labor and to reduce uncertainty for recipients. In effect most SBIR Phase II awards are treated as fixed cost, without the concurrent benefits.

The SBIR program has changed in Mr. Mendenhall’s view. It is increasingly focused on product development as a form of commercialization, which means that companies focused on solving problems for agencies are increasingly frozen out. This change has substantially affected DoD, sharply reducing the number of applications open to NEAR, somewhat less so at NASA. NEAR used to identify around 20 possible topics for a proposal in each solicitation and would then work to reduce the final number to 3-4; today the company is fortunate if it can find even one topic to which it can respond.

Mr. Mendenhall also observed that the Company Commercialization Report (CCR) scores generated for DoD applicants do not account for the fact that almost all of the work undertaken by companies such as NEAR are covered by ITAR, which severely limits commercialization to the civilian sector. Consequently, a small business who has had a number of SBIR contracts, but has been limited in commercialization opportunities, receives a low CCR score which incurs a penalty in the proposal rating system.

The TPOC’s role can be critical, Mr. Mendenhall noted. In his considerable Phase II experience, the company has encountered only one unsatisfactory TPOC—a staffer close to retirement. However, TPOCs can stand between the company and the ultimate customer, which NEAR experienced with Navy a number of years ago, for example. This can make it difficult to pursue Phase III effectively.

Mr. Mendenhall believes that the quality of Phase I reviews in particular has declined in recent years, possibly because staff has less time to conduct them. He has noticed a rise in what he considers to be random or not-relevant comments, some of which clearly affect the success of the proposal.

Finally, Mr. Mendenhall recommended that all SBIR agencies consider the approaches adopted for other programs at DARPA and DoE, where companies are encouraged to submit a short white paper, after which they are notified whether a full proposal is warranted. SBIR’s low success rate overall imposes substantial costs on small businesses. He also noted that any opportunity to review preliminary comments during the selection process would probably improve outcomes for both the company and the agency.

Update from the Company

At this update in mid 2014, NEAR is working on one Navy Phase II SBIR contract which has good commercialization potential even though it is under ITAR control. NASA is still providing a reasonable level of funding to the company, and a number of commercial companies have come to NEAR for assistance on specific aerodynamic problems, a sign that the overall economy in the aerospace industry is improving. NEAR has added several retired NASA

engineers to its staff for work on aerospace problems which can benefit from the “greybeard” expertise and corporate memory generated during more than one-hundred years of technical experience. The DCAA audit for calendar year 2008 is still ongoing, but there is hope it may be completed before the end of this year.

OPTEMAX: SBIR CASE STUDY

Based on interview with Shirley Collier, CEO August 31, 2010 Columbia, MD

Optemax aims to solve increasingly pressing technical problems that face the military and in some cases non-military users of communications technology. For aerial surveillance, where sensors and hyper spectral imaging generates massive bandwidth requirements for high-definition real-time video, military requirements are for highly secure communications that provide extremely high bandwidth—on the order of 10-100 gigabits per second. These requirements are far beyond the capacity of standard radio frequency (RF) services. RF—with substantial enhancements on existing capabilities—may reach 1 G/ps. In addition, RF is inherently a broadcast mechanism and cannot be tuned to shield signals. Optemax is developing optical laser-based technology to address these needs. It has developed the BeamNet® mobile wireless optical networking system.

History

Founded in 2004, Optemax has licensed wireless optical networking technologies from world-class research institutions including Johns Hopkins University (JHU). Through collaborative research and development, Optemax believes that it will be able to deploy 40+ Gbps secure communications to mobile entities within a network, over a range of 100 Km or greater.

Optemax was founded by Shirley Collier and her husband Thomas Collier after they sold a previous venture, Paragon Computer Services. Optemax was founded to commercialize university technologies, and it focused on laser-based communications in part because of high-level research capabilities at local universities.

Technologies were licensed from the Applied Physics Laboratory at JHU and formed the basis for the approach funded through NAVAIR SBIR (see below). However, the relationship with JHU eventually dissolved. According to Ms. Collier, JHU staff could not understand the requirements of commercial R&D, especially the need for secrecy, and insisted on publishing results before they could be commercially protected. These drivers of standard university

activity could not be constrained even by the existence of standard nondisclosure clauses in the licensing and research agreement. Moreover, JHU is a large recipient of federal R&D funding. It appears that over time JHU determined that participation in commercial ventures—in which government agencies would likely end up paying commercial rates for technology acquisition—might endanger their primary R&D funding streams. Ms. Collier also noted that, although JHU scientists were very capable of specifying technical problems, they appeared less ready to develop commercially viable solutions. This clash of cultures eventually led Optemax to relinquish its $250,000 investment and dissolve the partnership.

Since then, Optemax has developed a network of engineers and technicians, using a dispersed work rather than a physically based central office. This has allowed Optemax to minimize overhead.

Currently, Optemax seeks funding to move further toward a deployable technology suitable for military or civilian use. Ms. Collier noted that the optical technologies at the core of BeamNet™ are extremely expensive to develop and that her original estimate called for investment of approximately $10 million to reach commercialization for this technology.

Technology

Because there are inherent limitations in laser-based technology, Ms. Collier has positioned BeamNet as a complementary technology—providing strong advantages when it is available, but acknowledging that weather conditions sometimes make laser-based technologies inoperable. Anticipated 90 percent availability would not be acceptable for backbone communications services (where 99.999 percent availability is required) but would provide sufficient access for such a complementary role, according to Ms. Collier. She also noted that areas of the globe where the technology would likely be used are also areas where cloud coverage is at a minimum.

BeamNet integrates a number of different cutting-edge technologies, including networking, forward error correction, advanced optics, and routing algorithms. The BeanNet system has three components:

• An appliance, which provides the primary computing platform, including optical modem, storage, and processing power
• A software suite, which controls the hardware, provides continuous monitoring, and manages processes such as weather mitigation
• A gimbal-mounted FSO terminal, which includes a telescope, camera, and media conversion technology

The technology is currently at approximately TRL 4-5, at the preprototype stage. Optemax is seeking funds to move the technology to TRL 6.

Optemax and SBIR

Optemax won one Phase I, Phase II, and initial Phase III funding from the Naval Air Systems Command (NAVAIR) in 2005 and 2006. Optemax was awarded a Phase II research contract to demonstrate a BeamNet prototype to satisfy NAVAIR requirements for an aerial LPI/LPD communications network as part of the EPX program, aimed at developing a future SIGINT program for Navy.⁴⁶

Phase III Experience

Optemax has had mixed experiences with Phase III. The company found support and a sponsor in a program that targeted high-level manned surveillance. Optemax was in line for further support when the program was canceled at the end of 2009.

Prior to that, Optemax successfully acquired a Congressional earmark for further research. Since then, Optemax has been working to find connections to other possible funding sources, including prime contracts (especially Lockheed Martin) and other DoD acquisition programs, notably Navy unmanned surveillance programs. Unfortunately, the primary sponsor for Optemax research at Navy has since left federal employment. There have, however, been some successful contacts at the engineering level, but not with PEOs or other potential funding supporters.

Indeed, Ms. Collier explained that she has identified a very likely fit with the E6 program at Pax River but has been completely frustrated by the refusal of Navy staff to share contact information for relevant staff within the program. It appears as though all contacts have to be made second- or third-hand via press and public relations officers.

Optemax experienced a similar lack of success via the Navy Commercialization Assistance Program. Ms. Collier described the program as being primarily designed for scientists and engineers with minimal understanding of markets and marketing, which, given her extensive marketing background, provides her with minimal new information. Optemax also participated in the Navy Opportunity Forum, but it discovered that these events attract large numbers of marketing staff from primes, rather than acquisitions and operations staff. Therefore, Optemax generated no additional contacts beyond the company’s existing network. Ms. Collier noted that, in her experience, primes are not especially interested in encouraging or supporting early-stage research, being much more focused on later stages of the TRL readiness spectrum.

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⁴⁶Planned as a replacement for the EP-3 Aries aircraft, the EPX will be a manned multi-mission, multi-intelligence, surveillance, reconnaissance and targeting (ISR&T) platform. Defense Update, EPX—Studying a Future SIGINT Platform for the US Navy, February 8, 2008, <http://defense-update.com/newscast/0208/news/news_080208_epx.htm>.

These experiences led Ms. Collier to formulate a number of possible improvements to DoD SBIR programs. Ms. Collier believes that NAVAIR SBIR staff is focused on spreading SBIR money to a large number of companies and have adopted a highly linear view of technology development and the role of SBIR awards. In this model, a single Phase II award is sufficient to move a company’s technology past the prototype stage to TRL 6 or better, which Ms. Collier noted rarely exists in the real world. However, its dominance at NAVAIR makes it difficult for companies to acquire the multiple awards needed to build a substantial platform for an advanced and complex technology such as optics-based wireless communications.

Ms. Collier was also highly critical of what she considers to be lack of transparency regarding upcoming DoD platforms and technology requirements. She believes the decision to discontinue the Advanced Technology Review Board was a mistake, eliminating an important medium through which companies could find TPOC sponsors and supporters.

Ms. Collier also observed that large primes exert too much influence, which results in over-reliance on incremental improvement of existing technologies instead of support for truly disruptive innovations. In addition, despite efforts to improve funding flows, gaps between Phases are still significant and cause difficulties for small firms.

Overall, Ms. Collier is a strong supporter of the SBIR program, but believes that it should be reorganized to provide larger amounts of funding for highly promising projects, rather than distributing funding widely across a broad array of recipient companies.

OPTO-KNOWLEDGE SYSTEMS INC. (OKSI): SBIR CASE STUDY

Based on interview with Dr. Nahum Gat, Founder and President February 8, 2012 Torrance, CA

OKSI specializes in the development of turn-key electro-optical sensor systems, especially those that combine imaging and spectroscopy, including the mechanical assembly, electronics, optics, computer interface and signal acquisition, algorithms for signal and data processing. OKSI focuses on R&D projects where off-the-shelf solutions are unavailable.

