SBIR at the Department of Defense (2014)

5

Insights from Case Studies and Extended Survey Responses

To complement its review of program data, the committee commissioned case studies undertaken in 2010-2012 of 18 SBIR companies that received Phase II awards from the Department of Defense (DoD). This chapter highlights key issues from these cases (presented in full in Appendix F) and also draws on the extended responses received from respondents to the committee’s most recent survey of SBIR recipients.¹ These comments and concerns, summarized in text boxes, illuminate some of the details of program operation and illustrate the various roles that SBIR plays in the development of small innovative firms. Their value is derived from the details they offer and the stories they tell. Together, the case studies and excerpts of comments from the surveys provide a broader qualitative understanding of the program, particularly from the user’s perspective, and are thus an essential part of the information gathered by the committee to assess whether the DoD SBIR program is meeting all four of its legislative goals.²

The qualitative analysis in this chapter is divided into five broad sections: the effects of the SBIR program on the companies; its impact on company missions; other SBIR Congressional objectives; comments and concerns about the SBIR award process and implementation at DoD; and ideas from the companies for improvements.

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¹ The 2011 survey covered DoD Phase I and Phase II SBIR recipients with awards 1999-2008. The survey included an open comment box where respondents could describe their company’s experience with SBIR.

² The committee has drawn on a complement of quantitative and qualitative information including surveys, case studies of firms, as well as discussions with program staff to develop this assessment of the DoD SBIR program.

ROLE OF CASE STUDIES

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 (see Box 5-1). 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 full in Appendix F of this report and highlighted in this chapter, have been verified by the companies that they feature and they have explicitly permitted their use and identification in this report.

COMPANY EFFECTS

SBIR awards can affect companies in a number of powerful ways, ranging from providing the support and sometimes impetus for company formation (e.g., TRX) to funding a commercially critical breakthrough (e.g., Qualcomm). This section draws on company stories to illustrate a number of these effects.

Company Formation and Seed Funding

For a number of companies, SBIR awards were the catalyst for company formation itself. For example, Cybernet was formed as a direct result of an SBIR award. In 1990, Heidi Jacobus won a Phase I award related to her PhD thesis; later that year Cybernet received its first Phase II award, which provided funds to hire Charles (Chuck) Jacobus and to move to new premises. Similarly, OKSI was founded by Dr. Gat in 1991, on the basis of a successful Phase I award. This award had the not insignificant side effect of proving to the Internal Revenue Service (IRS) that the company was in fact a going concern.

More recently, TRX Systems was founded in part because an SBIR award from the National Science Foundation (NSF) in 2007 provided critical seed capital. TRX founders were well aware of the SBIR program because Chief Technology Officer (CTO) Carole Teolis had been a principal investigator for awards at a previous company.

For a better known company, iRobot, SBIR funding for early-stage investments in multiple technologies provided the key to eventual success. Dr. Frost (CTO) explained that the support iRobot received from the SBIR program for a number of technologies in the mid to late 1990s was critically important to helping the company develop expertise in a range of related areas. Only one of the proposed products (the PackBot) became a commercial success, but that served as a technical and market platform on which the company’s future success could be built.

Non-Linear Development and R&D

Innovation rarely moves in a straight line from idea to prototype to product. False starts and multiple initiatives can lead to products not aligned with those originally envisaged. In some important cases, SBIR funding was used by companies to reinvent themselves or to adopt a broader view of their R&D portfolios (see Box 5-3).

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

Cybernet adopted a bootstrap strategy typical of mid-West companies, for which venture or angel funding remains elusive. Even though Cybernet was able to raise $5 million in funding for its force feedback projects in the late 1990s, Dr. Jacobus considered this to be the exception rather than the rule. Noting that Cybernet’s portfolio-based strategy did not fit well with the standard Silicon Valley/venture capital model, Dr. Jacobus likened her company’s strategy to farming—some years are better than others, but no project ever really dies, in contrast to the prune-and-focus approach of the venture model.

Aurora tried to craft a comprehensive research and development (R&D) program for prospective products that involved a number of SBIR awards but reached beyond them to seek Phase III and other funding from other, possibly more attractive, sources. One example was the SPHERES program, which was developed for DoD and NASA and focused on nanosatellites.

This is perhaps an unusually complex example, but many companies rely on multiple funding multiple sources and undergo multiple iterations to reach a successful product. TRI, for example, made conscious efforts to commercialize its technology both within and outside DoD. Its efforts led to a spin-off partnership with another organization. A similar spin-off occurred at Powdermet, that time in conjunction with a new funding partner. TRX was developing multiple applications for different agencies off of the same base platform.

Bridge/Growth/Capabilities Funding

Once an initial technology has been developed, multiple barriers may appear before and during the initial period of market launch. Core technologies must be adapted for specific markets and needs; different federal agencies have different requirements; and, to sell into DoD, companies must move through the technology readiness levels (TRLs) until the product’s risk has been fully addressed. These developments require time and funding, and the SBIR program often plays a critical role in providing both (see Box 5-4).

A potentially important set of technologies in nanotech is emerging from NCTI, which in 2010 won an oversized Phase II award of more than $4.5 million from the Air Force Research Laboratory (AFRL) to “Scale Up Production, Optimize Properties of Large-Format Carbon Nanotube Sheets for Future Use in Manned and Unmanned Aircraft.”³ This award allowed NCTI to hire Northrop Grumman Aerospace Systems and Cytec Engineered Materials as subcontractors. With SBIR support, NCTI is working to make the jump from batch to mass production for what DoD has identified as a critical technology.

Similarly, SBIR funding was critical for building technical capabilities at MesoCoat and Powdermet, sister companies focused on nanotech-based powders and cladding. The SBIR program funded the hiring of PhD scientists before market sales existed and was essential to maintaining a critical mass for R&D, without which Powdermet would have no substantial technology platform. According to the founder, “Without SBIR, the company would likely have remained a small scale jobbing materials contractor with maybe $1 million in revenues—SBIR was key in supporting the development of in-house capabilities.”

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³ For the full award abstract and details, see Small Business Innovation Research/Small Business Technology Transfer (SBIR/SBTT), <http://www.sbir.gov/sbirsearch/detail/7699>, accessed July 11, 2014.

Timing Effects

The survival and growth of a small business is to some extent serendipitous. Because of a general lack of financial cushion and the relatively high fixed cost of staff and facilities, single contracts can make or break small SBIR companies. Stories from case studies illustrate just how important SBIR funding can be if it comes at a critical juncture. Numerous respondents affirmed the key role of the SBIR program in company survival during fiscally challenging times, either in the economy at large or toward the end of R&D funding and the transition to production (see Box 5-5).

iRobot pursued a range of technologies using SBIR awards during the late 1990s. In 1998 it received a DARPA research contract, which helped fund development of the technology that led to PackBot, iRobot’s first commercially successful product, which turned out to be an inflection point for the company.

