STTR: An Assessment of the Small Business Technology Transfer Program (2016)

4

Qualitative Assessment: Company and University Perspectives

This chapter addresses a range of program effects as described by executives of STTR companies and by agency and university technology transfer office staff. It also draws on textual responses by recipients to open-ended questions from the Academies Phase II recipient survey questionnaire (see Appendix A for detailed explanation of survey methodology).

This qualitative review provides context for the numbers discussed in the quantitative outcomes chapter and helps to explain why the program is so strongly supported by many award recipients.

This chapter is organized into three broad sections:

• Small business concern (SBC) perspectives
• Company concerns and recommendations
• STTR and the National Laboratories

Together, these sections provide the first wide-ranging publicly available feedback of the STTR program from program recipients and universities. Where appropriate, materials drawn from discussions with agency staff are also utilized.¹

COMPANY PERSPECTIVES

STTR awardee companies provided input for this chapter in two ways: through case study interviews and through the Academies 2011-2014 Survey

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¹For this report, relevant staff were interviewed at NIH (including also interviews with a number of NIH institutes and centers); DoD (including interviews with component staff including Army and Navy); DoE, NASA, and NSF. This section also draws on material provided through the Academies STTR Workshop on May 1, 2015.

(discussed in detail in Appendix A). The survey provided opportunities for STTR recipients to describe differences between the SBIR and STTR programs, explain the impact of STTR on their companies, and suggest improvements to the program. A total of 305 textual comments were received, and 11 formal case studies were conducted. In addition, several companies that were earlier profiled for their experience with the SBIR program, in relation to the broader scope of the committee’s study, were re-contacted and were provided the opportunity to also share their experiences with STTR. Case studies included companies with STTR awards from all five study agencies.

It is important to be cautious when contextualizing survey comments. Each company experience is somewhat unique, and as one recipient stated, “Every university partner is different.” In addition, as discussed in Chapter 2 (Program Management), there are important differences in how the agencies run their programs. Indeed, Bradley Guay, STTR program manager for the Army, noted that even within the Department of Defense (DoD), the differences among

components in operating their STTR programs are often greater than the differences between SBIR and STTR within a single component. He considered the STTR program at Army to be less similar to the STTR program at Navy than to the SBIR program at Army. Furthermore, because there are few STTR awards overall, it is difficult to make supportable generalizations about the program at individual agencies, or individual components within DoD.²

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²Interview with Bradley Guay, Army STTR program manager, September 2, 2015.

SBIR and STTR: Differences from Company Perspectives

Some companies follow the Department of Energy (DoE), National Science Foundation (NSF), and National Institutes of Health (NIH) in seeing little difference between the programs. One survey respondent noted, “As a small business that mostly develops our own technology, the differences are only slight as we continue to collaborate with universities for needed services.” There are similarities even in linkages to research institutions, the congressional objective for STTR. Many SBIR awards also involve research institutions as subcontractors, although their participation in SBIR awards varies substantially by agency.³ Nevertheless, most respondents and case study interviewees did see differences between the programs.

Aside from the formal differences between the programs noted in Chapter 2, some survey respondents and case study interviewees said that, broadly speaking, where there were differences in topics, STTR topics tended to be more research-oriented and less focused on short-term commercialization. A respondent observed, “Topics with a high degree of fundamental research are appropriate to STTR. Topics with more focus on developing prototype hardware with nearer-term commercialization potential are better for SBIR due to the need for greater funding at the small business, and export control issues at universities.” Similarly, another respondent observed, “The biggest difference lies in the topic definitions. The STTR projects tend to be much more academic, and harder to envision commercializing.” Several program managers shared this perspective (see Chapter 2), although there is evidence that topic-level differences between SBIR and STTR are closing at some agencies. NSF experimented with separate topics for SBIR and STTR, but has since abandoned this approach, while at DoE the same solicitation is used for STTR and SBIR.

Survey respondents also observed that there were structural differences in the relationship between the small business and the research institution in the two programs. One noted, “In an SBIR award, the private business leads the effort and the University primarily supports that effort as a subcontractor. The STTR program is more of a partnership where the university personnel are given more autonomy and freedom. This gives the program a more academic flavor and the work is typically incorporated into one or more graduate dissertations.”

Some respondents also saw a difference in the kind of technology sourcing involved. SBIR awards are used by small businesses to fund subcontracts at research institutions, which can perform specialized work or provide access to expensive equipment. In comparison, under STTR the research institution is sometimes itself the technology source. A survey respondent said,

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³See National Research Council, SBIR at the Department of Defense, Washington, DC: The National Academies Press, 2014, and National Academies of Sciences, Engineering, and Medicine, SBIR/STTR at the National Institutes of Health, Washington, DC: The National Academies Press, 2015. Effective 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.

“In SBIR we can use the University as a subcontractor, taking advantage of specialized services that they may provide, or specialized expertise in a given area. In the STTR program, technology initially developed at the University is transferred to the Small Business for further R&D (in collaboration with the University).”