The company was founded by Dr. Gat in 1991, on the basis of successful Phase I award (which had the positive side effect of proving to the Internal Revenue Services (IRS) that the company was in fact a going concern).

The company has tried several times to move beyond small batch production and prototypes into manufacturing, but has not yet been successful. Recently the company has been exploring the DoD program for Low Initial Rate Production (LRIP).

Technology and Products

OKSI has developed a number of technologies related to its mission of “converting light into knowledge.” These have included an intelligent fire detection system (in the late 1990s), a number of hyperspectral systems, multispectral imaging systems for use in particular in aircraft (e.g., the Airborne Multispectral/Thermal imager, which is used for plant stress and vigor analysis, ground thermal mapping, and ground imaging), and a range of other imaging technologies such as infrared imaging, software for spectral analysis, and technologies integrated into surveillance systems and platforms.

True Color Night Vision

Among the most interesting current technologies are those developed for true color night vision. With the wars in Iraq and Afghanistan, DoD demand for high-quality night vision technology has expanded rapidly. OKSI’s approach has been to develop a true color technology, which is contrasted with existing false color and monochromatic technologies.

The prototype produces a true-color night imagery camera system, using a visible/near infra-red color EMCCD camera fused with output from a thermal long wave infra-red (LWIR) camera. The fusion draws complimentary information from both images while retaining true color information. The system can work to produce true-color images in light down to about the level of quarter moon, after which it switches to fused monochrome and thermal. At lower light level the system reverts to thermal only. The system works in real time to generate both digital and analog-video outputs at 30 frames per second.

According to Dr. Gat, Army has shown very strong interest in the technology. The True Color Night Vision—Fusion system did not move forward because the Army decided that the EMCCD technology was too expensive, had high power consumption, and had high noise level. So the Army decided to invest in a new technology to replace the EMCCD.

IP

According to the publications page of the OKSI web site,⁴⁷ OKSI staff has authored more than 100 papers in the broad field of opto-electronics. In addition, the company has received 12 patents based on its work funded by SBIR.⁴⁸in the field of infra-red cameras.

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⁴⁷<http://www.optoknowledge.com/publications.html accessed March 15 2012>.

⁴⁸<http://www.optoknowledge.com/patents.html>.

OKSI and SBIR

OKSI has received more than 50 Phase I and 25 Phase II awards since 1991, totaling about $20 million. Most of the awards have been from DoD, with the remainder from NASA and DoE/NNSA. Within DoD, OKSI has received awards from all the major service branches and several others.

Overall, about one-half of OKSI’s revenues are currently from SBIR awards, a share which has not changed much in recent years. This funding was especially important in early years, helping the company to “get on the map,” according to Dr. Gat. Although the company can now get non-SBIR contracts, the SBIR program is still invaluable for entering technical areas that are otherwise dominated by either large prime contractors or universities. For example, OKSI has undertaken a number of non-SBIR contracts with the Missile Defense Agency (MDA), for whom it has developed sensors for many different kinds of missions, in most cases acting as its own prime contractor. Without the SBIR program, OKSI would not have been able to build sensors and demonstrate its technology directly to MDA.

Dr. Gat noted a continuing and substantial gap between the Phase I and Phase II funding streams at DoD. In fact, for a recent SBIR award, OKSI received a Phase I option at the same time as its Phase II award, which meant that 3 to 4 months of work schedule was lost.

These awards have, according to Dr. Gat, been the basis for essentially all of the-cutting edge technology developed at OKSI. And the technology clearly has been valued by the agencies. In addition to multiple SBIR awards, OKSI has received quality awards. In 2011, OKSI received a Tibbetts award, which followed a 2006 Army Quality Award for its Continuously Variable Aperture/Cold Stop technology, which is used for automated target recognition in the Future Combat Systems platform as well as other applications.⁴⁹ OKSI partnered with Raytheon and L-3, DRS Communications, and Cincinnati Electronics to implement this technology. OKSI received a Phase III from Army for this project, plus additional funding from its partners to adapt the technology to their own cameras. Following successful prototyping, the Army opened a solicitation for systems development and demonstration.

However, according to Dr. Gat, Army eventually decided to work directly with the primes. Despite the facts that the partners signed highly restrictive nondisclosure agreements (NDAs) and that SBA sent a letter to Army requiring it to cease violating the governing SBIR policy directive, Army continued to freeze out OKSI. As a result, OKSI has been very careful in its dealings with the primes.

However, as Dr. Gat observed, a technology company working in the defense sector has few options for commercializing its products beyond the primes, given DoD’s strong preferences for working with its established contractors. In fact, OKSI is working with other primes on a system to enhance

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⁴⁹Army SBIR Quality Awards, 2006.

driving vision with infra-red technology. OKSI is helping to convert the currently all-analog system to provide digital outputs. OKSI is designing and building electronic boards that will replace the existing technology. . More recently, Dr. Gat noted that the customer program has been eliminated following budget cuts, so this project is now on hold. OKSI is now working with yet another prime on the True Color Night Vision, and has submitted a joint proposal to the DoD.

SBIR Problems and Recommendations

Overall, Dr. Gat strongly supports the SBIR program, which he believes provides a key innovation platform for DoD. However, he noted a number of significant and in some cases growing problems.

• Many topics came from the research side, especially for the Army but also Air Force. This tends to create significant gaps between topic authors and acquisitions programs.
• There is a particular problem aligning SBIR awards with acquisitions. For example, OKSI demonstrated its night vision technology for DoD and found an enthusiastic audience—but no clear path toward a requisition that would allow purchase of the technology.
• Small companies are essentially on their own to find acquisitions partners. The night vision technology may in the end be picked up by DoD. There was, however, no marked path or guidance to help OKSI find this potential buyer.
• There are difficulties in working with universities. SBIR contracts require that publication has to be approved by the agency, which presents a problem for universities, since they have rules for unrestricted publications in for peer review journals. While the collaborating faculty may agree (on a “hand-shake basis”) to restrict their publishing in case of SBIR collaborative efforts, the university administrator would not accept any restricting clauses in the subcontract. In addition, almost all of the work undertaken by OKSI is covered by ITAR, which place too many restrictions on the flow of knowledge for most universities to accept.
• There are problems with contracting and auditing. Like other SBIR firms in southern California, OKSI experienced serious problems with DCAA, the DoD audit organization. Dr. Gat noted that DCAA prides itself on using a single standard for audits, regardless of the company size, which in his view imposes significant costs on small business. In addition, DCAA does not provide the information needed to correct any possible errors and takes far too long to complete its work. At OKSI, DCAA took 7 months to complete an audit for a 15-person company. OKSI failed because of inadequate written procedures—which had the

POWDERMET INC. AND MESOCOAT INC.: SBIR CASE STUDY

Based on interview with Dr. Andrew Sherman—Founder, Powdermet and MesoCoat; CEO, MesoCoat September 24, 2012 By telephone

Powdermet is a privately held nanotechnology and advanced materials research and development organization, headquartered in Euclid, Ohio. The company was founded by Mr. Andrew Sherman as a spinout of Ultramet, Inc., in 1996, with a mission to “mature and transition clean, sustainable, energy and life-saving advanced materials solutions to the marketplace.”⁵⁰ Powdermet focuses on the commercial development of advanced nanoengineered composite powders, using its technologies to develop materials that reduce weight, resource consumption, environmental footprint, and life-cycle costs, while increasing energy efficiency.

Powdermet technology was initially based on the extensive research and resulting intellectual property developed by Ultramet Inc. (another SBIR recipient company). This IP was licensed to Powdermet in 1997, and the operating group that developed them at Ultramet moved to Powdermet. In 1997-2005, Powdermet acquired the exclusive worldwide rights to the proprietary Chemical Vapor Deposition (CVD) technology developed at Ultramet over the prior three decades (limited to particulate coating), and successfully completed the development and commercial scale-up of a powder encapsulation and vapor-conversion nanoparticle production process. Technologies were developed for scalably depositing numerous metals and ceramics onto particle sizes ranging from submicrometer to 100 mils.

In 2003, the company relocated from California, where it operated a 7,000 sq. ft. R&D facility, to Ohio, where the company currently operates a 54,000 square foot manufacturing facility enabled through a minority interest corporate VC investment. From 2002-2005, Powdermet was listed twice in the INC 5000 with a roughly 80 percent annual growth rate, completed ISO9001 quality system development and implementation, completed a brownfield cleanup and environmental restoration of an EPA listed, unutilized and nonproductive urban industrial site in a labor surplus area, and increased capacity in its initial 18,000 sq. ft. high bay manufacturing building to more than 10 R&D, pilot, and production reactors capable of producing 100,000 lb/year of

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⁵⁰Powdermet Inc., “About Powdermet,” <http://www.powdermetinc.com/company_overview.html>. Accessed September 24, 2012.

nanoengineered particulates, and with plans, approvals, infrastructure, and permits for 2-3,000,000 lb nanocomposite and microencapsulated powder production capacity.

Powdermet’s commercial success and continued SBIR support allowed it to substantially expand its research facilities. In 20067-2008, the company renovated the 36,000 sq. ft. former TRW Caldwell Research Center, a three-floor R&D Center with more than 26 individual labs, and opened the “Nanomaterials Research Center” in summer 2008 including a high-temperature thermal analysis and XRD lab, a furnace/sintering lab, a mechanical, friction, and wear characterization lab, a foam processing lab, a refractory metals lab, and a coating development/thermal spray laboratory.

In 2008, Powdermet spun-out its life of asset wear and corrosion control solutions (surface engineering) group into Mesocoat Inc., which went public as Abakan Inc and is listed under the ticket symbol ABKI. In 2013, a second spin-out, Terves Inc (Hungarian for “to Plan”) was formed to pursue commercial introduction of “environmentally responsive metals”, structural nanocomposite materials that sense and respond to the environment. A third spin-out, Cratos Energy, was formed in 2014 to commercialize nanocomposite thin film capacitors, currently demonstrating 20X state of the art energy storage capabilities with record-breaking 20-30 J/cc film capacity.