The conflict in Afghanistan generated immediate demand for remote-controlled devices to scout within buildings and to address improvised explosive devices (IEDs). These needs expanded after the invasion of Iraq in 2003. This demand for PackBot represented a pivotal point in iRobot’s transition from a research company to a product company. Since inception, iRobot has sold more than 4,500 tactical military robots.⁴ According to iRobot executives, “The success of the PackBot was key to allowing iRobot to hold a successful IPO and contributes to the continuing financial success of the company.”

Qualcomm—now a multi-billion dollar global leader in chip design for cell phones— received eight Phase I awards and four Phase II awards during its first 5 years of operation. SBIR funding came at a pivotal time in the company’s development. According to Irwin Jacobs, founder and CEO at the time, “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 a competency in application-specific integrated circuits (ASICs). Although those ASICs have long since left the market, the competency has remained. Approximately two-thirds of Qualcomm’s current revenues are derived from ASICs.⁵

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⁴ iRobot 10K submitted to Securities and Exchange Commission, Annual Report 2011, p. 3.

⁵ Jacobs Senate testimony, op.cit, and interview, April 26.

High-Risk/High-Payoff Research

One of the key tensions within the SBIR program exists between the drive for commercialization—for ensuring that funded projects are not simply more research—and the need to support high-risk projects that are otherwise difficult to fund. The case studies themselves did not tend to draw attention to this tension, in part because most of them focused on projects that were successful commercially. However, many of the survey respondents offered thoughts on this issue (see Box 5-6). Their comments emphasized that almost no commercial funding is available for high-risk projects until preliminary results—at the level funded by SBIR—are available.

Ongoing R&D Funding

The SBIR program has been a general source of ongoing R&D funding for innovative small companies, few of which have the resources to invest sufficiently in high-risk R&D themselves. Venture capitalists are reluctant to engage in this R&D because the risk is too high or the market too small (a

particular problem for defense). As one survey respondent noted, “The SBIR program invests in areas where the venture community does not, or does so very reluctantly. As such, the program is critical to maintaining US dominance in many scientific areas.”

That was the case initially at ATC, where the SBIR program funded the research that led to the company developing its own products and moving away from a service delivery strategy. TRI, a long-time provider of Navy technologies, used SBIR as a central plank of its business strategy almost from the inception of the program. It received its first SBIR award from the first round of NSF awards in 1983.

The SBIR program also allows companies to become more attractive partners by funding R&D that commercially oriented partners do not want to touch. Cybernet has discovered that, although it is almost always necessary to have a marketing partner to enter specialty markets, those partners are, according to Dr. Jacobus, “rarely prepared to pay for technology development.” Here the SBIR program funds the technology development that can later be licensed or spun out.

Validation at DoD

Small companies can find it difficult to break into DoD contracting. Some never manage to do so despite the quality of their products and technologies. Often, it is important to work with a prime contractor (see below). Equally important, however, is the ability of a small company to convince DoD acquisitions officers not only that their technology and product have been tested sufficiently and are ready for insertion, but also that the company itself is a reliable and stable provider. From the perspective of several companies, one of the SBIR program’s many virtues is that it provides direct access to DoD acquisitions officers and other staff without the need to work through a prime contractor (see Box 5-7).

Several companies, such as Microcosm, noted that the SBIR program provides a unique gateway for small companies into DoD acquisitions. Without the program, all contacts with DoD would have to be channeled through prime contractors. As a result, small businesses would lose the opportunity to connect directly with customers, and acquisitions would lose direct access to the flexibility and technical capacity of innovative small firms.

ATC’s first federal contracts included a substantial role as subcontractor to the Volpe Center in Boston, which was leading the Federal Aviation Administration’s (FAA’s) efforts to develop next generation traffic control systems. This subcontract led to numerous contracts with the FAA: ATC performed more than 50 projects for the agency, ranging from terminal and tower automation to runway safety. Because of its work for the FAA, ATC provided software development and specialty engineering services to industry leaders such as Ford and Boeing.

Even though OKSI could acquire non-SBIR DoD contracts, the program was still invaluable to the company when entering technical areas that were otherwise dominated by either large prime contractors or universities. For example, OKSI undertook a number of non-SBIR contracts with MDA, for whom it developed sensors for many different kinds of missions, in most cases acting as its own prime contractor. SBIR allowed OKSI to build sensors and demonstrate its technology directly to MDA. Without SBIR, according to Dr. Gat, this direct access to the customer would not have been possible.

In some cases, DoD validation is explicit. For example, DoD has, through its Title III Defense Production Act, designated NCTI’s products as “critical to national defense.”

Ms. Politi said that TRX found enhancement programs within SBIR to be of considerable value and would call for expanding them, particularly at DoD where they can be used to 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 from other investors.

Validation—Outside Investors and Strategic Partners

Validation effects go beyond DoD. Many companies focused primarily on DoD encounter difficulties in attracting private venture capital because their products are seen to have limited mass market potential and venture capitalists prefer to avoid the tightly regulated DoD acquisitions marketplace. Even so, some companies serving DoD do have substantial non-DoD businesses and access to other sources of strategic funding. Several companies observed that SBIR funding was an important validator both for investors and for strategic partners.

SBIR funding was catalytic for Powerdermet. Between 2005 and 2007, Powdermet won an Army SBIR award in partnership with Caterpillar, through which it applied its technology to thermal spray coatings. This led to a 2x magnitude improvement in processing speed over state-of-the-art coatings. Based on these results, the Third Frontier program in Ohio provided additional funding and the State of Ohio economic development office provided direct funding for business planning. Validation through the SBIR program was important.

As noted above, Qualcomm received SBIR funding at a particularly critical juncture in its early development. But as founder Irwin Jacobs noted in Senate testimony, although SBIR “was not the only source of funding for us at the time, it was one of the critical ‘stamps of approval’ that allowed us to successfully pursue sources of private capital.”⁶

According to the CEO of NCTI, even though the SBIR awards came later in the technology development process than is usually the case for SBIR companies, they provided critical validation for the company and its technology, which strengthened its relationships with prime contractors and customers and its efforts to attract investors. Michael Gurau of Community Ventures, who led NCTI’s Series A round in 2006, observed that this validation was especially useful in sectors such as materials and defense where venture funding was scarce and became increasingly important overall as early stage venture capital became even more difficult to attract.

TRX was able to attract outside investors and generate financial support from strategic partners. According to CEO Carol Politi, support from SBIR awards, a Maryland TEDCO grant, and an NSF Phase IIB award provided critical early funding to deliver proof of concept. NSF support in particular was, according to Ms. Politi, 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.”

