SBIR at the National Science Foundation (2015)

5

The Phase IIB Program

The Phase IIB program (formally entitled the “Phase IIB Option” or the “Phase IIB Supplement”) is designed to bridge the funding gap between the end of SBIR Phase II and the start of commercial revenues or investment (known as Phase III, but not funded through the SBIR program itself).

FEATURES OF THE PHASE IIB PROGRAM

Introduced by the National Science Foundation (NSF) in 1998,¹ the Phase IIB program was a response to the growing body of evidence that small companies encounter a “Valley of Death” between the end of government funding (in many cases for basic research) and the advent of commercial revenues or commercially based investments.² This funding gap appears to be especially relevant to innovative small companies, which may encounter substantial research and development (R&D) expenses well before they generate revenue from their products. As NSF states, “The objective of the Phase IIB Option is to extend the R&D efforts beyond a current grant to meet the product/process/software requirements of a third-party investor to accelerate the Phase II project to the commercialization stage and/or enhance the overall strength of the commercial potential of the Phase II project.”³

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¹Kesh S. Narayanan, “Testimony Before the Small Business Committee U.S. House of Representatives,” April 22, 2009, accessed October 14, 2010, <http://www.nsf.gov/about/congress/111/ ksn_tech_090422.jsp>.

²See National Research Council, An Assessment of the SBIR Program (Washington, DC: The National Academies Press, 2008).

³National Science Foundation, Phase IIB web page, accessed May 21, 2015, <http://www.nsf.gov/ pubs/1999/nsf9957/Chapt-10.htm>. Unless otherwise indicated, information about the NSF Phase IIB program is drawn from the referenced web page, which is the official NSF description of the program.

TABLE 5-1 Leveraged External Funding, 2004-2008

SOURCE: Dr. Kesh Narayanan, NSF, Congressional Testimony, April 22, 2009.

The program was designed to leverage NSF investments to accelerate and enhance commercialization. Funding for standard NSF Phase II SBIR awards was, in general, limited to $500,000, which is $250,000 less than the maximum allowed by Small Business Administration (SBA) guidelines prior to reauthorization.⁴ The lower limit provided room for NSF to add Phase IIB funding under the overall Phase II award ceiling, focused on projects that NSF believes to have substantial commercial potential. Critically, third-party validation is provided by the requirement that companies match Phase IIB funds at least 2:1, providing two dollars for every dollar provided by NSF. To ensure that this third-party validation is substantive, only certain kinds of match are permitted (see criteria below under subheading, “Funding Criteria”). The match requirement has the effect of leveraging NSF resources: NSF indicates that substantial additional funding has been leveraged as a result (see Table 5-1). (This question is further addressed in the discussion of survey responses later in this chapter.)

Projects that receive less than $250,000 from NSF are extended for 1 year (making a total of 3 years for Phase II and IIB combined); projects that receive more than $250,000 are extended for an additional 2 years. NSF notes that Phase IIB grants, like other grants, may be completed early. The maximum size of an NSF Phase IIB award is $500,000.

In his congressional testimony, Dr. Narayanan, then Director of the Division of Industrial Innovation & Partnerships, observed, “We have found that awardees that are able to secure the outside funding to qualify for Phase IIB have had better success in commercializing their innovations. After 5 years, about 69 percent of companies that received Phase IIB funding were beginning to see success, whereas only 31 percent of those not having a IIB supplement were successful. Many of the Phase IIB companies have grown in both revenue and employ-

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⁴All discussion of the NSF Phase IIB program in this chapter should be viewed in the context of the program prior to reauthorization.

ment and some have been acquired by larger companies.”⁵ Thus by design, the Phase IIB program has a dual impact: it directly provides promising companies with additional SBIR funding, and at the same time, by requiring that recipients attract at least a 2:1 match from other sources, it leverages the NSF investment.

Phase IIB is a one-time opportunity for NSF Phase II recipients. It applies only to Phase II awards that are currently active, and resubmission at a later date is not permitted. Projects that have received a no-cost extension are not eligible for Phase IIB.