Origins and Development Trajectory

At Ultramet, Mr. Sherman was the principal investigator on SBIR awards from 1987-1996, and was the company’s chief metallurgist and business development manager. It was his original vision of “nanoengineered powder metallurgy”, or building in nanostructural features to micron-mm sized particle “repeating microstructural units” which led to the spinout from Ultramet. The company licensed the relevant technology from Ultramet and hired several Ultramet staff (a spinout that was amicable on both sides—Ultramet did not wish to dilute its core focus to enter the areas in which Powdermet focused).

From the beginning, Powdermet was premised on the belief that success would require the ability to scale—that simply being an R&D house was not the objective. Even a pilot plant was, however, too expensive and hence risky for Ultramet, as it required a significant investment and permitting change. So initial funding came from Mr. Sherman, friends, and family, and then from SBIR and a series of private investors (as well as a loan/contribution from Ultramet). Mr. Sherman observed that “the role of the entrepreneur is to provide early vision—passionate knowledge and drive—prior to the time where sound financial metrics can be used to drive the business.”

Overall, the initial startup of the company attracted about $1 million in capital, with about 75 percent being debt. A key early support came from the National Institute of Standards and Technology (NIST) in the form of an ATP award, which essentially matched the initial investments with a further $1 million, funding the company during its first 2 years of operations.

Initially, the company was based in southern California in Pacoima and then San Fernando California. It received technical support from LARTA (a Los Angeles area nonprofit that supports innovation⁵¹), which helped attract angel funding and also helped with capital structuring. The decision to move to Ohio was driven by a number of factors, notably:

• The high cost of land in California. The company sought land to build what was in essence a chemical plant. Dr. Sherman noted that land costs were on the order of 95 percent cheaper in Ohio.
• Regulatory concerns. Because California has very strict environmental regulations, and was not supportive of the specialty chemical industry, Powdermet might not have been able to build the plant, even if it had the land. In contrast, he believed that regulatory and permitting problems could be worked out efficiently in Ohio—as they were.
• Encouragement from Kennametal. This strategic partner wanted Powdermet close to its own operations, especially its largest cutting tool facility, which was in Ohio.
• The Third Frontier Program.⁵² Through this program, Ohio offered a substantial amount of business planning support on a cost share basis (a program that has since been eliminated).⁵³

Once in Ohio, Powdermet developed in two directions. First, it built a $300,000-$500,000 annual revenue “toll production” business through which it provided customized materials (mainly coatings) for use by large companies (typically Fortune 100/500). Second, it began to explore partnership options for developing a business that would go further downstream, producing the coatings themselves as well as the specialized materials that are used to produce coatings.

In 2002, the company formed a strategic alliance with Kennametal Inc., a large producer of components and products for the aerospace, auto, mining, machining industries as well as agriculture. The partnership was based in part on the idea that Powdermet—in which Kennametal took a minority equity stake with a view to eventual purchase—would become the cutting-edge research arm, providing new technologies that would provide Kennametal with a competitive edge. Powdermet in turn would utilize SBIR awards to generate the technology and fund the company’s ongoing operations. The first connection with Kennametal was forged via the ATP award from NIST, focused on the market for cutting tools, and eventually led to the building of a nano-engineered carbide powder production plant in Cleveland

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⁵¹See <http://www.larta.org>.

⁵²A technology-based innovation support program and fund based in the Ohio State Development Services Agency, <http://development.ohio.gov/bs_thirdfrontier/default.htm>.

⁵³According to Dr. Sherman, Third Frontier now focuses on much larger partnerships and projects.

Ohio seemed like a good location in other ways. Powdermet’s dealings with the state were productive. The state offered significant tax incentives and leverage for the Kennametal investment in the form of a 166-direct loan. Finally, because Powdermet bought a renovated a brownfield site, it was eligible for additional financing for land acquisition and cleanup. Overall, the new facility cost about $6 million to acquire, clean-up hazards from prior industrial operations, renovate, and purchase and install the nanoengineered powder production equipment.

The transition from California to Ohio was not without cost: Powdermet lost key employees among its 15 total employees. Still, the new facility offered Powdermet with an opportunity to scale up production. Kennametal was ready to use its output and its strategy—to utilize the Kennametal brand, market knowledge, and management expertise to leverage Powdermet’s ability to develop technologies and processing capabilities—appeared to be working. Global market shifts intervened, however. In 2002-2003, Chinese intervention in the global tungsten market led to a fall in price of 50-70 percent. As a result, Kennametal radically shifted its strategy, from focusing on technology (and particularly nanotechnology) to focusing on tungsten sourcing, pricing, and market consolidation—tungsten being a large part of Kennametal’s overall business.

By 2004, Kennametal’s commitment to new technology and to Powdermet had essentially vanished. Furthermore, a new CEO had new ideas. Eventually, the partnership unwound (amicably) with Powdermet providing Kennametal with a license to cutting tools technology as well as some of the equipment used for joint projects. Mr. Sherman bought out Kennametal’s preferred positions and options to invest further to buy a controlling interest in Powdermet. The agreement to unwind was concluded in 2004, although the unwinding itself took some time longer.

From 2002 to 2005, Powdermet experimented with a number of markets. It worked on penetrators and warheads with DoD (largely through SBIR). For a while it was a significant player in the battery industry, because it had the production infrastructure and the capacity to build nanocomposite cathodes, and its R&D100 (2000) award winning fluidized bed production technology could overcome mass and heat transfer limitations enabling production of high quality nanoengineered C-LiFePO4 composite cathodes at tonnage quantities needed for commercial use.

In 2005-6, with the primary market of hard materials and tooling exclusively licensed to Kennametal, the company made some more strategic shifts, and refocused its commercial main focus on chrome replacement and coating applications of its nanomaterials, using much of the same technology but for a new set of applications. This was helped by a new federal executive order in 2005 which required the elimination of chrome—which requires highly toxic

manufacturing processes—in government applications. This opened new markets for the company’s technology.⁵⁴

The chrome replacement technology was based on Phase I/II SBIR technology, derived for an Army SBIR award for wear resistant, thermally insulating coatings to improve efficiency and reduce emissions and heat rejection in diesel engines using nano-engineered thermal spray coatings. This program turn led to 2 order of magnitude improvement in wear resistance over state-of-the-art coatings. Based on these SBIR results, the Ohio Third Frontier program provided business plan development funding under an SBIR commercialization matching grant program.

Spinout of MesoCoat, Inc.

By 2007, the business planning was complete, and Powdermet was ready to spin out a new company, MesoCoat Inc, to address the new opportunities in coatings. Powdermet retained its core processes and still had solid revenues of $500 thousand to $1 million from toll processing work. It also continued to win highly competitive SBIR awards to continue to improve the technology and customizing nanomaterials for DoD and other agency needs.

The spinout was driven not only by the need for distinct strategies for the two parts of the business, but also because earlier efforts to raise external funding for Powdermet had left the capital structure too complicated to attract the funding needed for rapid growth. In addition, Powdermet could not take on significant additional corporate or venture capital without losing SBIR eligibility, which remains part of its core strategy as the primary, and largely the only source of non-dilutive financing for high risk technology development. MesoCoat was formed as a wholly owned subsidiary, which licensed technology from Powdermet in the surface engineering field of use as well as some physical assets. The spin-out structure was designed with Powdermet as a service provider/support, and with an equity position to align its interests and return mechanisms directly with equity investors to facilitate financing.

The new company was initially monetized and brought into existence via Congressional earmark (based on the need to find a chrome alternative and eliminate use of hex chrome) as the route to financing the Phase III. Funding came from the House Appropriations Committee, Air Force, and prime contractors, with $1.6M spread over the 2008 and 2009 appropriations cycles (the third year was unfunded due to elimination of earmarks and the untimely death of Congresswoman Stephanie Tubbs-Jones in 2010. This earmark was leveraged with a Jumpstart (regional economic development corporation) loan for $350,000, and in 2009, MesoCoat closed an additional $1.4 million seed investment round that includes milestone-based options for an additional $18.8 million.

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⁵⁴Executive Order 13423, 2007.

By the time MesoCoat was up and running and seeking serious capital in late 2008 to continue growth, the window for venture capital (VC) investments had effectively closed with the market crash of 2008. In fact, the company was is due diligence for an investment with a corporate partner in the oil and gas industry at the time of the financial crash- the corporate partner was wiped out with the loss of a $500M line of credit and ultimately went bankrupt in early 2009. Due to the strength of the technology platform, SBIR and industry validation, MesoCoat able to find a corporate venture partner in Abakan Inc., whose principles had roots in the mining industrial sector. Abakan principles believed that the proven financial valuation models based on prospecting, proving reserves, and then exploiting an opportunity could be applied in technology-driven industries like coatings as well as in mining and oil and gas in order to capitalize technology based businesses using the small cap public marketplace. This same financial model has also been applied by Abakan principles to solar and superconductor technologies (Tape Solar), and several other (mainly DOE/national-lab) technology spin-outs/start-ups as well

Most recently, Mesocoat has become a wholly-owned subsidiary of Abakan, completing the “creeping take-over” agreement, and has completed construction and bringing to initial operational status an 11,000 sq. ft,, 5.4 acre new clad pipe manufacturing demonstration facility located next to Powdermet’s facilities.

With management transition complete at Mesocoat, Mr. Sherman is now focused on monetizing and transitioning the environmentally responsive and light metals technologies through a new spin-out Terves Inc following the mesocoat (and originally Powdermet-Ultramet) license model. Terves has recently raised nearly $1M in seed capital which was used to develop and qualify high strength “triggered” (disintegrates upon a chemical triggering event) disintegrating magnesium completion tools, and is in the process of raising its series A to meet growing market demand for this and related products for reducing the cost and environmental impact of oil and gas operations.

Mesocoat Technologies

Powdermet and MesoCoat together have developed technologies to underpin two broad lines of future applications: coatings and claddings.