Working Effectively with Primes—Company Perspectives

The case studies and survey responses highlighted the critical importance of being able to work effectively with DoD’s prime contractors. Without links to primes, it is exceptionally difficult to consistently transition technology, because most DoD technology-related spending is for major weapons systems that are integrated and delivered by primes, who are also in many areas the suppliers of specific components. This section provides insights into successful partnerships with primes, and the following section into less successful relationships.

DWHA had a very long history of exceptionally fruitful collaboration with a number of primes. For example, several of DWHA’s early SBIR awards were used to develop data fusion capabilities 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, despite inconsistent or even erroneous data. The tool was developed further so it could be tested on the EDG 1000 Navy R&D destroyer that was designed to help locate mines. ONR provided further funding, and DWHA developed tools that were adopted for real-time mine avoidance.

DHWA then teamed with Applied Research Labs of the University of Texas, which provided sensor technology, and SAIC (with whom DHWA had

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⁶ Jacobs Senate testimony, op.cit.

partnered for more than 20 years) to apply the tools for use by submarines. On other projects, prime partners include Lockheed Martin, Boeing, the Institute for Defense Analysis, Westinghouse, McDonnell Douglas, and SAIC. DHWA also partnered with MIT’s Lincoln Labs and Johns Hopkins Applied Physics Laboratory.

Aurora’s partnership with Northrop Grumman in UAVs (unmanned autonomous vehicles) dates back to at least 2004. A number of achievement awards attest to Aurora’s strong links to primes: it has been a “Platinum Source” supplier for Northrop Grumman since 2008. It has a Supplier Gold certification from Sikorsky Aircraft Corporation—the highest recognition for supplier quality. In 2011, Aurora was named “supplier of the year” by Sikorsky.

Giner Electrochemical Systems managed a joint venture with GM to accelerate the development of fuel cell vehicles. GM took a 30 percent stake in the joint venture and continued to provide research funding through an annual research contract.

There are many other examples, such as:

• Microcosm worked with almost all small-spacecraft prime contractors and on mission and systems engineering for many large commercial and government programs, including Iridium, GPS, Teledesic, and Discover II.
• NCTI announced a major strategic partnership with Du Pont to develop products utilizing NCTI’s unique materials and processes, as well as partnerships with Lockheed Martin on the NASA Juno project and Northrup Grumman on AFRL SBIR contracts.
• Over the past 35 years, NEAR developed an extended collection of clients in the United States, which includes almost all of the prime contractors working in aerospace.
• TRI teamed with an array of prime contractors including Boeing, Lockheed Martin, Northrop Grumman, Sigma Coatings Inc. USA, 3M, Hughes, and Textron.
• TRX Systems sold primarily through partner organizations, which include Motorola, Globe manufacturing, Boeing, and Honeywell.

Lessons Learned from Working with Primes

It is striking that companies that cracked the code to working successfully with primes were generally able to replicate the process with multiple projects and multiple partners. As one CEO noted, this was in part a longevity and stability effect: he thought that primes would rarely partner with companies with less than 10 years of operational experience.

DWHA’s effective cooperative arrangements were driven in part by the lack of competing interests. DWHA provided highly specialized services that, from the perspective of prime contractors, were not only too small to be worth

pursuing, but also too difficult to manage given the very high degree of technical knowledge required. They would not lead to large follow-on contracts, that is, there was no Phase III goldmine at the end of the road, and hence primes saw no need to enter that market.

Similarly, Dr. Dugan observed that TRI’s partnerships with primes were possible because primes were generally not interested in entering markets for materials products. They did not see the need for improved materials reflected in DoD itself. In most cases, work on materials for DoD focused on niche applications with small potential markets and few non-military opportunities, and hence is of little interest to primes.

Dr. Upadhyay at Mayflower said that relations with primes largely depended on whether they were primarily acting as systems integrators or as technology developers. Raytheon, for example, partnered with Mayflower on some early contracts as a systems integrator, but lost interest in pursuing partnerships in that area after it bought Magnavox and acquired its own capabilities in GPS. When looking at relationships that worked less well, this issue surfaced a number of times: primes have their own research interests, and while acting as integrators can easily favor their own in-house research if they so choose.

Working Against the Primes—Company Perspectives

It would not be fair to state that there were substantially more negative comments about working with primes. However, the penalty to SBIR companies for conflicts with a prime can be severe and long-lasting. Several interviewees indicated that effective rules were not in place to sufficiently protect small companies.

ATC worked on a number of projects with prime-led teams. However, after a number of failed partnerships, the company decided that the incentive structure at DoD caused primes to squeeze out smaller companies once a contract has been awarded. As Mr. Proctor of ATC 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.” Now, ATC will work on a team with a prime only if the prime is the subcontractor to ATC. Mr. Proctor further observed, “The primes would never voluntarily put a small business subcontractor in the critical path of a major project.”

Navsys entered a period of severe crisis in 2007, following SBIR awards that led to its technology using GPS to improve the targeting of “smart bombs.” The company expanded to 50 employees in anticipation of a Phase III contract, but Air Force instead awarded the contract (and the technology) to Boeing. Navsys was forced to lay off half of its workforce in 2007, and Dr. Brown mortgaged her house 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.”

Dr. Brown emphasized that Navsys’ problems with Talon Namath had implications far beyond the immediate issue. Not only was DoD at risk of failing to acquire the best technologies, but also there were long-term implications for small high-tech companies that were a key part of the military supply base. Effectively, if there was no path into procurement or if the path was too risky, then the military would have no long-term business model for companies such as Navsys. This Phase III barrier made it much more difficult for companies to lessen their dependence on SBIR funding.

After receiving a Phase III award, OKSI was eventually frozen out by Army’s decision to work directly with the primes. Even though the partners signed highly restrictive nondisclosure agreements (NDAs) and the Small Business Administration (SBA) sent a letter to Army requiring it to cease violating the governing SBIR policy directive, Army continued to exclude OKSI. OKSI filed a lawsuit against the prime in question, but eventually decided that fighting such a large corporation made little sense for a small

business. Consequently, OKSI became very careful in its dealings with 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.

AGENCY MISSION EFFECTS

Most of the successful companies profiled in this report initially focused on sales within DoD, and many remained so for commercialization. Given the unique characteristics of the DoD R&D ecosystem, and the limitations that can be placed on the transition of technology developed for the military sector to the civilian sector (especially in a globalizing world economy), this is not surprising.

Sales to DoD are a de facto statement that the program is meeting agency mission needs: the primary objective of DoD R&D is to provide new capabilities to the warfighter or to support activities that in turn support the cutting edge of DoD forces. Purchases by acquisitions officers are evidence that this mission is being accomplished. However, there are other indicators that agency mission is being addressed.