Phase IIB Applications

Phase IIB applications can be submitted at any time during the related Phase II project, up to 30 days before the expiration of the Phase II award. Procedures differ for companies that seek NSF funding of less than or more than $250,000, respectively. All companies must do the following:

• Receive permission to submit an investment package for review
• Submit a completed Phase IIB investment package, which includes documentation that specify the source and conditions governing the Phase IIB matching funds
• Pass NSF Phase IIB Committee review
• Receive application approval from the NSF Phase IIB Committee
• Submit a Phase IIB proposal
• Receive Phase IIB approval from NSF
• Companies seeking $250,000-500,000 must in addition provide an oral presentation to the NSF Phase IIB committee. Presenters must include the Principal Investigator (PI), the CEO, and the third-party investor.

Funding Criteria

Only certain kinds of funding meet NSF criteria to count as matching funds. The NSF Phase IIB web page contains two different descriptions of these criteria:

• Third Party Documentation: “The investment package consists of executed third party documentation from the third party investor(s). The documentation must specify the amount of the investment and the method by which the investor will provide the funding to the company. The third party funding can be cash, liquid assets, tangible financial instruments but not in-kind or other ‘intangible assets’. Loans and investments with contingency clauses are not acceptable. Self-funding does not qualify for

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⁵Kesh S. Narayanan, “Testimony Before the Small Business Committee U.S. House of Representatives.”

• the Phase IIB option. The company provides NSF with a letter from the investor(s) stating that the investment was a direct consequence of the NSF Phase II project.”

• Link to Phase II Funding: “The third party funding must be a direct consequence of the Phase II award. This funding can be cash, product sales revenues and/or licensing revenues, liquid assets, tangible financial instruments but not in-kind or other ‘intangible assets’. Loans and investments with contingency clauses are not acceptable. Self-funding does not qualify for the Phase IIB option” (emphasis in the original).⁶

While there is some overlap between these two descriptions, they are not identical. In particular, the first definition does not include sales or other market revenues, while the second definition does. In fact, the tone of the first definition—which is reiterated separately for applications of less than and more than $250,000—appears to require that matching funds meet a more standard meaning of “investment.” The survey evidence discussed below reveals confusion among Phase IIB awardees on this point.

The second description also mandates that the funding be a “direct consequence of the Phase II award.” This has the effect of ruling out any funding generated as a consequence of the Phase I award or other company activities that may be coterminous with the Phase II award—a point made in interviews with NSF Phase IIB awardees, some of whom at least believe that this interpretation is implemented at NSF.⁷

NSF has imposed further requirements on larger Phase IIB awards. When Phase NSF IIB funding will be in excess of $250,000, matching funds must come from nongovernmental, private-sector, third-party sources. This may, in some cases, conflict with the inclusion of sales revenues as matching funds, because some NSF projects (about 10 percent of survey responses) indicated that their product sales were to the Department of Defense.

All proposals are submitted electronically via the NSF FastLane program. NSF has set a deadline of 60 days from application for award notification.

NSF Phase IIB “funds can be used only for advancing the research-related elements of the project. The third-party investor funds can be used for research or other business-related efforts to accelerate commercialization. Market research, advertising, patent applications, and business plan improvement are all examples of uses of third-party investor funds.”⁸

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⁶National Science Foundation, Phase IIB web page, accessed October 18, 2010, <http://www.nsf.gov/eng/iip/sbir/phase_iib.jsp#REVIEW>.

⁷The company making this point preferred to remain anonymous.

⁸National Science Foundation, 1999 SBIR/STTR Phase I Program Solicitation and Phase II Instruction Guide, <http://www.nsf.gov/pubs/1999/nsf9957/Chapt-10.htm#BM10_3>. Accessed May 29, 2015.