Coatings

Thermal-sprayed coatings can be very effective in increasing component life and value, decreasing machinery down-time, and improving performance. They have a wide range of potential applications in numerous industry sectors. Thermal spraying processes coat a surface by spraying melted (or heated) materials onto it. They can provide thick coatings over a large surface area at high deposition rate as compared to other coating processes, and they can use metals, alloys, ceramics, plastics, and composites.

Feedstocks are fed in as powder or wire, heated to a molten or semi-molten state, and accelerated toward substrates as micrometer-size particles. Because the sprayed surface does not necessarily heat up significantly, the coating can be made from flammable substances. Coating quality is measured by assessing porosity, oxide content, macro and micro-hardness, bond strength, and surface roughness. Generally, the coating quality increases with increasing particle velocities.

MesoCoat’s technology constitutes a substantial improvement on state of the art, according to Mr. Sherman. MesoCoat claims that its coatings can extend the life of components by 3-20 times and are cheaper, lighter, and involve minimize use of toxic materials.

PComP’s (MesoCoat’s coatings) are cermets (ceramic-metal composites) fabricated into a hierarchical structure, using a patented process to engineer down to the nanoscale. The result is a microcomposite cermet coating that the company claims offers revolutionary performance and cost breakthroughs. The technology for this application was based on the Army SBIR Phase II award, and further developed and perfected using the congressional earmark funding, and a related SBIR from the department of energy on nuclear criticality control for waste and fuel packages that taught Powdermet how to design with a wide range of materials in the structure. PComP Materials are now in commercial use, primarily for replacing chrome plating and extending too, pump, and valve life in the oil and gas industry. The primary advantages are 3-7X the toughness of traditional cermets (due to the hierarchical structure), combined with improved wear, excellent machinability, and extremely low friction performance derived from the engineered nanostructured features.

Mesocoat has developed new compositions under a Phase I/II DOE (ARRA) award, and is launching a PComP version which is virtually immune to wear, corrosion, and thermal shock in metal processing operations (zinc coating), where it expects a successful commercial launch and major industry cost and energy savings to be achieved in 2014-2015.

Cladding

MesoCoat also has a cutting-edge cladding technology, CermaClad™. This is a high-speed high-energy-density fusion cladding process for large areas that the company claims can clad materials 15-100 times faster, is cost competitive, and offers better metallurgical properties than the competitive weld or laser cladding processes. Traditional thermal spraying delivers only 5 lbs of material per hour—which were insufficient for Navy ship-scale needs which were a target application of the materials technology. To solve this problem, a research partnership with Oak Ridge National Laboratory generated a technology that can deliver 500 lbs/hr of coating, which is 80-100 times higher productivity, simply enabling for Large area applications such as preventing corrosion of infrastructure

CermaClad™, fusion cladding, utilizes a high-intensity light source to rapidly fuse metal and ceramic coatings onto steel pipes, plates, and bars. Process speed is sufficient to match the line speed of steel mills and hence reduce lead times for clad pipes, plates, and bars by 75-80 percent. The same technology can be used to protect large surface areas in highly caustic and corrosive environments. Mr. Sherman describes the long term-vision as “paint the world with stainless steel”, and has aspirations for the technology to augment or replace organic coatings with metallic coatings that have 10-100 times greater durability.

Other Awards

MesoCoat was recently recognized by Forbes as one of “The Most Promising American Companies” and was the highest ranked material science and nanotechnology company on the list. Powdermet has won approximately 100 federal and state awards (including SBIR awards) over its 18 year history. It has been the recipient of four R&D 100 awards, three NorTech Innovation Awards, a wall street journal “manufacturing technology of the year” award, the pipeline innovation guilds “subsea technology award”, and numerous other industry accolades and recognitions. The companies have made the INC 5000 list of fastest growing companies 4 times.

Future Strategy and Prospects

MesoCoat’s revenues have tripled annually since 2008, and the number of employees increased from 3 to 30 during the same period. FY2011 revenues equaled $3.5 million; FY2012 revenues are projected to be about $8 million, and 2014 $40 million. As new plants come on line, this growth rate is expected to continue, according to Mr. Sherman.

MesoCoat/Abakan are raising about $20 million to support expansion in Brazil and Canada, as well as a third target site in the Middle East or Asia. All three are primarily focused on the oil and gas industry. Existing partners in Houston are also growing rapidly. Abakan Inc., MesoCoat’s largest shareholder and a publicly traded company, is providing growth capital (perhaps better understood as late stage venture funding).

Since forming Mesocoat in 2008, Powdermet has been under new management. It remains a primary supplier of raw materials to MesoCoat, and it continues working with the SBIR program to advance the next technology platform. With recent maturity and transition of Mesocoat more fully under Abakan (now 90 percent owner), Mr Sherman is working to successfully monetize and transition light and reactive metals (Terves), and Energy storage (Cratos Energy) technologies which have reached sufficient validation and maturity to be of interest to the financial (venture) markets using SBIR and other (primarily ATP/TIP, and previously congressional directed funding).

Powdermet, MesoCoat, and SBIR

As Table F-5 indicates, Powdermet successfully pursued awards from five agencies, although DoD predominates and accounts for 75 percent of Phase II awards. It should be noted that Powdermet is less successful than the average company in transitioning from Phase I to Phase II—particularly at DoE and NSF, but also true to a lesser degree at DoD. The average transition rates at all three agencies range from 40-50 percent.

According to Dr. Sherman, the SBIR program has been essential to the long-term success of Powdermet (and hence MesoCoat, and Terves). SBIR funding has been used as non-diluting funding to build core competencies and capabilities, and to incubate technologies (and the company) and survive long enough to become commercially viable in a materials marketplace where development, maturation, and commercialization cycles are typically between 10 and 20 years (or longer). It has been absolutely critical for building technical capabilities, supporting PhD scientists before market revenues developed, and maintaining a critical mass for R&D, without which there would be no substantial technology platform at Powdermet. Without the SBIR program, the company would likely have remained a small scale job shop materials contractor with maybe $1 million in revenues and a dozen employees.

More generally, Mr. Sherman noted that outside of the SBIR program there a very few funding sources for entrepreneurs to develop and support the science, team, and tools needed to commercialize emerging technologies. He

TABLE F-5 Mesocoat SBIR Awards

SOURCE: SBA TechNet Awards database, accessed September 24, 2012.

believes that venture funding is not an alternative to SBIR funding because it fills a different space in the value chain, and is mainly aimed at technologies that can deliver substantial market share in 3-5 years (at most, meaning 7-10 years into the development cycle for materials and manufacturing technologies). He also believes that small businesses do not have access to many of the mainstream development funding sources supporting larger businesses (grants, contracts, and retained warnings), universities, and non-profits.

SBIR Concerns

Mr. Sherman is very concerned about recent changes to what he considers to be a highly successful program. In particular, he believes that the growing pressure to ensure that SBIR funding generates commercial returns is profoundly misplaced: it is driving selection of projects that are shorter term and lower risk. Such projects are better suited to other funding streams—either acquisitions within DoD or venture funding in the private sector. In his view, SBIR is shifting toward a role as substitute for other sources of capital, for example, 6.3 and EMD funding at DoD and venture capital in the private sector. It is becoming an alternative to large company R&D and is being used to lower the cost of capital for venture firms. In short, it is becoming more of a corporate welfare program than a technology investment and high risk exploratory program.

The net effect is to kill the technology innovation seed corn by starving innovative projects and companies, according to Mr. Sherman. Perhaps as a result, new companies are finding it harder to access SBIR funding. SBIR awards are now being made to established larger companies, which can provide more and better data and offer the lowest risk, rather than to the most creative and innovative companies. It is notable that although Powdermet continues to win awards to apply its technology to DoD projects, MesoCoat has not been able to break in and receive DoD support, even though its products has more commercial and cost-savings potential in the long-run, and was originally created to serve DoD needs.

According to Dr. Sherman, this shift has occurred at most agencies. He believes that PEO’s in DoD have recognized the shift (and program offices want low technology and execution risk and rapid insertion/benefits), and that NSF has moved away from its previous portfolio investing approach to one that requires each project to be successful. The emphasis is on making sure that one-half of all projects can in some way be described as successful, rather than finding the 1 in 20 or 1 in 50 big disruptive technologies.

As a result, Mr. Sherman is concerned that the original mission of the SBIR program is being lost. He discussed data that indicate that only about 5 percent of all federal R&D funding goes to small business, and that SBIR accounts for more than two-thirds of that funding. Hence a significant shift in the SBIR program could mean a catastrophic effect on overall R&D by small businesses—which generate a disproportionate share of cutting-edge

technologies and employee the majority of scientists and engineers, not to mention entrepreneurs like Mr. Sherman.

QUALCOMM CASE STUDY ⁵⁵

Based on interview with Dr. Irwin Jacobs, Founder April 26, 2011 By telephone

Qualcomm Inc. (Qualcomm) is a publicly traded company headquartered in San Diego. It was founded in 1985 by a small group of researchers, some of whom had previously founded Linkabit, a precursor company. Since then, Qualcomm has grown to become one of the preeminent companies in the wireless technology business and the largest fabless semiconductor manufacturer in the world. Qualcomm intellectual property provides the technical base for most of the 3G networks that now dominate wireless markets worldwide.

Qualcomm is a case study in the development, implementation, and widespread adoption of a highly disruptive technology⁵⁶—code division multiple access (CDMA). This technology revolutionized the wireless industry by dramatically increasing the capacity of wireless networks, permitting the adoption of wireless technology by millions of users and the subsequent emergence of smart Internet-enabled mobile phones.

In order to establish its credibility, Qualcomm had to prove the feasibility of this new and unproven technology. It took the company more than 6 years to firmly establish the feasibility of the technology, and it was during this period that the SBIR awards proved influential.

Background

Qualcomm’s first important contract was to build the OmniTRACs messaging and location system for the trucking industry, starting in its first year of operations in 1985. According to Dr. Jacobs, the contract was a “bet the company” risk for Qualcomm: It needed the OmniTRACs revenues to survive, but was not sure at the time that it could deliver the agreed technologies and services. The contract generated about $6 million in development revenues in 1987, and Qualcomm then signed an important commercial contact for OmniTRACs with Schneider National in 1988.