Title III Certification

One of the case study companies reached an unusual milestone: NCTI, was designated as firms that have developed technologies regarded as “critical to the national security.” For NCTI, a successful Phase I demonstration showed that large-format CNT sheets can meet the functional requirements of EMI shielding and can also withstand the industrial stresses involved in pre-pregging, a process that prepares the material for direct insertion into aircraft manufacturing systems. As a result, Ashton Carter, Under Secretary of Defense for Acquisition, designated the research as a “critical SBIR program,” which in turn led to a Phase II award from Air Force of more than $4.5 million in 2010.⁷

Innovative Products for Military Use

SBIR projects often address particular technical problems for the sponsoring agencies— sometimes problems that may have only limited sales potential but are of considerable value. For example, in 2001 ATC started a new focus on airport incursions—blind spots for ground control. It developed a system that alerts the control tower and flashes landing lights as a warning to pilots. The technology underpinning the system was similar to that developed for use on Aegis class warships, for which ATC acted as a subcontractor for Lockheed Martin.

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⁷ For the full award abstract and details, see SBIR/SBTT, Non-Metallic Conductive Material for ESD/EMI Applications, <http://www.sbir.gov/sbirsearch/detail/7699>, accessed June 11, 2014.

Through what it calls its “most significant SBIR-funded work,” Aurora developed ducted-fan UASs that can take off vertically, hover like a helicopter, and transition to horizontal wing-borne flight, which is faster and more fuel efficient—technology that originated in DARPA SBIR awards. One SBIR contract supported development of the ducted-fan technology that enabled the company to compete for the U.S. Navy Small Tactical Unmanned Aircraft Systems (STUAS)/U.S. Marine Corps Tier II UAS program.

Cybernet solved the problem of automating the sorting of small arms ammunition, which required hundreds of hours of manual labor. The Automated Tactical Ammunition Classification System (ATACS) sorts ammunition at a rate of 12,500 rounds per hour and has been widely adopted by Army.

DHWA applied mathematics to sea-based search. It was 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 2,000 fathoms.
• The successful search for the Coast Guard packet ship sunk off the coast of South Carolina in 1857, with $400 million of gold (from California) aboard.

Giner supplied PEM electrolyzer stacks to the U.S. Navy Seawolf-Class submarine fleet through a partnership with the Treadwell Corporation. Giner technology eliminated the need for gas compressors, which can be bulky, troublesome, costly, dirty, and noisy. Giner then supplied next-generation LPE (low pressure electrolyzer) stacks for the retrofit of all Ohio-class submarines and for replacement of stacks on board the Seawolf class.

Navsys developed the GI-Eye system: a low-cost, tactical-quality inertial unit integrated with a GPS receiver and a digital video camera. This system extracts 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. 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.

Commercialization

Although much of the impact of commercialization is best captured through data generated from the survey and from an analysis of agency data, its full impact is sometimes not easily captured.

Qualcomm was an early SBIR company, receiving awards in the late 1980s. Its success has led to substantial dividends for the taxpayer. In FY2010, the company paid federal income tax of $1.4 billion, not including the personal federal income taxes paid by the thousands of Qualcomm employees. Dr. Jacobs noted that Qualcomm directly employed more than 10,000 people in San Diego in 2007, and money spent by Qualcomm and its employees created and supported more than 26,000 jobs involving a variety of goods and services in San Diego County. As of 2007, Qualcomm was responsible for economic output equal to approximately 3 percent of the Gross Regional Product of San Diego County and supported an estimated 2.4 percent of total jobs. All of these numbers are much higher today, given Qualcomm’s continuous and rapid growth. Finally, Qualcomm continues to pour funding in R&D. As of year-end 2010, it was funding R&D at more than $2 billion annually, approximately 19 percent of revenues.⁸

Rapid Response/Sole Source

The SBIR program is credited with rapidly fielding technology-driven improvements—much faster than traditional DoD acquisitions programs can manage. For example, within 60 days, Cybernet developed and fielded the ATACS for the U.S. Army in Camp Arifjan, Kuwait, where the product was used to reclaim serviceable ammunition through a faster, safer, and more consistent inspection process. Cybernet is currently building its sixth ATACS system for the Army. This rapid delivery was made possible in part by the SBIR compete clause, which permitted Army to sole source the contract to Cybernet based on the competition for the previous SBIR award.

OTHER CONGRESSIONAL OBJECTIVES

Innovation

Some of the more formal metrics for innovation (patents, publications) are discussed in Chapter 3. But metrics are a measure, not the object being measured, and they do not capture the multiple dimensions and impacts of successful innovation. Focus on these metrics substantially limits insight into the innovative power of the SBIR program. The case studies reveal efforts that have profoundly transformed the economy or even the world, for example:

• Qualcomm’s technology is still embedded in most mobile phones.
• iRobot introduced the first commercially available personal robots.
• Aurora is on the cutting edge of drone technology.

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⁸ Qualcomm, Qualcomm Announces Fourth Quarter and Fiscal 2010 Results, November 3, 2010, p. 5.

• Giner is providing a core technology for all Navy Virginia-class submarines.
• TRX technology can dramatically enhance the safety of first responders.
• NCTI new materials technology can support profound changes in multiple industries, including aerospace, energy, and personal safety.
• Through automation, Cybernet transformed a mandatory but difficult and time-consuming task (munitions sorting) for Army.
• Powdermet’s coatings and claddings should have a large impact in several industries, including energy and defense.

Knowledge Metrics

It is difficult to generate quantitative metrics that fully capture knowledge effects, given the importance of informal knowledge transmission as people change jobs and companies are acquired. Metrics for SBIR tend to focus on patents and peer-reviewed publications as indicators (but not the sum total of knowledge effects). In addition to these metrics, the committee considered links to universities.

Many of the interviewees viewed publishing and patenting as important aspects of their ongoing operations. This finding was noteworthy because patenting has acknowledged difficulties (notably cost and timeliness) and there is less incentive to patent when the market is limited to a specific set of possible buyers (within the U.S. military). In addition, companies have many incentives to keep technical advances secret rather than publish in the scientific literature.

Publications

Throughout its existence, ATC has seen value in publishing technical documents. Founder Kenneth Thurber’s biography claims more than 60 peer-reviewed publications and 14 books on local area network (LAN)-related topics.⁹ The company published a book on computing architectures¹⁰and developed its own publishing imprint, through which it distributes Dr. Thurber’s book on building a technology company.¹¹

Giner personnel publish extensively in leading journals and make significant presentations at technical meetings in the United States and abroad. Key staff have received awards for scientific excellence and solving difficult problems for government and industry.