Review of Phase IIB Proposals and Selection Criteria

Phase IIB proposals are reviewed in house by a minimum of two NSF SBIR/ STTR Program Officers, based on the following two review criteria drawn verbatim from the NSF Phase IIB web site:

Through survey responses and interviews, several NSF awardee companies indicated that NSF Phase IIB approval has in recent years become strongly focused on opportunities for rapid commercialization. Commercialization is a stated objective of the SBIR program and has been emphasized by NSF SBIR program management in discussions with the Academies,¹⁰ and this perspective is supported by comments from both recipients and management. In addition, it is worth noting that the commercialization imperative appears in both of the above criteria.

Payment and Release of Funding

The Phase IIB match is released on different schedules for projects that have been extended for 1 and 2 years. One-year extensions, which receive NSF funding of up to $250,000, receive 50 percent as an advance payment at the start of the Phase IIB and the remaining 50 percent on approval of the 6-month interim report. Two-year extensions (NSF funding greater than $250,000) receive 25

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⁹National Science Foundation, Phase IIB web page, accessed October 18, 2010, <http://www.nsf.gov/eng/iip/sbir/phase_iib.jsp#REVIEW>.

¹⁰Effective July 1, 2015, the institution is called the National Academies of Sciences, Engineering, and Medicine. References in this report to the National Research Council, or NRC, are used in an historic context identifying programs prior to July 1.

percent as an advance payment, 25 percent on approval of the 6-month interim report, 25 percent on approval of the 12-month interim report, and 25 percent on approval of the 18-month interim report. In both cases, the final payment due under the Phase II award is retained until after approval of the final project report. And in both cases, initial payments will be made only after NSF has received a letter stating that the entire amount of any third-party match been transferred to the company.

Reporting Requirements

Phase IIB awardees are required to provide interim reports every 6 months, along with a final project report on conclusion of the award period. These reports are submitted electronically.

PHASE IIB AWARDS

The NSF Phase IIB program has been in operation since 1998. This section summarizes award patterns, based on data provided to the Academies by NSF.

The total number of awards, total NSF funding, and average funding per project are summarized in Table 5-2.

TABLE 5-2 NSF Phase IIB Awards and Funding, by Year 2001-2014

SOURCE: National Science Foundation.

Discussions with NSF staff suggest that the annual variation in the number of awards may, in part, reflect the way that records are kept rather than a genuine shift in NSF priorities, as well as variations in the status of potential applicants and other factors. Awards are not a direct reflection of NSF policies.

NSF reports that Phase IIB funding is associated with more than twice the amount of matching funds (see Table 5-3). This issue is addressed further in the detailed discussion of Phase IIB survey results.

An average NSF investment of $281,000 is associated with average matching investments of $830,000—a 3:1 ratio, according to NSF data. The extent to which there is a causal relationship between NSF funding and matching funds is explored through the Phase IIB survey, described below.

Some companies have successfully sought funding for more than one project. Table 5-4 lists the 14 companies that were awarded more than two Phase IIB awards.

2010 PHASE IIB SURVEY RESULTS

This section is based on responses to the 2010 Phase IIB Survey.¹¹ This is the first survey to target recipients of Phase IIB funding. Its purpose is to compare Phase IIB with Phase II projects (see Box 5-1)

Company Foundation and Status

Almost all responses related to companies that were still in business. Further research (calls and Internet research) indicated that many of the non-responding companies may have gone out of business or had been acquired and were no longer independent entities.

The mean number of founders for these companies was approximately 2.5. About 80 percent of companies reported at least one founder with an academic background, while about three-quarters reported at least one founder with a business background. Serial entrepreneurs are an important element of the ecosystem for high-tech innovative companies, and slightly more than one-half reported that at least one founder had previously founded a different company.

The survey asked whether the awardee company was woman-owned or minority-owned. A higher percentage of Phase IIB respondents reported their companies as woman-owned compared to Phase II respondents. There was a roughly equal response rate between the two groups with regard to minority ownership (see Table 5-5), although this result may be somewhat unreliable because interview evidence suggests that the definition of “minority-owned” is not consistent across companies.