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⁵⁵This section is based on the testimony of Dr. Irwin Jacobs before the Senate Small Business Committee on February 21, 2011, and on an interview conducted with Dr. Jacobs on April 26, 2011.

⁵⁶A term used to describe technologies that disrupt existing markets, originally coined by Clayton Christensen in J.L. Bower and C.M. Christensen, Disruptive technologies: Catching the wave, Harvard Business Review, January-February 1995.

By 1989, Qualcomm’s technology was in a sufficiently advanced position for the company to acquire $1 million in funding from Pactel and, perhaps more importantly, sell $20 million in Series B preferred shares in April and further Series C shares for $8/share in September. The year culminated with the critically important first-ever CDMA (Code division multiple access) field trial for Pactel in San Diego—a trial which provided critical evidence that CDMA technology could be applied successfully.

The timing of the trial suggests that SBIR funding indeed played an important role. Much of the revenue generated in 1986 was used to support development of the OmniTRACs system, with little left for finalizing the research needed to implement cellular CDMA for the first time. To complete technology development of an entirely new networking technology to the point of field trials in the course of 2 years required the limited resources from SBIR, which arrived right at the critical time.

Timing in the development and deployment of CDMA technology was absolutely central to its success. By March 1990 the telecommunications Industry Association (TIA) had approved a competing technology—TDMA—for use in the United States, which was quickly adopted through the GSM standard as the primary technology for the emerging European cellular market. There was therefore strong support for TDMA from existing cellular carriers, many of whom were not convinced that CDMA could ever be implemented in the field, even though the theory underpinning the technology had been initially patented during WWII.

Anticipated rapid growth in the U.S. market, and pressure to address capacity constraints in existing networks, meant that network providers would soon be forced to decide which technology they would use to make the critical transitions from analog AMPS technology to the new digital age. Once made, that decision would determine the future of the industry through the first generation of digital deployment. Accordingly, the timing of the San Diego field trial was absolutely central to Qualcomm. Had the trial been unsuccessful, or had it been a year later, key decisions would likely have been made and the window of opportunity for CDMA would have closed.

It should also be understood that once TIA had endorsed standards based on TDMA, there was very strong industry resistance to what was called a split standard, because that would involve expensive development of two technologies: “No one is overjoyed about the split in the cellular standard &#8212; least of all manufacturers who together shelled out $200 million to $300 million developing TDMA and now face a similar expenditure on CDMA.”⁵⁷

The fact that Qualcomm’s trial was timely and was successful is in part due to the key funding provided through the SBIR program, which as Dr. Jacobs noted, helped the company to crack certain key technical problems on its way to building a successful solution.

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⁵⁷Business Week, April 27, 1992.

The effect of the San Diego trial and a second in New York 3 months later was immediate: six leading operators and equipment manufacturers signed up to develop and implement CDMA-based solutions. These companies committed more than $30 million to development over 2 years. ⁵⁸ In 1991 Qualcomm made its first large international deal when South Korea’s ETRI agreed to a partnership to develop a CDMA-based industry in South Korea.⁵⁹

The timing of this breakthrough is also indicated by the extremely rapid diffusion of CDMA technology thereafter.

What was the role of the SBIR program in Qualcomm’s technical success and business breakthroughs? This has to be understood in the context of the technical challenges facing Qualcomm at the time.

Key Technical Challenges in the Early Years of Qualcomm—The Road to CDMA

Rapidly accelerating demand for mobile services drove the need for a massive increase in mobile capacity, which clearly would require a switch to

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⁵⁸Dave Mock, The Qualcomm Equation: How a Fledgling Telecommunications Company Forged a New Path to Big Profits and Market Dominance, AMACON, 2005. p. 91.

⁵⁹Mock, op.cit., p. 48.

digital technology. However, although CDMA theoretically offered far larger gains in capacity and potentially reduced costs, formidable technical barriers had to be overcome. Indeed, some respected experts in the industry and in academia argued that CDMA was simply too complex and faced too many technical difficulties to be implemented effectively. Four technical challenges had to be addressed.

The Near-Far Field Effect

Because all users would operate on the same spread spectrum, interference from other users—and in particular signals from other users closer to the base station—would drown out others who were further away. This problem required a new focus on minimizing the power of the user signal rather than maximizing it, as was customary under AMPS, FDMA, and TDMA, where users did not share the same spectrum at the same time. Qualcomm solved the problem by using existing automatic gain control circuits in the handset, which became the basis for what it called the open loop power control method.⁶⁰

At the same time, Qualcomm used new technology at the base station to deliver closed loop feedback to handsets hundreds of times a second, which required the handset to increase or reduce power based on needs of the cell. This technology was patented in November 1989 and provided a solution to a subtly different problem, that of outside interference (e.g., phones in motion).⁶¹

Soft Handoffs

Existing systems for transferring calls between cells were hardware based and used “make and break” to hand off. Essentially, the call was connected to a second cell tower before it was disconnected from the first one. Hence calls were maintained on two towers at the same time.

Qualcomm opted instead for what became known as a “soft handoff,” in which the call is transferred via software coordination between the towers. This required precise synchronization between the towers, and Qualcomm used GPS to synchronize, drawing on its experience with the OmniTRACs satellite-based system. Again, it was not clear at the time that this more complex and challenging solution could be implemented.

Voice Coding

Qualcomm was among the first to realize that major gains in capacity could be driven by more efficient ways to digitally encode voices advances. The company developed a variable rate coder (VRC) that could process information at four different levels of accuracy, depending on the bit rate employed. The

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⁶⁰Mock, op.cit., p. 63.

⁶¹Mock, op.cit., p. 64.

VRC was able to identify dead time between words and to reduce the bit rate to a minimum, without any loss of quality. As Qualcomm found that a considerable percentage of conversation time is in fact silent, which dramatically expanded the system’s capacity without reducing voice quality. Dave Mock, Qualcomm’s biographer, says that this tripled the system’s capacity.⁶²

In addition, VRC allowed the system to simply reduce quality in the face of congestion. FDMA and TDMA could only drop calls in response. Degraded but still functional connections provided a substantial market advantage for CDMA systems.

Custom ASICs (application-specific integrated circuits)

Many of the core technologies developed by Qualcomm had to be implemented via development of an ASIC—off-the-shelf processors at the time were not well suited to CDMA needs.

The original ASICs division team developed the ASICs for the OmniTRACs system and for the Viterbi decoder, but only the rapid expansion that Dr. Jacobs says was partly fueled by SBIR permitted Qualcomm to provide chips at the scale required for network deployment.⁶³ Qualcomm produced its first custom ASIC in May 1991.⁶⁴

Qualcomm and SBIR

Qualcomm has long since graduated from the SBIR program. It now employs more than 31,000 staff worldwide¹¹ and has annual revenues on the order of $25 billion, up 30 percent year over year. It is highly profitable, earning near $7 billion in profits in fiscal 2013, increased 12 percent year over year. It sold about 190 million MSM chipsets in the last quarter of 2013.⁶⁵

Qualcomm is therefore one of the largest companies ever to participate in the SBIR program. But in 1988 and 1989, its position was very different. During its first 5 years of operation, Qualcomm received eight Phase I and four Phase II awards, amounting to about $1.4 million. Critically, SBIR funding provided a crucial influx of funding in 1988 and 1989, providing about $700,000 in 1988 award cycle funds.

According to Dr. Jacobs, “This funding allowed us to pursue several innovative programs that otherwise would not have been possible.” In his Senate testimony, Dr. Jacobs noted that SBIR funding had a particularly direct and powerful effect on the company’s ability to develop ASICs and a core competency in this area. Although those ASICs have long since left the market,

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⁶²Mock, op. cit., p. 70.

⁶³Jacobs interview.

⁶⁴Qualcomm, private communication.

⁶⁵Qualcomm Announces Fourth Quarter and Fiscal 2013 Results.

the competency has remained. Approximately two-thirds of Qualcomm’s current revenues are derived from ASICs. ⁶⁶

In the interview, Dr. Jacobs specifically identified three areas in which SBIR funding made a central difference:

• A project involving bandwidth-efficient coding techniques
• A method and hardware to test error detecting codes
• Development of an application-specific integrated circuit (a first step in a business that now brings in about two-thirds of company revenue).

The role of SBIR funding is usually best captured by the views of executives involved at the time. In his testimony and interview, Dr. Jacobs highlighted the importance of SBIR funding to Qualcomm at a very early and critical stage of its development. Beyond the immediate funding impact, he SBIR provided a critical “stamp of approval” that allowed the company to successfully pursue sources of private capital.⁶⁷ The NRC and others have identified this validation effect as an important although difficult to quantify contribution of the SBIR program to the U.S. innovation ecology.

Finally, it is worth noting that SBIR funding for the technology was largely provided by DoD and in particular by Navy. Although it does not appear that Navy directly acquired Qualcomm technology in advance of its private-sector success, the continuation of funding suggests that Navy found positive outcomes from its SBIR awards with Qualcomm.

Qualcomm After 1991

Building an industry coalition was not the end of the game for Qualcomm. The eventual success of CDMA technology in the United States required many more years of effort, as well as the inevitable setbacks and successes. Even 4 years later, in 1994, the Wall Street Journal was still not convinced: “It’s a good idea. But in technology, ideas alone won’t cut it. Speed in rolling out a product is vital … Qualcomm’s whiz-bang digital technology is losing ground, some experts believe, to older digital methods already adopted.”⁶⁸

During 1997 and 1998, Qualcomm rolled out the world’s first commercial CDMA smartphone (the pdQ™), and in 1999 most major network vendors agreed to use CDMA for the rollout of 3G networks, which for the first time brought the Internet to millions of smartphones and ushered in the transition from a voice-driven to a data-driven mobile network.

Jumping forward, Qualcomm has remained an industry leader. For example, in 2008 a Qualcomm chipset drove the G1, the first Android phone.⁶⁹

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⁶⁶Jacobs testimony, op.cit., and Interview, April 26.