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 Air Force, it 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.

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

OKSI staff have authored more than 100 peer-reviewed papers in the broad field of opto-electronics. In addition, the company has received four patents in the field of infra-red cameras.

Patenting

In recent years, ATC has worked to patent its technologies. According to the U.S. Patent and Trademark Office (USPTO), ATC was the assignee on 15 patents as of October 2011.¹² The company observed that patenting has only

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⁹ Dr. Kenneth Thurber’s biography page, <http://www.atcorp.com/index.php/about/senior-management>, accessed July 11, 2014.

¹⁰ J.A.K. Baker and K.J. Thurber, Developing Computer Systems Requirements, Ithaca, NY: Digital Systems Press, 2011.

¹¹ K.J. Thurber, Big Wave Surfing, Edina, MN: Beaver Pond Press, 2011.

¹² See U.S. Patent and Trademark Office (USPTO), ATC search, <http://patft.uspto.gov/netacgi/nphParser?Sect1=PTO2&Sect2=HITOFF&p=1&u=/netahtml/PTO/search-

recently become important, in part because software’s life cycle is so short that patenting is rarely the best way to protect its value.

Other companies have also made extensive use of patenting to protect their intellectual property:

• Giner has more than 100 U.S. patents in the field of electrochemistry.
• Since 2001, iRobot has been the assignee on 130 patents granted by the USPTO.¹³
• As of May 2013, a search on Qualcomm at USPTO returned more than 10,000 hits.

Universities

Many of the companies have deep connections with major research universities. Aurora is a spin-off from MIT and maintains extremely close relations with the university: its R&D center is located in Cambridge, Massachusetts. Aurora highlights these close ties in its corporate mission statement: the Research and Development Center’s “mission is to forge cooperative relationships with the Massachusetts Institute of Technology (MIT) and other universities. Aurora’s synergistic relationship with MIT merges the innovative ideas from MIT’s faculty and staff with Aurora’s proven abilities to bring technologies from the lab to products that address the customer’s requirements.”¹⁴

NEAR has also worked with universities, including Johns Hopkins University Applied Physics Laboratory and the MIT Lincoln Laboratory.

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 it has successfully tapped university technical capacity, ATC is careful to limit and control university involvement. Specifically, ATC wants to ensure that the university has no stake in any IP developed in the course of the relationship. As hired subcontractors, universities and their staff remain focused on solving specific and defined technical problems.

Not all ties to universities have been so positive or long lasting. Optemax was founded to commercialize university technologies, and it focused on laser-based communications in part because of high-level research capabilities at Johns Hopkins University (JHU). However, the relationship with JHU eventually dissolved. According to Ms. Collier (Optemax founder and CEO), JHU staff could not understand the exigencies of commercial R&D,

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bool.html&r=0&f=S&l=50&TERM1=architecture+technology&FIELD1=ASNM&co1=AND&TERM2=&FIELD2=&d=PTXT>, accessed October 10, 2011.

¹³ USPTO, iRobot assignee search, accessed September 14, 2012.

¹⁴ Aurora company fact sheet, <http://www.aurora.aero/Common/Downloads/People/Aurora%20Overview%20Fact%20Sheet.pdf>, accessed May 24, 2013.

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 nondisclosure clauses in the licensing and research agreement. Ms. Collier also noted a tension between the needs of commercial activity and JHU’s primary funding for research from federal R&D funding. In the end, Optemax relinquished its $250,000 investment and dissolved the partnership.

Dr. Gat from OKSI observed that SBIR contracts require agency approval of publications, which presents a problem for universities whose mission requires the publication of results for peer review. In addition, almost all of OKSI’s work was covered by International Traffic in Arms Regulations (ITAR), which placed restrictions on the flow of knowledge that most universities could not accept.

Women and Minorities

Although Cybernet and Navsys are woman-owned companies and Giner is a privately held minority-owned business, TRX, which is legally neither, provided some significant insights in this area.

TRX is not woman-owned, but it is woman controlled. The CEO and CTO are women. Ms. Politi explained that TRX’s success in raising outside funds caused it to lose its woman-owned status with the SBA as outside money took a larger stake. So, although the company is less than 50 percent venture owned, it is more than 50 percent owned by outside funders, and therefore is no longer woman-owned. This change highlights a significant weakness in efforts to track the engagement of women (and minorities) within the SBIR program: successful companies may eventually fail to meet the standard SBA definition of woman-owned or minority-owned. Ms. Politi also observed that being woman controlled may help more at DoD, which implemented some new FAR regulations in this area.

Training and Manpower Effects

Several companies observed that the SBIR program provides opportunities for important training in project management and that SBIR companies provide important technical training and mentoring for other companies in their fields and regions.

ATC uses the SBIR program to train young engineers. An ATC engineer wishing to apply for SBIR funding first needs to make the case internally that the project will result in commercial sales, and then writes the proposal, which is valuable training in and of itself. If ATC wins an award, then the engineer is asked to run the project. This process not only provides critical experience, but also serves as a valuable incentive for staff and limits the amount of senior management time involved.

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.

NEAR staff members have served on at least 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.

PROGRAM OPERATIONS

Interviewees offered comments and insights on a wide range of operational issues related to the SBIR program.

Topics

Dr. Gat from OKSI observed that many DoD topics came from research labs rather than from acquisition programs, especially for Army, which tended to create significant gaps between topic authors and acquisitions programs.

The Powdermet CEO said the growing pressure to ensure that the SBIR program generates commercial returns is profoundly misplaced: it is driving

selection of projects that are shorter term and lower risk. These types of projects are better suited to other funding streams—either acquisitions within DoD or venture funding in the private sector. In his view, the SBIR program is becoming a substitute for other sources of capital, for example, 6.3-6.5 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 program.

Matching Money

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

Data Rights

Various views on data rights emerged during the case study analysis.¹⁵ Dr. De Luis (Aurora) raised concerns about protecting IP within the SBIR application process; Aurora had experienced problems with IP during Phase III as well. In general, he noticed relatively few IP problems when the government was the only client, but more serious issues for technologies with more commercial applications. Therefore, Aurora had been very cautious about protecting the technology embedded in its Skate micro-UAV project, for example.

OKSI was one of several companies that realized that, in practice, data rights could be ignored. For example, despite awarding what was in effect a Phase III award for the technology, Army later decided to work directly with primes and ignored the legal requirements related to Phase III data rights. It claimed that because the award was not labeled as a Phase III by Army, it did not need to be recognized as such.

Dr. Mike Dingus (TRI) said that contracting officers were a weak link and needed substantially more education about SBIR data rights, because knowledge varied widely between officers. Moreover, there were no effective penalties for violating data rights—in effect, companies were helpless if agencies did not play by the rules. He suggested that penalties should be enumerated and widely published. TRI had never used the sole source provisions of SBIR data rights and did not anticipate using them in the future.