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¹¹The 2010 Phase IIB Survey was conducted separately from (and prior to) the broader 2011 Survey referenced elsewhere in this volume. All figures in this chapter are based on this Phase IIB survey unless identified otherwise. A discussion of the methodology utilized is provided in Appendix A.

TABLE 5-3 Matching Investment for Phase IIB

SOURCE: National Science Foundation, private communication.

TABLE 5-4 Companies Receiving More Than Two Phase IIB Awards, 1999-2009

SOURCE: National Science Foundation.

TABLE 5-5 Woman- and Minority-Owned Companies

SOURCE: 2010 Phase IIB Survey, Question 6.

As expected for a sample of small companies, for which the principal investigator (PI) is often the owner, data for woman- and minority-owned companies are reflected in the data for PI demographics (see Table 5-6). Phase IIB respondents reported a higher percentage of both woman and minority PIs than Phase II respondents.

Project Status

Table 5-7 summarizes the current status of the surveyed project. Almost twice the share of Phase IIB projects had generated products, processes, or services that were in use at the time of the survey.

TABLE 5-6 Female and Minority Principal Investigators (PIs)

SOURCE: 2010 Phase IIB Survey, Question 17.

TABLE 5-7 Current Project Status

SOURCE: 2010 Phase IIB Survey, Question 7.

Commercial Outcomes

The survey asked a number of questions focused on commercial outcomes from the surveyed projects, with the initial aim of determining whether the projects had in fact reached the market (see Table 5-8).

Although a majority of responses from both groups indicated that sales had occurred, more Phase IIB projects reported sales. Of the Phase II only projects that had not yet reported sales, 31 percent still expected sales in the future.

However, simply reaching the market is not a sufficient metric for commercialization. It is also important to know the size of the commercialization results. Table 5-9 shows the distribution of responses by sales groupings. Table 5-10 shows the average allocation of sales by customer sector and by group. Sales were heavily concentrated in the U.S. private sector.

TABLE 5-8 Sales Status

SOURCE: 2010 Phase IIB Survey, Question 10.

TABLE 5-9 Distribution of Responses by Total Amount of Sales per Project

SOURCE: 2010 Phase IIB Survey, Question 13.1.

Employment Impacts

Survey responses suggest that Phase IIB companies tended to be somewhat larger than Phase II only companies at the time of application. More Phase IIB companies than Phase II only companies reported 20-49 employees and 50-99 employees at the time of application (see Table 5-11). Overall, Phase IIB respondents reported double the number of employees at the time of application (22 vs. 11).

The differences in company size are potentially important. Larger companies tend to be better established and have more resources beyond the SBIR award.

TABLE 5-10 Average Distribution of Sales by Customer Sector and Group

SOURCE: 2010 Phase IIB Survey, Question 14.

TABLE 5-11 Company Size (Employees) at Time of Application

SOURCE: 2010 Phase IIB Survey, Question 16.1.

Therefore, companies that were able to raise the matching funds for Phase IIB were already likely to be more commercially advanced.

Respondents were also asked to report the number of employees at the time of the survey (see Table 5-12). More Phase IIB than Phase II only respondents reported that their companies had grown substantially since the time of application—on average, Phase IIB respondents reported 78 employees at the time of the survey, while Phase II companies reported 15.

Thus the data reveal that Phase IIB companies not only had more employees at the time of application, but also grew much more than did Phase II only respondents (see Table 5-13). Phase IIB companies increased by 56, or 254 percent, while Phase II only companies on average increased by employees, or 36 percent. This difference is heavily influenced by the large growth of a few companies. The median employment for the Phase IIB group increased by 113 percent (from 8 to 17), while that of the Phase II-only group increased by 60 percent (from 5 to 8).

Survey data indicated that the number of staff hired directly as a result of the SBIR award was limited.¹² Similar results were obtained for employees retained (rather than hired) as a result of the award. Phase IIB companies reported a mean retention almost two times that of Phase II-only companies (4 vs. 2). To summarize, employment effects were larger across the board for the Phase IIB group (see Table 5-14).