⁶⁷Jacobs testimony, op.cit.

⁶⁸Wall Street Journal, October 11, 1994.

⁶⁹Qualcomm, private communication.

The company now has more than 31,000 employees, up from 428 in 1990, 6,300 in 2000, 9,300 in 2005, and 17,000 in 2010. MSM chip shipments continue to grow rapidly.

The Qualcomm business model is worth noting. Once Qualcomm provided CDMA technology and supported initial implementation by providing a complete package of software and hardware, including both handsets and base stations, it quickly adjusted to re-focus on the IP side of its operations, developing partnership relations with telecoms manufacturers and operators.

Today Qualcomm has a market cap of more than $123 billion⁷⁰, and its technology is in use in more than 2 billion 3G connections worldwide.⁷¹

Qualcomm has also continued to fund research and development at a very high level. R&D funding grew to $5 billion in fiscal year 2013, about 20 percent of revenues.¹⁷ Cumulatively, Qualcomm has invested more than $31 billion in R&D investments over its lifetime.⁷²

Paying Back for the Nation’s SBIR Investment

Qualcomm’s success has led to substantial dividends for the taxpayer. In FY2010, the company paid federal income tax of $1.3 billion,⁷³ not including the personal federal income taxes paid by the thousands of Qualcomm employees.

Qualcomm has had significant regional impacts in the San Diego area. According to a San Diego Workforce Partnership & San Diego Regional Economic Development Corporation study released in 2013, Qualcomm contributes $4.53 billion in direct and indirect economic activity annually.⁷⁴ The same study found that Qualcomm employed more than 11,000 people directly in San Diego and that money spent by Qualcomm and its employees created and supported more than 26,000 jobs touching a variety of goods and services in San Diego County. According to the study, Qualcomm is responsible for economic output equal to approximately 3 percent of the Gross Regional Product of San Diego County in 2010 and is the county’s largest private sector employer.

Today, the San Diego region hosts hundreds of telecommunications companies, from startups to leading R&D facilities of global telecom companies, which is in sharp contrast to what existed in 1985. The telecom industry supports the region’s economy with thousands of high-paying jobs. Qualcomm has contributed to the creation of this industry cluster through spinoffs and partnerships with other companies.

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⁷⁰As of July 31, 2014.

⁷¹Qualcomm’s Fiscal 2013 Annual Report on Form 10-K filed with the SEC.

⁷²Qualcomm, private communication as of third quarter fiscal 2014.

⁷³Qualcomm’s Fiscal 2010 Annual Report on Form 10-K filed with the SEC.

⁷⁴The Economic Impact of Qualcomm, January 2013

Finally, Qualcomm continues to pour funding in R&D. Qualcomm reported at the end of the fourth quarter of 2013 that it continues to fund R&D at more than $5 billion annually, approximately 20 percent of revenues.⁷⁵

TEXAS RESEARCH INTERNATIONAL: SBIR CASE STUDY

Based on interview with Dr. Michael Dingus, Vice President and Technical Director October 21, 2011 By telephone

Texas Research International (TRI) is a privately held company headquartered in Austin, Texas. Founded in 1975 by Dr. J. Scott Thornton, the company specializes in addressing the materials-related needs of defense and government clients, and its mission is to “develop, characterize and transition innovative materials and material health monitoring systems that address the critical needs of the Armed Forces.” TRI currently has more than 125 employees.

TRI is organized into three subsidiaries or divisions:

• TRI/Air Testing Inc. focuses on compressed air testing, medical gas testing, and indoor air testing
• TRI/Austin, Inc., TRI’s flagship company, conducts materials research and development projects

TRI/Environmental, Inc. (TRI) is an independent, third party, geosynthetics firm providing geosynthetics testing and research services to the international community. The SBIR awards were acquired by TRI/Austin, and this case study focuses on that division.

TRI/Austin’s areas of technical expertise include materials science, composite materials and products, environmentally compliant alternative material development, adhesives, polymer science, coatings, nondestructive testing, accelerated life testing, reliability engineering, and specialized instrument development.

Technologies and Capabilities

Advanced materials are at the core of TRI capabilities and cover a broad range of polymer chemistries. More specific capabilities include the following:

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⁷⁵Qualcomm Announces Fourth Quarter and Fiscal 2013 results.

• Composites Engineering, especially for marine use. TRI uses materials selection, solid modeling, finite element analysis, and structural analysis to optimize composite components, as well as a variety of composite manufacturing techniques to produce prototypes and preproduction components.
• Experience with extreme environments. TRI develops high-performance products to meet demanding environments for military aircraft, land vehicles, ships, and submarines. For example, TRI’s Proteckt^R High Temperature Coating provides a new, high temperature resistant abrasion coating for the Joint Strike Fighter, directly improving the reliability and maintainability of the weapons system.
• Meeting environmental and safety regulations. TRI has developed 100 percent lead-free solids and volatile organic compound (VOC)-free materials that meet or exceed the performance of incumbent materials. For example, ThermaSafe™ composite resins meet fire, smoke, and toxicity restrictions aboard submarines.
• Materials Testing. TRI has extensive materials testing facilities to support R&D projects and also develops customized protocols for specialized testing requirements.
• Diagnostics/Prognostics/NDE/NDT. TRI holds patents on structural health monitoring systems and nondestructive testing technologies, and it ran DoD’s Nondestructive Testing Information Analysis Center for over 15 years.
• Materials Qualification and Transition. Part of the transition process for using materials in the military is testing and qualification. TRI has developed, tested, and qualified numerous materials for military use, for example Bond-Coat^R, which was developed under a Navy Phase II SBIR and significantly extends the life of submarine and other underwater electrical connectors and is mandated for use by the Navy.⁷⁶

Business Strategy and Commercialization

TRI began as a contract research house, and it used SBIR award funding to supply the armed forces with specific research required to address technical problems. It still performs contract research and development and product development for DoD and other government agencies as well as private industry. It also performs contract technical support services. For example, for over 15 years TRI ran DoD’s Nondestructive Testing Information Analysis Center, which contained the world’s largest library on NDE/T technologies.

TRI has worked hard at SBIR transition and has made significant investments to commercialize its technology both within and outside DoD.

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⁷⁶NAVSEA S9320-AM-PRO-030/MLDG, REV 03.

Aside from direct commercialization discussed below, it has developed a spinout in partnership with another organization called Ideas to Market LP. This partnership has successfully launched the Ecomass^R products under the spinoff company Ecomass Technologies (<www.ecomass.com>) (see Box F-4), which have generated more than $43 million in sales.⁷⁷ The limited partnership raised more than $1 million in an initial offering for market research, intellectual property protection, and additional product development efforts for selected SBIR technologies.

Today, TRI sees itself as a company providing “cradle-to-grave” advanced materials for advanced applications, not only within DoD where the company has four primary customers, but also in the oil industry around its home base in Austin, Texas.

This focus on commercialization has led the company into relationships with a number of prime contractors (discussed in the TRI and the Primes section below).

According to Dr. Dingus, several of the company’s products have completely transitioned to commercial production. These notably include the following:

• Bond-Coat, a method of extending the life of underwater electrical connections. According to the Quad-Chart describing project progress and provided by TRI, Bond-Coat has saved the Navy $814,400 per submarine over the life of the connectors, even before considering savings due to improved combat readiness. The federal government now requires Bond-Coat NCC on Navy underwater connectors and other outboard equipment.⁷⁸ Bond-Coat—which costs about $50 per connector—potentially extends the useful life of underwater electrical connectors up to 6-fold—from 2.5 to 15 years. Dr. Dingus notes that sales are more than $10 million, of which over $7 million were made by TRI.
• Submarine flex hose, which has generated sales of more than $2.7 million to date. TRI has partnered with a cable production company—Cortland Cable—on this project. The TRI technology addresses a significant problem with lead exposure to workers and sailors related to the production of control hoses for certain torpedoes.

Following Bond-Coat, TRI has aimed to move from a licensing-based strategy toward one focused on manufacturing and implementing solutions that contain its technology. This transition has been supported by SBIR.

TRI is working to commercialize other products.

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⁷⁷See Ecomass description at <http://www.ecomass.com/>.

⁷⁸Phase II SBIR Final Technical Report “Non-Conductive Coatings for Underwater Connector Backshells”, May, 1995, Contract Number N00024-93-C-4124.

TRI and the Primes

TRI has teamed with an array of technology leaders, primes, and commercialization partners. These include Boeing, Lockheed Martin, Northrop Grumman, Johnson & Johnson, Hazeltine, Sigma Coatings Inc. USA, Ameron, PolyOne, W. W. Henry, Gilson, Conoco, 3M, Dell, CTI Alaska, API, MTI, Hughes, Fuel Systems—Textron, and Newport News.

According to Dr. Dingus, these partnerships are possible because primes are generally not interested in entering small markets for materials products. In most cases, work on materials for DoD is focused on niche applications with small potential markets and few non-military applications, and hence of little interest to the primes.

Overall, TRI has had strongly positive experiences with teaming:

• Lockheed Martin. In an effort partly funded by Lockheed Martin, aircraft appliqués were developed as paint replacement materials to minimize the costs associated with paint application and waste disposal.
• Boeing. Corrosion costs the Air Force alone more than $100 million per year in total direct costs. Boeing has now integrated TRI’s

• Johnson & Johnson. With funding from Johnson & Johnson (J&J) Medical, TRI developed powder-free natural latex and neoprene surgical gloves. The patented coating system allows surgeons to don the gloves either wet or dry. TRI also assisted J&J with the transition to production of these new gloves.
• NASA, Boeing, and Lockheed Martin. In response to the Columbia accident, NASA established a new office, the NASA Engineering and Safety Center (NESC), to provide independent (outside NASA) assessment of potential safety issues. TRI was part of the team working on these issues, and conducted studies on the reliability of aging Space

Shuttle composite overwrapped pressure vessels (COPVs). In general, Dr. Dingus observed that working with primes is more difficult on transition and commercialization projects that on contract research projects, which have fewer potential conflicts of interest and strategy.