Dr. Brown (Navsys) experienced extended difficulties with Air Force over data rights, when—according to the company and the SBA—it was

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¹⁵ SBIR Technical Data rights are defined as “the rights an SBIR awardee obtains in data generated during the performance of any SBIR Phase I, Phase II, or Phase III award that an awardee delivers to the Government during or upon completion of a Federally-funded project, and to which the government receives a license.” SBA, SBIR Policy Directive, February 24, 2014.

squeezed out of follow-on implementation work in favor of a prime contractor. This story is discussed in detail in the Navsys case study in Appendix F, but this brief summary illustrates the difficulties of competing with a prime, when the prime is interested in and capable of providing the technology at issue.

Audits

A number of companies based on the West Coast experienced potentially company-breaking problems with the local offices of the DoD audit agency, DCAA. Although it is possible that the worst of these problems was resolved by the shift of some responsibilities away from DCAA, the audit process constituted a major barrier to small business operations.

Microcosm executives said that overall the contracting process is fundamentally broken because it does not effectively support agency objectives. They noted a previous decision to exclude the use of non-employees in handling contracts at DCAA had left an insufficient number of employees in place. According to Dr. Wertz and other interviewees across California, DCAA has applied extremely harsh regulatory practices to SBIR companies, with the effect of severely impacting SBIR-winning businesses:

1)   Dr. Wertz (Microcosm), Dr. Mendenhall (NEAR), and Dr. Gat (OKSI all observed that DCAA refused to disclose the basis on which their company had failed the audit, which made it impossible to take the steps necessary to comply with required rules.

2)   Even more damaging, during the period in which the company was not in compliance, it could not acquire new contracts from DoD. Given the considerable delays, this meant that Microcosm lost important contracts because of what turned out to be minimal or even trivial breaches of FAR.

3)   Dr. Mendenhall (NEAR) said that the company’s problems were compounded by the slow response time at DCAA. Its most recent Phase II award came after a gap of 8 months, during which time NEAR would have had to lay off staff had two not moved on to other opportunities. At OKSI, DCAA took 7 months to complete an audit for a 15-person company and was 3 years behind in auditing labor rates.

4)   Dr. Gat (OKSI) noted that DCAA prided itself on using a single standard for audits, regardless of the company size, which in his view imposed potentially serious costs on small business.

5)   Several interviewees noted that the pass/fail approach adopted by DCAA led to needless delays for minor infractions. For example, OKSI failed because of inadequate written procedures, which had the effect of delaying a number of critical contracts, some of which were critical for not only the company but also the agency.

Both Dr. Mendenhall and Dr. Wertz explained that these difficulties arose largely because DCAA itself received a highly critical report of its procedures from the Government Accountability Office (GAO), which led to a tightening of procedures. DCAA responded to its audit in part by failing large numbers of small businesses, an approach that Dr. Mendenhall described as being a drastic over-reaction.

It should be noted that companies in other DCAA regions did not experience these types of problems.

Contracts

Some interviewees observed that the contracting process and the contracts themselves had become much more burdensome. For example, Dr. Mendenhall provided a copy of a recent Phase I contract for Microcosm at DoD, which inter alia included a clause requiring that Microcosm implement procedures to inform employees that they were not permitted to text while driving.

Dr. Mendenhall also stated that task order contracts were more common, which adds substantially to the costs for the small business. For example, a Microcosm contract named BAE as the owner of the contract. This meant that BAE was paid a fee for managing the contract, was required to do some portion of the work, and was required to retain review responsibilities over the project. Moreover, subcontractors were not permitted to order supplies through a task order contract—BAE must order all material and, indeed, must put under contract all Microcosm subcontractors.

Several interviewees noted that acquisition of a DoD Phase II award requires a large expansion of bureaucratic capacity from the small business. Dr. Wertz noted that in some cases small businesses simply decide not to make the investment and turn away from the SBIR program as a result.

Dr. De Luis (Aurora) said that acquiring a certified Phase III award was almost impossible. He has received two such awards during his entire career.

According to Dr. Wertz (Microcosm), contracting officers (COs) came under enormous pressure, as the volume of contracts increased and the number of COs did not. Many COs had little understanding of the SBIR program, and rules regarding SBIR Phase III awards were almost universally ignored.

Payment Structures

A number of company representatives identified payment processes and structures as problems. Dr. Werz (Microcosm) considered this problem to be a perennial one—there is often a significant mismatch between the cash flow needs of small companies and the rigid payment structures of the federal agencies. Microcosm staff also noted significant differences among the agencies—NASA, for example, disbursed funding in thirds against progress, and, in contrast, Army paid equal amounts monthly. The Army payment

structure led to significant problems when expensive pieces of equipment had to be purchased, or when expensive testing was required. Even for Phase II enhancement, which for Microcosm usually focused on prototype development, equal payments were mandatory and had the effect of significantly slowing development. Dr. Mendenhall added that SBIR funding could be overly back-loaded to support the kind of front-end activities required for a successful project.

The interviews also revealed that Army had not been prepared to commit to a second year of SBIR funding, even for Phase II awards. This reluctance introduced significant uncertainty in company hiring decisions and prevented front-loading of payments to cover equipment or testing.

Selection

Most of the concerns about selection were focused on a perceived shift away from innovation toward short-term commercialization. Several interviewees believed that this shift was changing the character of the program.

Commercialization Emphasis

Ms. Collier (Optemax) said that NAVAIR SBIR staff seemed focused on spreading SBIR money to a large number of companies and adopted a highly linear view of technology development and the role of SBIR awards. In this model, a single Phase II award was considered sufficient to move a company’s technology past the prototype stage to TRL 6 or better. Ms. Collier noted such direct progress is rarely found in the real world, but that the prevalence of this view at NAVAIR made it difficult for companies to acquire the multiple awards needed to build a substantial platform in an advanced and complex technology such as optics-based wireless communications.

Dr. Sherman (Powerdermet) stated that SBIR awards were being made to established larger companies that could provide more and better data and offer the lowest risk, rather than to the most creative and innovative companies. Although Powdermet continued to win awards to apply its technology to DoD projects, its sister company MesoCoat was not able to break in, despite having more long-term commercial potential and more innovative technology. PEOs in DoD recognized the shift toward faster commercialization, and NSF transitioned to an approach in which each project must be successful, which replaced its previous portfolio investing approach. The emphasis became making sure that one-half of all projects could in some way be described as successful, rather than finding the 1 in 20 or 1 in 50 big disruptive technologies.