Intellectual Property and Knowledge Effects

Commercial returns are not the only significant outcomes of SBIR-funded projects. One of the mandated congressional goals is to support the extension of scientific and technical knowledge. In past Academies reports, work toward this goal has been measured using patent, trademark, and copyright data as proxies for the development of commercially valuable intellectual property.¹³

Table 5-15 shows that a higher percentage of Phase IIB companies reported receiving one or more related patents than Phase II-only companies (46 percent vs. 37 percent), and more Phase IIB companies reported applying for one or more patents than did Phase II-only companies (76 percent vs. 57 percent). Moreover, a higher percentage of Phase IIB companies applied for and received multiple patents.

Another standard metric for knowledge dissemination is authorship of articles published in peer-reviewed journals. One might hypothesize that companies focused on commercialization would be unlikely to generate peer-reviewed publications, and hence that Phase IIB companies would be less focused than Phase II only companies on publishing, but this turns out not to be the case (see Table 5-16).

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¹²2010 Phase IIB Survey, Question 16.3.

¹³See National Research Council, An Assessment of the SBIR Program at the National Science Foundation (Washington, DC: The National Academies Press, 2008), p. 126.

TABLE 5-12 Company Size (Employees) at Time of Survey

SOURCE: 2010 Phase IIB Survey, Question 18.

TABLE 5-13 Change in Employment

SOURCE: 2010 Phase IIB Survey, Question 16.

TABLE 5-14 Summary of Employment Effects

SOURCE: 2010 Phase IIB Survey, Question 16.

TABLE 5-15 Patenting Activity

SOURCE: 2010 Phase IIB Survey, Question 18.

TABLE 5-16 Publications in Peer-Reviewed Journals

SOURCE: 2010 Phase IIB Survey, Question 21.

NSF Phase IIB Application and Process

In its analysis of the operations of the Phase IIB program, the Committee surveyed only projects that received Phase IIB funding (as confirmed by the NSF awards database and the company itself). This was done because non-recipient projects would not have inside knowledge of Phase IIB impacts and procedures. At the same time, for the 74 Phase II projects that did not apply for Phase IIB funding were asked why. Just under 60 percent of responses reported that the company did not apply because they could not raise the required matching funds

(see Table 5-17). As anticipated by NSF, the requirement for matching funds is a formidable gate for Phase II recipients to pass through on the way to Phase IIB.

Case study interviews with SBIR awardees indicated that NSF enjoys a strong reputation for working closely with awardees and applicants. This positive reputation was confirmed by responses to a survey question about how closely the company worked with the NSF program officer during the Phase IIB application process (see Table 5-18). Almost 80 percent of respondents indicated a considerable degree of contact and guidance from the NSF program officer.

Developing a winning application requires significant efforts. Given the additional complexity of the Phase IIB matching funds requirements, the burden on respondents could be substantial. Table 5-19 indicates the level of effort reported by respondents.

TABLE 5-17 Reasons for Not Applying for Phase IIB Funding

NOTE: Responses do not sum to 100 percent because respondents could select more than one answer.

SOURCE: 2010 Phase IIB NSF Survey, Question 29.

TABLE 5-18 Working Relationship with NSF Program Officer

SOURCE: 2010 Phase IIB Survey, Question 44.

TABLE 5-19 Amount of Effort Required to Submit Phase IIB Proposal

SOURCE: 2010 Phase IIB Survey, Question 44.

The responses confirmed that Phase IIB applications required considerable effort for some companies, with more than 22 percent of companies recording more than 2 months of full-time work from senior staff. For most, however, the burden was much less: 40 percent reported 2 weeks of effort or less.