TRI and SBIR

SBIR has been a central plank of TRI’s business strategy almost since the inception of the program. It received its first SBIR award from the first round of NSF awards in 1983 and overall has received more than 150 Phase I and 60 Phase II awards, totaling approximately $50 million (as of 2010).⁷⁹ TRI has expanded its use of the SBIR program in recent years. Starting around 1995, TRI experienced a sharp increase in the number of Phase I and II SBIR awards at TRI. Its conversion rate to Phase 2 increased significantly in 2000, but has declined somewhat since 2006. More recently, SBIR awards at TRI appear to be declining, with non-SBIR work increasing, although it is perhaps too soon to tell whether this is a trend.

According to Dr. Dingus, TRI has been interested in participating in commercialization efforts within the DoD. For example, TRI has repeatedly participated in the Navy Transition Assistance Program (TAP). TRI submitted a proposal for a Phase II enhancement covering new technology to deploy camouflage face paints that are less expensive and have properties that reduce facial burns. A Phase II enhancement second project concerns a high-temperature coating that effectively retains color, to avoid coating burn off in high temperature areas of Air Force aircraft.

Dr. Dingus believes that the new Rapid Innovation Force RIF program will be very popular, perhaps resulting in more than 5,000 white papers at DoD. However, he notes that the first $25 million has already been allocated, and if

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⁷⁹SBA TechNet SBIR Awards database, accessed October 21, 2011.

funding is approximately $3 million per project as expected, then funding will be available for only 25-50 projects. This suggests a considerably lower success rate than for regular Phase II SBIR awards.⁸⁰

SBIR and Data Rights

Data rights are an extremely important part of the SBIR program, according to Dr. Dingus. Indeed, had current rules been in operation at the time of Bond-Coat’s development, the company would have been able to substantially accelerate and expand commercialization (the project predates the current data rights rules introduced in 1994).⁸¹

More generally, Dr. Dingus said that contracting officers need substantially more education about SBIR data rights because knowledge varies widely between officers. Moreover, there are no penalties for violating data rights—in effect, companies are helpless if agencies do not play by the rules. He said that it would be useful if penalties could be enumerated and disseminated.

Finally, Dr. Dingus noted that, although he appreciates the sole source provisions of SBIR data rights, they have never been used by TRI and he does not anticipate their use in the future.

SBIR Recommendations

Many of TRI’s most pressing concerns with SBIR center around the role of the TPOC, which Dr. Dingus believes is central to a project’s success.

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⁸⁰In an email update, dr. Dingus noted that TRI-Austin has received 2 RIF awards and is a subcontractor on a third.

⁸¹See RIGHTS IN DATA--SBIR PROGRAM (52.227-20) (MAR 1994), <http://code210.gsfc.nasa.gov/autoc/html/subE27-33/F27-20.html>.

Although recent improvements in the award cycle mean that there should be fewer instances of TPOCs changing in the course of the project, this remains a major concern.

Dr. Dingus supports all efforts to provide ways for agencies and companies to connect prior to submission of the formal application. He endorsed the Air Force introduction of a pre-solicitation publication of areas of possible interest as “tremendously beneficial,” because it provides adequate time to investigate an area and talk to potential sponsors.

TPOC connections are so important that, whenever possible, TRI tries to meet face to face with potential sponsors. The reduced timeline for proposals from 12 to 8 weeks, however, makes that more difficult.

Dr. Dingus appreciates the increase in the award size, especially for Phase I, but is concerned that this will lead to fewer awards, a trade-off that TRI would not favor.

Dr. Dingus expressed concerned that at some of the Services—notably Army—priorities can shift quickly even after award of a Phase I, leaving worthwhile projects stranded. For example, the Ecomass project was highly successful, but Army funding for Phase II disappeared despite highly favorable reviews. He believed that a commitment to fund at least one Phase II per topic (provided that solutions were technically successful at Phase I) would be appropriate.

Company Update:

Under Phase II SBIR and internal IRAD funding, TRI/Austin has developed and recently transitioned a lightweight, low cost, energy dissipating vehicle floor mat material called Proteckt^R that substantially mitigates the risk of serious leg and lower body injury in the event of IED detonation under military tactical vehicles. Proteckt^R (U.S. Patent No. 8790776) is a novel hybrid material that can be readily adapted to the Joint Light Tactical Vehicle (JLTV) and any other new or existing vehicles to prevent injuries. Proteckt^R energy absorbing floor mats can be rapidly designed for and integrated into ground vehicles as an insertion floor mat kit - no changes to the vehicle are required. In addition to superior performance, Proteckt^R weighs and costs less than currently used blast energy dissipating floor mats. The Proteckt^R technology development, design, and testing were initially performed under an Army TARDEC SBIR Phase II (SBIR Topic number ARMY 06-192, Contract Number W56HZV-08-C-0047). TRI/Austin recently produced 55 floor mat kits for the HET A0 vehicle and delivered 5 blast mats kits for the LVSR that passed full vehicle blast tests. TRI delivered and installed 5 Proteckt^R interior occupant impact attenuation vehicle kits for the A1P2-FMTV via Army TACOM (contract number W912CH-09-C-L512). TRI has also internally funded IR&D efforts for initial production scale up, design modifications, and IED floor blast simulated tests. TRI has established a 3000 sq. ft. Proteckt^R production facility that includes all necessary equipment and storage space to support low rate

initial production. The facility is currently ISO 9001 compliant and is ISO 9001:2008 certified.

TRX SYSTEMS: SBIR CASE STUDY

Based on interview with Carol Politi, CEO February 2, 2013 Greenbelt, MD

TRX Systems is a privately held company headquartered in Greenbelt, Maryland. Founded by Carole Teolis, Gilmer Blankenship, and Ben Fun, TRX established a focus on indoor location in part because of its success in winning an SBIR award from NSF in 2007, which provided critical seed capital.

The company focuses on developing new tools for geo-locating personnel in locations where existing technologies (such as GPS) do not work or work poorly—for example, indoors or other areas where there is considerable signal interference.

Business Model

TRX is the developer of NEON®, an indoor location system that delivers precise, infrastructure-free tracking of personnel inside buildings where GPS is not available and in outdoor urban centers where GPS is unreliable. NEON greatly improves situational awareness and command effectiveness through the use of advanced sensor fusion, time of flight ranging, and mapping algorithms that deliver precise, real-time location of personnel in GPS-denied locations.

The TRX business model focuses on selling NEON, including a TRX developed accountability system, to federal and public safety markets as well as in licensing the NEON technology on an OEM basis for integration into third-party products.

Core Technologies

GPS, Wi-Fi, and ultra wideband technologies are all used for geo-locating, but they have significant shortcomings. They work less effectively in certain environments, particularly indoors where GPS and compasses are unreliable, and in circumstances where building maps are not available.

TRX NEON is a software suite that integrates data from numerous and disparate sources to create accurate 2D and 3D maps and to track personnel across them. These patent-pending sensor fusion and mapping algorithms integrate data from a broad range of sensors including compasses, GPS, ranging,

inertial, light, and pressure sensors to deliver accurate tracking of personnel paths.

NEON determines when a degraded sensor (e.g., compass or GPS) is providing accurate estimates and when it is not. Poorly functioning or degraded sensors are isolated and de-emphasized or eliminated in the navigation solution. As a result, NEON works well even when a sensor’s data is more than 50 percent erroneous.

NEON uses received sensor information to build site maps, building features, and other landmarks dynamically as people move about an area or building. Information from multiple people is merged to deliver “team-wide” location estimates. Essentially, by managing the data flow from multiple sensors NEON can determine the likelihood that any one data stream is erroneous, and act accordingly.

Ranging information, if available, can also be used to constrain location results. Examples include people operating within 50 meters of each other or working within range of a fixed RF node.

Accuracy is further increased where there are known features or floor plan information, because NEON can also match location estimates and inferred maps to known features and floor plans. User corrections can also be incorporated into NEON’s data stream.

Products

NEON Location Services

The NEON Location Services are the core product for TRX. NEON uses an open architecture that is easily implemented with sensors from partner-provided hardware systems. The NEON Engine software includes application programming interfaces APIs for integrating input or constraints from partner systems and for providing indoor location data to third-party applications.

System Components

In addition to delivering location information in an API, TRX delivers an application into the public safety market (called NEON Tracker Command Software) that supports rapid and easy 3D building mapping, clear 2D and 3D views of personnel operating in and around buildings, and a record/history of personnel activities for after action review. System configuration can be performed in advance or immediately prior to an event or training session. Personnel equipped with NEON tracking units, or devices running NEON software, are automatically detected and monitored. NEON’s Tracker Software allows commanders to visualize the location of personnel outfitted with NEON Tracking Units in both 2D and 3D as they operate indoors.

NEON Tracking Units are waist-worn devices (about the size of a deck of cards). They include a number of sensors: temperature compensated triaxial accelerometers and gyroscopes, triaxial magnetic sensors, barometric pressure, light sensor, Time of Flight (TOF) RF ranging, and GPS. These Tracking Units interface to radios or smartphones to transmit location information back to the NEON Tracker Command software. TRX is also now implementing its location algorithms on Android smartphones which now have many of the same sensors that exist in the NEON Tracking Units.

NEON Multi-Sensor Anchor Nodes can be used in fixed site applications to enhance precision. Anchor Nodes do not require networking and can be added during operations. It's also possible to use both Bluetooth and Near-Field Communications to support location initialization using cellular devices.

Markets

There are numerous potential markets that require an efficient means to geo-locate people in circumstances where standard GPS does not work effectively. TRX has focused on three core areas: first responders, defense, and security

First Responders

First responders often work inside buildings, in dangerous circumstances, where GPS is unavailable and where the location of personnel is a critical need for commanding officers.

NEON’s key feature is that it can work in areas that are currently unmapped and that are not equipped with networked beacons: it does not require a building plan or pre-installed infrastructure to constraining the routes through which people move. This differentiates NEON sharply from many competing approaches, which rely in part on existing building maps and often require installation of beacons to deliver location indoors.