However, discussions with case study interviewees reveal that this generalization may be too broad and that technology can originate with the small business or the research institution under STTR. For example, Dr. R. Lawrence Ives (Calabasas Creek Research [CCR]) observed that his company had STTR awards for which the company was the primary technology provider and driver, as well as STTR awards for which the university researcher was the primary technologist. Similarly, Dr. David Green (Physical Sciences) said that the origin of the technology in his company’s STTR projects might be the small business or the research institution.

Company Motivations

Although all STTR awards are made in response to a solicitation from the awarding agency, company motives for seeking STTR awards can be categorized into four primary areas:

• To access equipment and expertise for technology development to be found only at a research institution
• To help commercialize technology developed at the research institution
• To garner funding by addressing needs expressed through a solicitation
• To acquire indirect benefits from the program, such as reinforcing or developing links to an appropriate research institution partner, or identifying possible new employees.

Several companies with multiple STTR awards observed that they had at different times responded to each of these motives. However, several—such as Calabasas Creek Research, Vista Clara, and Xia—reported shifts over time, in particular away from more opportunistic motives and toward development of technology that was strategically important for the company. This shift may have resulted in part because of the new commercialization benchmarks introduced after the 2011 reauthorization. The companies mentioned above said that they now pay more attention to a topic’s commercialization potential and are more reluctant to proceed unless it aligns with the company’s overall commercialization strategy.

Access to University Technology, Expertise, and Equipment

Research institutions are repositories of technical expertise and in many cases equipment that companies especially at an early stage cannot afford to buy

for themselves. As Dr. B. Lynn Allen-Hoffman (Stratatech) explained, the equipment in her laboratory at the University of Wisconsin represented an investment that was far beyond that available to a startup. Dr. Ives (CCR) noted that an STTR award allows a small company such as CCR to enter entirely new technology areas by tapping into expertise and equipment at a research institution. CCR’s most recent STTR awards require equipment that it does not have and could not afford even with a Phase II STTR award but that is readily available at North Carolina State University.

Companies can tap equipment and expertise, however, through both SBIR and STTR awards. For a number of companies, the decision to seek an STTR award was based on the origin of the technology. As one survey respondent commented, “If the origin is from our business and we invite a university to join us, it is easier for us to frame the project as an SBIR. If it is the other way around, it would be easier to frame up an STTR project.” Similarly, Dr. Charles Gary (Adelphi Technologies) noted that “the STTR program is primarily designed to allow [us] to directly acquire and commercialize technology developed at universities and national laboratories.”

Enhanced Links Between Small Businesses and Research Institutions

Links to research institutions can benefit small businesses in many ways, while links of research institutions to small businesses offer a path to commercialization that may otherwise not be available to RI-sourced technologies. Dr. William Warburton (Xia) said that collaborations could be long running and very fruitful. For example, through an ongoing collaboration with Lawrence Berkeley National Laboratory, Xia was linked to a scientist aiming to move his technology out into the world. He provided access to instruments and considerable feedback. In exchange, Xia supplied him with next-generation equipment for his experiments. The collaboration has lasted 10 years.

More generally, STTR can help to strengthen linkages between the small business and the research institution. One survey respondent noted, “The STTR program is important to us because it helps gain and/or strengthen relationships with research universities in the area. This expands our technical horizons, and, most important, provides us with a glimpse and first bid on a pool of young, qualified new staff members, reducing our hiring timelines and risks.” Another respondent wrote, “Interaction with research institutions provides access to knowledge, experience, and resources not available within the company.”

Dr. Ives (CCR) explained that STTR provides an appropriate structure for partnering with research institutions and was particularly enthusiastic about the access it provides to the creativity and enthusiasm of graduate students. A survey respondent observed, “STTR relationships more easily support grad students. This is a long-term investment in highly qualified people with

significant risk. It paid off for us, but there are no guarantees. The STTR mechanism is not for short term R&D but should be part of a long term strategy.” Another respondent wrote, “STTR awards are beneficial to expand company relationships to potential future employees (graduate students) and outside perspectives.”

This point can be aligned with quantitative data presented in Chapter 5—for example, Table 5-2 shows that 71 percent of respondents indicate that STTR has resulted in an enhanced relationship with the research institution.

Funding

Several of the companies interviewed indicated that STTR funding was critical for the company’s formation and first steps toward commercialization. Dr. Bill Hersman (Xemed) said that the company was founded only when STTR funding was acquired. Dr. Kurt Amundsen (Ekso Bionics) said that STTR was especially helpful at the earliest stages of company development: Dr. Homayoon Kazerooni, a company principal, and other key staff were on the faculty at University of California, Berkeley, and STTR was the perfect bridge from academia to the company.

STTR funding can be used in other ways to advance the small business concern. For example, some companies reported that STTR validated their work and helped them to leverage additional investments from other sources. One survey respondent explained, “The funding provided by SBIR/STTR allowed my business to receive funding that could be used for credibility in leveraging for additional angel investment. Without the funding it would have been highly unlikely that this small business would have been created.”