Dr. Mendenhall (NEAR) made a slightly different although related point. He said that the SBIR program was increasingly focused on product development as the primary form of commercialization. This meant that firms whose primary objective was to solve problems for the agencies were increasingly frozen out. As a result, the number of topics open to NEAR sharply

dropped. NEAR used to identify close to 20 possible topics for a proposal in each solicitation and would then work to reduce the final number to 3-4; at the time of the interview, the company was fortunate to find one topic to which it could respond.

Other Selection Issues

Phase I Reviews

Dr. Mendenhall (NEAR) said that the quality of Phase I reviews in particular had declined, possibly because staff had less time allocated to review them. He noticed a rise in random or not relevant comments, some of which clearly affected the success of the proposal.

Debriefing

Mr. Proctor (ATC) said that, overall, the selection process was fair and the debriefs correctly recognized the strengths and weaknesses of a proposal. He noted that outcomes could be improved if successful proposals were also debriefed.

Accelerated Commercialization

Mr. Procter (ATC) strongly supported new efforts like the Commercialization Pilot Program (CPP) and the RIF at Navy. The company was actively pursuing partnerships with primes on the RIF program. However, the company expected primes to bring a program of record to the partnership and to be willing to act as a subcontractor if the team won.

Dr. Dingus (TRI) believed that the new RIF program will be very popular and that DoD would receive more than 5,000 white papers. However, he noted that the first $25 million had already been allocated and that, if expected funding remained at approximately $3 million per project, then funding would be available for only 25-50 projects. A lower number of projects suggested a much lower success rate than for regular Phase II SBIR awards. Success rates matter to companies: TRI was interested in the CPP but decided that the opportunities in this area were not a good fit in part because of the anticipated level of competition.

Technical Points of Contact and Contracting Officers

The survey gathered a substantial amount of data related to company views of Technical Points of Contact (TPOCs) (see Chapter 6). Case study interviewees added further details and insight.

Mr. Proctor said that it was ATC policy to meet face to face with each TPOC at least once, even if the company had to pay for the travel, to build trust

and identify the client’s real needs. Microcosm also tried to meet in person wherever possible: the reduction in the timeline for proposals from 7 to 8 weeks made that more difficult.

Some interviewees considered their TPOCs to be very helpful. A TPOC at Kirkland Air Force Base worked to resolve problems for Microcosm and clearly went out of his way to be helpful. However, this experience is the exception rather than the rule, according to Dr. Wertz. In most cases, TPOCs are driven by incentives that direct their attention away from their SBIR projects.

The role of the TPOC can be critical, Dr. Mendenhall noted. During the course of its considerable Phase II experience, NEAR encountered only one unsatisfactory TPOC, who was a staffer close to retirement. However, TPOCs can sometimes stand between the company and the ultimate customer, which NEAR experienced with Navy. This made it difficult to pursue Phase III opportunities effectively.

With recent improvements in the award cycle, there were fewer instances in which the TPOC changed during the course of the project. However this remained a major concern for TRI and other companies. Dr. Werz (NEAR) noted that the cancellation of Phase II awards before project completion was more likely if the TPOC changed.

Commercialization Support Programs

Dr. Jacobus (Cybernet) explained that he participated in almost all of the commercialization support programs over time, but they provided limited value to experienced executives. He strongly supported activities such as the Navy Opportunity Forum, which focused on connecting SBIR companies to the acquisition programs and primes. He suggested that more outreach to small business would be more useful than additional commercialization training.

Dr. Monach (DHWA) found that Navy Opportunity Forum to be very useful and participated every year. The Forum provided a critical opportunity to get the company’s technologies and capabilities in front of many potential high-yield customers, mostly connected with Navy, but also with Air Force, Army, and even private-sector buyers. This was the only trade show that DHWA attended. Dr. Monach noted that neither Army nor Air Force offered any equivalent opportunity or forum.

Ms. Collier said that Optemax also participated in the Navy Opportunity Forum but realized that the preponderance of the staff from the primes was marketing staff rather than acquisitions or operations staff. For Optemax, the Forum generated no additional contacts beyond the company’s existing network.

Dr. Sherman said that Powdermet received technical support from LARTA (a Los Angeles area nonprofit that supports innovation¹⁶), which helped with attracting angel funding and capital structuring. Ms. Politi (TRX) observed

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¹⁶ See Larta Institute, <http://www.larta.org>, accessed July 11, 2014.

that, through NSF, TRX also received commercialization support from LARTA, which was especially helpful in relation to a new collaborative mapping initiative. LARTA’s method focused on business planning and partnerships from the start of the Phase I, which could assist in supporting a new initiative within an existing company.

Tracking Commercialization: The Company Commercialization Report

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

Dr. Mendenhall observed that the CCR scores generated for DoD applicants do not account for the fact that almost all of the work undertaken by companies like NEAR are covered by ITAR, which means that civilian sector commercialization is severely limited.

REVIEW OF PREVIOUS CASES

Although changes in personnel at many companies made it impractical to systematically re-interview the staff used as information sources for the previous case studies, it is worth providing a contextual framework for the paths taken by these 32 companies, most of which were interviewed in 2006-2007.

A total of 32 case studies were published as part of the NRC’s previous report on the SBIR program at DoD.¹⁷ Of these:

• 18 are inactive within the SBIR program
• 14 continue to participate in the SBIR program
• 7 were bought by other companies or in one case private equity investors
• 1 appears to have gone out of business
• 2 companies are no longer eligible because they have more than 500 employees (1 has 2,700 employees)
• 3 companies received more than 500 SBIR awards (from all agencies) and more than $100 million in SBIR funding
• $ per award data indicate that some firms were much more efficient than others in transitioning between Phase I and Phase II

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¹⁷ National Research Council, An Assessment of the SBIR Program at the Department of Defense, C. W. Wessner, ed., Washington, DC: The National Academies Press, 2009. The case studies were undertaken 2005-2008.

SUGGESTIONS FROM CASE STUDIES

Size of Awards

Mr. Proctor (ATC) approved the shift to Phase II awards of $1 million, which provided sufficient funding to achieve solid research results. However, bridging programs such as the NSF Phase IIB would remain critically important, because they helped companies find full commercial markets for Phase II projects.

Dr. Jacobus (Cybernet) said that Phase I SBIR awards should be kept as small as possible, while ensuring that Phase II funding is sufficient to complete prototype development or a similar level of technology exploration.

Ms. Collier (Optemax) believed that the SBIR program should provide larger amounts of funding for highly promising projects, rather than widely distribute funding across a broad array of recipient companies.

Although Dr. Dingus (TRI) appreciated the increased award size, especially for Phase I, he was concerned about the possible reduction in the number of awards, a trade-off that his company would not favor.