To provide a comparative benchmark for these data, the survey asked the respondents to compare the effort required to submit a Phase IIB application with that required for other federal R&D projects (see Table 5-20). More than one-third of respondents reported that Phase IIB applications were easier or much easier than those for other federal R&D programs, while 19 percent reported that

TABLE 5-20 Comparison of Phase IIB with Applications to Other Federal R&D Programs

SOURCE: 2010 Phase IIB Survey, Question 42.

the process was more difficult or much more difficult. These data suggest that the NSF Phase IIB program is, on the whole, not imposing onerous demands on companies in the application process.

Given the different descriptions of NSF matching funds criteria on the NSF Phase IIB web page, the survey sought to determine what successful respondents believed would count as matching funds for NSF Phase IIB purposes. The responses are summarized in Table 5-21

These responses highlight considerable confusion even among companies that were successful in meeting the matching funds criteria. Well over half the responses identified sources as acceptable that are rejected by NSF. Conversely, more than 40 percent of respondents did not list equity investment and sales as acceptable matches. Interviews with some successful Phase IIB companies confirmed that sales were not universally understood to be acceptable source of matching funds.

NSF Phase IIB Funding and Matching Funds

One of the primary purposes of the Phase IIB program is to attract additional investment into SBIR awardee companies. Phase IIB requires a minimum of a 2:1 match by the company, and only certain kinds of funding can qualify as matching funds:

“The third party funding must be a direct consequence of the Phase II award. This funding can be cash, product sales revenues and/or licensing revenues, liquid assets, tangible financial instruments but not in-kind or other ‘intangible assets’. Loans and investments with contingency clauses are not acceptable. Self-funding

TABLE 5-21 Respondent Beliefs on NSF Phase IIB Matching Funds Criteria

NOTE: Responses do not total 100 percent because more than one response was permitted.

SOURCE: 2010 Phase IIB Survey, Question 41.

TABLE 5-22 NSF Phase IIB Funding, by Amount of Funding

SOURCE: 2010 Phase IIB Survey, Question 31.1; NSF awards data.

does not qualify for the Phase IIB option.” Self-reported data on funding from NSF tracks quite closely with NSF survey data (see Table 5-22).

The self-reported figures in column two track closely with the NSF awards data in column three. The primary discrepancy—in the numbers of awards at $400,000 and above—is explained by the existence of 33 awards that NSF recorded at between $480,000 and $499,999, which awardees likely reported as $500,000.

NSF data and survey data capture the amount of matching investment funds generated in connection with the Phase IIB award. (See Table 5-23). About one-third of projects reported matching funds greater than $1 million, and 25 percent reported funding between $500,000 and $999,999. Both the self-reported and the agency data indicated that NSF achieved its objective of funding projects with at least a 2:1 match from third parties, thus leveraging the Phase IIB NSF investment.

A specific objective of the NSF program is to encourage companies to generate third-party investments. Accordingly it is important to understand the source of the matching funds as well as any prior relationship with the funding source. Tables 5-24 and 5-25 show the distribution of funding by source. Because some respondents answered more than one survey questionnaire, Table 5-25 distinguishes between individual responses (column 3) and individual respondents (column 4). Regardless, more than 20 percent indicated that funding was derived

TABLE 5-23 Matching Funds for Phase IIB Awards, by Amount of Funds

SOURCE: 2010 Phase IIB Survey, Question 31.2; NSF awards data.

TABLE 5-24 Distribution of Funding by Source of Funding (Number of Responses)

NOTES: Includes only respondents who answered questions about both the amount of funding and the source of funding. The percentages in the respondents ‘column does not total 100 percent because respondents could select more than one answer.

SOURCE: 2010 Phase IIB Survey, Question 32.

TABLE 5-25 Distribution of Third-Party Funding by Source of Funding (Dollars)

SOURCE: 2010 Phase IIB Survey, Question 32.

from sales and from other U.S. companies. Nine percent of responses mentioned venture funding.