Defense

Dismounted war fighters increasingly rely on location for navigation and to deliver the situational awareness required for optimal command effectiveness. In some cases, GPS may be either unavailable or insufficiently precise. NEON is currently being adapted for use specifically for training, where trainers benefit from immediate review of exact personnel movements in near real time, as well as information on personnel orientation and proximity to other personnel or entities to enhance training realism.

Security

Security applications require easily deployed systems to support monitoring and tracking of essential security personnel. Event security requires highly portable systems that can be rapidly deployed with a minimum of facility integration, reliance, or impact. Many fixed facilities need to incorporate monitoring and tracking of security personnel in harsh environments, where infrastructure cannot be relied upon, or where networking of infrastructure is difficult or expensive.

NEON greatly improves situational awareness and command effectiveness for these applications, delivering real-time 2D and 3D locations for personnel operating in and around buildings. Key features include:

• Real-time 2D and 3D location of personnel
• Clear situational awareness, indoors and out
• Effective after action review
• Portable, lightweight, and rapidly deployed.

Partners and Business Model

TRX has focused primarily on infrastructure-free applications for which it has a substantial competitive advantage and on government applications in particular. It is now expanding to include mobile applications. Primarily, sales are made through partner organizations, which include Motorola, Globe Manufacturing, and ST Electronics.

In general, partners integrate TRX’s NEON geo-tracking system into their own solutions, thus becoming in effect a distribution channel for TRX, which can then focus on R&D and partner management. Partners often bring an extensive suite of tools in the form of a fully integrated solution, such as Motorola’s radio systems or Globe Manufacturing’s fire suit, and may also have expandable existing contracts and a sales and support organization already in place.

In addition, TRX has deployed some systems directly both in the United States and internationally. Such sales typically involve sale of a system for evaluation, followed by customization to integrate the system with existing radio networks or other situational awareness tools. This has allowed TRX to deploy very rapidly, providing a further competitive advantage.

Finally, sometimes TRX directly licenses its algorithms for use on other hardware, which provides greater form factor flexibility for the partner.

Over the long term, the management team at TRX foresees a much wider range of potential uses. According to Carole Teolis, CTO, “While TRX Systems started with a focus on firefighters, it has become clear that there are a many situations that would benefit from precise indoor location without relying on pre-installed infrastructure for support. In places like malls and office

buildings, this technology would allow a person to navigate to the exact restaurant where a friend is waiting, to a store with a favorite item is on sale or to an office cubicle to meet a colleague.”⁸²

R&D

TRX R&D programs include the deployment of NEON location services in a “software as a service” or SAAS environment, and on mobile devices. Current research projects include the following:

National Science Foundation: Collaborative Indoor Mapping Technologies

TRX is developing a smart phone application that creates indoor maps through sensor fusion and crowd-sourcing. The resulting indoor map database changes dynamically as individuals move about indoor spaces, using data gathered from sensors in Android smartphones. Building features and navigable passageways are detected and displayed, while accuracy increases as the number of users increases.

Federal Highway Administration: Navigation Aid for the Blind and Visually Impaired

TRX is developing a navigation aid for the blind and visually impaired, to track the location of a blind person anywhere, including areas where GPS is not available or reliable (for example, indoors or in urban areas with tall buildings). The application also aims to plan and adaptively update a route based on recognized obstacles to be avoided (for example, people or construction within the path). A third objective is to take gestural input and provide natural route guidance based on tactile stimulus instead of relying solely on auditory or visual instructions.

Army: Distributed Navigation

The goal of high accuracy and robust navigation for mobile soldiers requires a flexible system design that uses all available information. A network of soldiers must be able to move seamlessly from operating individually to navigating as a team. TRX is building a soldier-worn device that shares location information and leverages available communications (to other squad members and optionally to ground sensors and vehicle-based navigation systems and command), generating dynamic and timely information for improving navigation.

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⁸²A. Rote, TRX Systems, Inc., Taking a new Perspective, researchers develop new locating tech, NSF Livescience online magazine, December 12, 2012.

Department of Homeland Security

The Department of Homeland Security Science and Technology Directorate has sponsored Honeywell, with team members Argon ST and TRX Systems, to develop the Geo-spatial Location, Accountability and Navigation System for Emergency Responders (GLANSER). GLANSER provides accurate and reliable location of emergency responders (ERs) in all types of environments. It aims to provide indoor/outdoor precision navigation, robust communications, and real-time position updates for commanders.

Private Investment

In 2012, TRX received a $2 million A round of venture funding from Motorola Solutions Inc. (NYSE: MSI), New Dominion Angels, the Maryland Department of Economic Development, and inside investors. It is using the investment to fund integration of NEON with Motorola Solutions’ radios and to expand sales and marketing operations more generally.⁸³ (Since that time, NEON was approved for use with the Motorola APX radio and is now available to Motorola customers through its catalog).

“The ability to locate personnel operating indoors and often in hazardous situations improves command effectiveness, increases personnel safety and ultimately saves lives,” said Mel Gaceta, investment manager, Motorola Solutions Venture Capital. “The TRX NEON Indoor Location System

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⁸³J. Clabaugh, TRX Systems gets $2M in VC funding, Washington Business Journal, November 13, 2012.

clearly complements Motorola Solutions’ capabilities to improve safety for mission-critical users.”⁸⁴

TRX and SBIR

TRX can already be viewed as an SBIR success story. Only 5 years after its founding, received a Tibbetts award in 2012. TRX founder Carole Teolis was well aware of the SBIR program; Teolis had previously been a PI at TSI, another successful SBIR recipient in the Maryland suburbs of Washington, DC.

The company's focus on indoor location was critically enabled by its first SBIR award from NSF. It has since received several awards from DoD, including a recently expanded award from DoD’s Army training command. Three of TRX’s four Phase I awards have been selected for Phase II, providing total committed SBIR funding as of yearend 2012 of about $3 million.

Important early support was also provided by a TEDCO grant from the state of Maryland, which together with the SBIR program provided critical early funding to deliver proof of concept. Carol Politi notes that this early support was very important to the company’s success and allowed it to file its first patents in 2007 and 2008. (Since that time, TRX has had 7 patents awarded, four of these in the US).

TRX worked with Army’s Simulation and Training Technology Center (STTC) on group training and simulation technologies, focused on developing an application to help train soldiers in urban areas. Army is required to develop effective urban training and particularly needed a tool for after-exercise review in near real time. Existing solutions required expensive networking technologies such as ultra wide band or the introduction of numerous cameras for video review. A better approach would be lightweight and rapidly deployable, and it would require no pre-existing infrastructure or network, while still providing a means to track the location and path of all soldiers during an exercise. The Army also sought integration of interior maps where available.

TRX received substantial support from a program manager, Tim Roberts, at SSTC, who linked the company to staff conducting live training exercises. This provided important feedback for improving NEON, as well as access to testing venues.

Eventual take-up in DoD, according to Politi, must be based on end-user support and establishment of the right partners. TRX has recently partnered with General Dynamics to integrate NEON within the Army CTIA training architecture, and to extend the NEON capabilities to further enhance training realism.

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⁸⁴Motorola Solutions invests in TRX Systems Inc., PRWeb, November 12, 2013.

For TRX, key competitive advantages include the following:

• low costs (no infrastructure required, which means that training organizations can simply buy the technology without any significant prior planning or authorization, or need for integration with current systems)
• easy interface with programs of record, but no requirement for integration
• multiple sales options (more than 100 military training organizations are potential buyers)
• light weight both physically and technically (which means high degree of portability, so systems can be deployed for training within theater)

TRX primarily markets its product by looking for partners. Ms. Politi notes that in many cases, “TRX is an important piece of a much larger program.” As a result, partnership is inherent to TRX’s business strategy.

Similar solutions and approaches are used to address the training needs of other organizations, notably law enforcement, first responders, and others in the wider field of security. Here partnerships such as that with Motorola and Globe, and the development and potential licensing relationship with Honeywell, are the primary conduits for sales.

TRX has a flexible business model. Although Ms. Politi expects to make most sales through partners, TRX is set up to make direct sales where necessary or to offer OEM services where it provides the product but not fulfillment.

Ms. Politi observed some angel and VC funders are concerned that companies will become dependent upon SBIR funding, and apply for programs that become distractions from developing a product business. TRX frequently rejects opportunities to pursue SBIR funding in order to stay focused on its core business of location and mapping.

SBIR Matching Funds and Enhancements

TRX has found enhancement programs within SBIR to be of considerable value and would recommend expanding them, particularly at DoD where they can be used to help fund company efforts to traverse the difficult and demanding DoD validation process. Developing hardened products is expensive, and enhancement programs can provide key funding in that area.

DoD funding in this case required matching funds, which TRX was able to raise from a strategic partner (Motorola) as well as other investors.

TRX was also the recipient of an NSF Phase IIB award, which provided another important contribution. NSF support was central in helping the company raise its first angel funding: the ability to point to a federal

contribution that effectively doubled the money of investors was “a huge benefit in raising outside money.”

More generally, Ms. Politi observed that “matching programs give you a reason to reach out to people, and the double-your-money offer is very well received.”

Recommendations

TRX is not woman-owned but it is woman controlled. Both the CEO and CTO are women. Because TRX was successful in raising outside funds, its time as a woman-owned business, according to SBA’s definition, was limited. So, although the company is still well below 50 percent venture owned, it is more than 50 percent owned by outside funders—and therefore is no longer woman-owned. This change suggests a significant weakness in efforts to track the engagement of women (and minorities) within the SBIR program: successful companies quickly fail to meet the standard SBA definition of woman-owned.

Ms. Politi observed that through NSF, TRX had received commercialization support from LARTA, whose process was especially helpful in relation to a new collaborative mapping initiative. LARTA’s method focuses on business planning and partnerships from the start of Phase I, which could also help to support a new initiative within an existing company. TRX has also used the method to train new PIs.

In addition, through NSF, TRX has received invaluable marketing support. This support included the development of publicly available spotlights of TRX founders and technology, as well as videos showcasing TRX developments.