Improving Technical Points of Contact (TPOCs)

Mr. Proctor (ATC) said that variation in the quality of TPOCs was a significant issue. Indeed, if the TPOC was not strongly committed to a project, then it would be impossible for the project to move forward to Phase III. This problem might be alleviated by ensuring that SBIR activities are part of the TPOCs’ annual job reviews. ATC also found that when the TPOC changed, the project usually failed to reach Phase III. Mr. Proctor suggested that the agencies consider ways to reduce or eliminate this problem. The problem was to some degree addressed when DoD cut the timeline from initial topic submission to publication in a solicitation from more than 2 years to about 1.

Dr. De Luis (Aurora) said that the TPOC’s role and company connection was sometimes a substantial problem. The company’s success in engaging the TPOC largely determined whether the company would receive a Phase II award. This became especially important as some TPOCs learned to use the SBIR program to craft larger programs, for example at Ames. Dr. De Luis considered this connection to be so critical that he believed a small percentage of SBIR funding should be taken from the company and applied to the TPOC budget for travel and monitoring purposes. In addition, he strongly urged that a second “commercialization” TPOC be assigned from the acquisitions organization to encourage better Phase III transitions (a point echoed by Dr. Upadhyay from Mayflower, below).

From Dr. Upadhyay’s view (Mayflower), many TPOC’s “did not have their heart in it.” Often, the TPOC assigned to manage an SBIR award was not involved in the design of the topic. Overall, there were poor linkages between 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 from the DoD bureaucracy. He suggested two ways to improve the process.

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 maximized its return on its SBIR investment.

2)   The SBIR legislation could be adjusted to permit the use of 5 percent of the company’s SBIR funding by the TPOC to manage the award, including travel to the company site, which would support deeper engagement.

Selection and Pre-Solicitation Communication

Dr. De Luis (Aurora) believed that the current agency measure of overall program quality (i.e., the percentage of applications that received funding) was a measure of wasted resources for SBIR companies. A success rate of 15 percent for Phase I awards showed that high-quality applications were received, but it also showed that the resources expended by 85 percent of the companies seeking Phase I funding were wasted.

Dr. de Luis recommended that the agencies consider other approaches to improve the fit between proposals and agency needs, for example, exploring ways to adapt the selection process to allow companies a brief rebuttal to preliminary responses from proposal evaluators. He also called for a wider adoption of the “preliminary white paper” approach utilized in some other programs, notably at NASA and DoE.

Dr. Mittelstaedt (Giner) also approved of the DoE pre-submission notice, which encouraged applicants to submit a 2- to 3-page white paper outlining possible research, which agency staff would review prior to full submission. He believed that useful initiative could be more widely applied to the SBIR program. At Giner, no SBIR applications were prepared before the company had contacted the agency point of contact and received assurance that the company’s technical approach would be welcomed.

Dr. Mendenhall (NEAR) also supported an expansion of the DoE white paper model, at the end of which companies were notified whether a full proposal was warranted. He said that the SBIR program’s low success rate imposed substantial costs on small businesses and that any opportunity to review preliminary comments during the selection process would probably improve outcomes for both the company and the agency.

The DoE white paper model could be extended in other ways to other aspects of pre-application communications between companies and agency staff. At TRI, Dr. Dingus strongly supported all efforts to provide means through which agencies and companies could connect prior to submission of the formal

application. He endorsed the Air Force introduction of a pre-solicitation publication indicating areas of possible interest, which he saw as “tremendously beneficial,” providing additional time to investigate an area and talk to potential sponsors.

Funding Gaps

Several interviewees noted that funding gaps between Phase I and Phase II still existed (confirmed by results from the NRC survey of recipients).

Dr. de Luis (Aurora) observed that funding gaps, especially between Phase I and Phase II, were often a problem, and he suggested that other agencies and components look closely at the Air Force model, in which Phase II applications were requested 6 months into the 9-month Phase I award, thereby virtually eliminating the potential gap between Phase I and Phase II. It should be noted that Navy and Air Force have addressed this issue through the widespread use of Phase I options to bridge Phase I and Phase II.

Phase III

Dr. Jacobus (Cybernet) recommended that every program office, particularly in DoD and NASA, have an SBIR strategy. Topics were usually generated by staff familiar with current programs, and hence the topics addressed current problems. But by the time the Phase II was issued and completed, those programs were in the past, and the SBIR company was stranded.

Dr. Jacobus also said that agencies should allocate some SBIR funding via the prime, that is, allow the primes some input into the development of topics and the selection of awards.

Admiral Dyer (iRobot) observed that the “Valley of Death” was getting wider, presenting greater challenges to small innovative firms such as iRobot. And despite improvements, most DoD R&D staff still considered the SBIR program to be a tax. He strongly recommended that the SBIR program focus on helping companies actually reach full-scale commercialization, through the provision of considerably more Phase III resources.

Dr. Brown (Navsys) said that Phase III funding had become more difficult to acquire. There were wide variations even within the Services regarding their use of small business in general and SBIR in particular. She believed, for example, that less than 2 percent of SMC contracts by value were with small business. Dr. Brown also said that vertical integration by the primes led to obvious conflicts of interests throughout the procurement process, because primes were effectively positioned to make decisions about whether to fund their own projects/research or those of smaller competitors. She observed that in areas where the SBIR program was especially successful—notably some parts of Navy—a more competitive support base had been encouraged.

Audits/Contracting

Dr. Mittelstaedt (Giner) was particularly concerned by recent changes at NASA, which required completed line-item descriptions for all items to be purchased during the SBIR award at the time of the application. Because the award was a research project, where outcomes were by definition not known and course corrections almost inevitable, such false precision simply added a burden to the company at no benefit to the agency.

Dr. Mendenhall (NEAR) suggested that all SBIR awards be treated as fixed price contract, which would address the difficulties involved in pricing labor and would reduce uncertainty for recipients. He noted that in effect most SBIR Phase II awards were treated as though they were fixed cost, without the concurrent benefits.

The companies that had experienced difficulties with DCAA suggested a number of improvements, including:

• Ensuring that audits were conducted quickly and efficiently
• Requiring that DCAA provide a formal explanation of an audit failure
• Developing a new small business audit

IP and Data Rights

Dr. Brown discussed 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 of growing problems in this area—notably through documented violations by agency staff— there had never been a prosecution. Although the nominal data rights are well designed, in practice they are not sufficiently protected by the agencies especially at DoD. It is not clear whether SBA reports IP violations in the SBIR program to Congress.

Vanishing Phase IIs

Dr. Dingus (TRI) was somewhat concerned that some of the Services, notably Army, could shift priorities quickly even after award of a Phase I, leaving worthwhile projects stranded. For example, TRI’s 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.

TABLE 5-1 List of Individuals Interviewed for Case Studies