Conventional wisdom—and previous Academies studies—would lead us to expect that the average amount per project (final column in Table 5-25) from these sources would differ substantially and that venture funding would provide relatively large amounts per project. However, the latter was not the case for these projects. Venture support (for projects with some venture funding) averaged less than $500,000 per funded project; funding from angel investors was more than $500,000, and four sources provided more funding per funded project than did venture sources.¹⁴ The amount of federal agency funding was somewhat surprising given the requirement that Phase IIB awards above $500,000 utilize only private-sector matching funds.

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¹⁴The lower-than-expected venture funding may reflect the fact that VC firms now manage much larger capital bases that they did in the 1980s, and as a result now need to make much larger initial investments in individual projects to make the most of the time and effort of the partners. This trend may mean that the desired size of individual venture investments and the amount of third-part funding needed by most SBIR companies align less well now than in the past.

As noted, the NSF SBIR program encourages companies to find investors. Table 5-26 addresses this question. Only 30 percent of respondents reported matching funds were provided by a new investor, while 45 percent of responses reported funding from a long-term partner of some kind. The substantial number of respondents reporting “other” likely include the 30 percent of respondents who reported sales as a source of matching funds. Overall, these findings suggest that the NSF objective of generating new investment is being partly met.

Phase IIB Impacts: Accelerating Commercialization

The NSF Phase IIB program is aimed at accelerating the commercialization of products and services. The next set of questions focused on these impacts. Table 5-27 summarizes the impact of Phase IIB funding in accelerated commercialization:

TABLE 5-26 Company Relationship to Investor

NOTE: Responses do not total 100 percent because respondents could provide more than one answer.

SOURCE: 2010 Phase IIB Survey, Question 33.

TABLE 5-27 Phase IIB Impacts: Accelerating Commercialization

SOURCE: 2010 Phase IIB Survey, Question 35.

Eighty percent of respondents indicated that the funding had accelerated commercialization. Five percent thought it had not. Respondents also reported strongly positive views on the long-term impact of Phase IIB on the progress of the company (see Table 5-28).

Nine percent of respondents reported that Phase IIB had a transformative effect on the company, while a further two-thirds reported a “substantial long-term positive effect.”

Phase IIB Impacts: Acquiring Additional Investment

As one program objective is to bring in fresh investment, the survey asked respondents whether the Phase IIB match requirements brought in funding that would not otherwise have been acquired by the company. The response was overwhelmingly positive, as described in Table 5-29.

TABLE 5-28 Phase IIB: Long-term Impacts on Company

SOURCE: 2010 Phase IIB Survey, Question 37.

TABLE 5-29 Brought New Funding into the Company that Otherwise Would Not Have Been Acquired

SOURCE: 2010 Phase IIB Survey, Question 38.

Sixty-one percent of projects reported that the program had brought additional funding into the company that would not otherwise have been acquired.

Delving a little deeper, respondents who reported receiving Phase IIB funding were also asked whether the availability of Phase IIB funding had added incentives for the company to seek investment funds (see Table 5-30).

Respondents overwhelmingly reported that the Phase IIB funding was at least to some degree an incentive to acquire investment funds. Fifty-two percent indicated that Phase IIB made a great deal of difference or drove the process.

Respondents that indicated that Phase IIB did bring new investment into the company were then asked how much additional funding had been brought in as a result of Phase IIB matching requirements. Responses are described in Table 5-31.

Overall, 20 percent of respondents indicated amounts of less than $200,000, while 59 percent reported amounts of $500,000 or more. The overall average amount was $956,000, and the median was $500,000.

Beyond the additional investment that Phase IIB recipients attribute directly to the Phase IIB program, Phase IIB companies have been more successful in securing additional funding beyond the required match. About three quarters of Phase IIB respondents indicate that their company has received such additional investment funding, compared with about half of Phase II only projects. (See Table 5-32.)

For all projects (Phase II and Phase IIB) reporting additional funding, the survey asked whether they had received any funding (beyond the Phase IIB match) from the following sources (whether as a result of the Phase IIB program or not). These data represent the percentage of respondents indicating that they received additional funding from a given source. Accordingly, the total number of responses adds up to more than 100 percent (see Table 5-33).

A considerably higher percentage of Phase IIB companies reported receiving additional venture funding than did Phase II-only companies (16 percent

TABLE 5-30 Phase IIB Impact: Incentive for Acquiring Investment Fund

SOURCE: 2010 Phase IIB Survey, Question 43.

TABLE 5-31 Distribution of Additional Funding Generated Strictly as a Result of Phase IIB Requirements

SOURCE: 2010 Phase IIB Survey, Question 39.

TABLE 5-32 Additional Investment Reported for the Surveyed Project (Excluding, in the Case of Phase IIB Respondents, Phase IIB Required Matches)

SOURCE: 2010 Phase IIB Survey, Question 22.

versus 2 percent). The higher participation of venture capitalists as the SBIR projects move farther out in their development validates that the SBIR program helps companies during a time that is generally too early for extensive attraction of venture capitalists. This finding is evidence that the SBIR is positioned as intended—helping bridge innovative companies across the “Valley of Death.”

TABLE 5-33 Sources of Additional Investment

NOTE: Responses do not total 100 percent because respondents could provide more than one answer.

SOURCE: 2010 Phase IIB Survey, Question 21.

Phase IIB Impacts: Respondent Perspectives

Table 5-34 summarizes overall respondent views of the Phase IIB program. Overall, 98 percent of respondents have positive or very positive views of the program. None report a negative view. And 99 percent reported that it was worth the effort to apply (even though it costs the equivalent for two months of senior staff time for more than 20 percent of applicants).¹⁵

More detailed insights into these highly positive responses can be found in additional comments received for survey question 36, which sought to identify ways in which Phase IIB funding made a difference to the company’s ability to bring products or services to the market. The comments leave little doubt that for many respondents, Phase IIB funding had a major positive impact on the commercialization of their products and services, and on the long-term success of their company.

Respondent Recommendations for Program Improvement

Respondents were asked two questions about the size of the Phase IIB program. The first focused on overall program size. Responses are summarized in Table 5-35. Three percent of respondents recommended that the program be reduced in size. Conversely, 40 percent recommended that it be expanded.

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¹⁵2010 Phase IIB Survey, Question 46.

TABLE 5-34 Phase IIB Overall Impact: Respondent Views

SOURCE: 2010 Phase IIB Survey, Question 47.

TABLE 5-35 Should the Size of the Phase IIB Program be Changed?

SOURCE: 2010 Phase IIB Survey, Question 49.

This corresponds to respondent views on the adequacy of the individual awards they received: about two thirds of respondents thought they received about the right amount of funding—the remainder almost all thought they had not received enough.¹⁶ However, only about one fifth indicated that the size of awards should be increased if that meant that NSF would award fewer Phase IIB awards (Table 5-36).

One issue that had emerged in the context of case study interviews was whether NSF should relax its prohibition on the use of appropriate in-kind resources as matching funds. No majority view emerged from respondents, although almost half indicated that some relaxation might be appropriate (Table 5-37).

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¹⁶2010 Phase IIB Survey, Question 50.

TABLE 5-36 Should Award Size be Increased Even if that Means Fewer Awards?

SOURCE: 2010 Phase IIB Survey, Question 51.

TABLE 5-37 Use of Appropriate In-kind Contribution as Matching Funds

SOURCE: 2010 Phase IIB Survey, Question 52.

CONCLUSIONS

Overall, the NSF Phase IIB program is supporting the accelerated commercialization of SBIR-funded research. It is helping to attract third-party investors, and to accelerate or otherwise enhance the commercialization of SBIR-funded technologies.

The evidence clearly shows that overall there are distinct differences in outcomes for Phase IIB projects compared with Phase II-only projects. In part, this reflects the rigorous selection process—NSF selects Phase IIB projects specifically for their commercial potential, so improved commercial outcomes should be expected. At the same time, evidence from recipients and from case studies strongly suggests that the program also has a catalyzing effect, attracting additional funding, and that it makes a difference to company activities and outcomes.