As companies mature and grow, STTRs can become less attractive. Dr. Amundson observed that Ekso Bionics now wants to move quickly and is less interested in academic research. It also does not wish to be so tightly coupled to university needs and interests.

Small Business Perspectives: Some Positive Conclusions

Although small businesses have many concerns about STTR, which are described in the following section, company interviewees and survey respondents also reported on STTR advantages.⁴

Companies reported that when partnerships with research institutions work well they can have a substantially positive impact on the company, providing access to unique technology and expertise, opening the door for the recruitment of future employees, and also providing a pathway for the commercialization of technologies being developed at research institutions. Moreover, the data reported in Chapter 5 reveal significant differences between

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⁴See Table 5-2 on STTR impacts on SBC-RI relationships. Approximately 71 percent of survey respondents report an enhanced relationship.

SBIR and STTR regarding the role of the RI. These results reflect a key Congressional objective of the STTR program, which is to increase linkages between small businesses and research institutions. Table 4-1 shows responses to an Academies survey question about the type of linkages between the funded project and RIs, for both SBIR and STTR Phase II recipients.

COMPANY CONCERNS AND CHALLENGES

Projects that require teaming are likely to be more challenging for small businesses than are projects in which the small business has full control. Partnering with large organizations that often have different motivations and interests presents an additional set of hurdles. This section considers a number of challenges and concerns described by company interviewees and survey respondents.

Different Cultures: Small Businesses and Research Institutions

Several companies raised concerns about differences in perspective between small businesses and research institutions and, in some cases, differences in objective. Survey respondents observed that universities may not be well suited to partner with small companies. One survey respondent said, “Success of the STTR program depends a lot on the effort made by the University. One problem we consistently faced is that the academics tend to look at research as an open-ended problem whereas a small company has

TABLE 4-1 Research Institution (RI) Contributions to SBIR and STTR Projects

SOURCE: 2011-2014 Survey, Question 71.

short-term goals and time constraints that may also not fit with the academic schedule.”

The mandated participation of research institutions in STTR projects makes them significantly different from SBIR projects. The small business’ mission is to create products and/or provide services to meet customer requirements; the RI’s mission is to educate students (or deliver technology for the agency in the case of National Laboratories). In developing an STTR collaboration, the small business and research institution must work together to develop a statement of work that supports the small business’ objectives while affirming the research institution’s mission. This challenge does not exist for SBIR, which does not require a joint statement of work or a formal partnership with the research institution.

The research institutions perspectives on partnering with a small business can also vary. Dr. Ives (CCR) noted that CCR had differing experiences with research institutions. Some research institutions, such as North Carolina State University offered realistic licensing terms and welcomed collaboration with small companies. Others, however, did not appear to understand the limited resources of small businesses and demanded unrealistic upfront licensing fees and royalties.

Different Time Frames

Small businesses and research institutions can find themselves operating on different time frames within the same project. Small businesses are driven by the need to complete work on time and to reach commercialization as rapidly as possible. For them additional time means additional costs. Small businesses are also small and flexible and therefore can adjust to changing circumstances quickly. Research institutions in contrast are driven by the much slower calendar of annual budgets, academic research, and the needs of administrators.

These differences can present significant challenges to small businesses. One survey respondent explained, “Universities tend to work on a different (slower) time scale than SBIR subcontractors. There is no real urgency on the part of universities so work and deliverables are always slipping. Students working on STTR projects also do not place a high priority on the work.” Another respondent wrote, “One must be very careful when choosing a partner for an STTR program. Many academic collaborators are not accustomed to working under tight deadlines or to supply results on a regular and timely basis.”

Fixed Funding Shares and the Challenge of Enforcing Accountability

Some of companies surveyed noted that the structure of the STTR program contains a built-in rigidity: unlike SBIR, where small businesses are free to choose alternative subcontractors as needed, STTR requires that the same research institution remain a partner across all phases of the project. A survey respondent observed, “In the STTR award you benefit from technology developed at the research institution. However, it also entails a commitment by the Small Business to continue working with that research institution throughout the STTR project.” As a result, if the research institution fails to deliver on its milestones, the small business remains responsible for the project and it must make good itself—which may be difficult or impossible—or must abandon the project. It is clear that the success of the STTR depends on the commitment of both partners and that the different perspectives of the partners can cause difficulties. Indeed, all partnerships work best when both parties are committed. While agencies do require written agreements between small businesses and research institutions, they cannot in advance determine the degree of commitment for a specific STTR project.

A survey respondent explained that he experienced projects in which one of the collaborators did not deliver, and the technical point of contact (TPOC) had no leverage against individual collaborators. Another respondent noted, “SBIR awards are much easier to manage, even with a university subcontractor. A non-performing SBIR subcontractor can be replaced or the work performed by the small business.”

The STTR requirement that at least 30 percent of the funds flow to the research institution imposes significant fiscal drag on the project—at least from the small business perspective. A survey respondent wrote, “Getting the research institution to do what is expected on time and using their >30% of the budget is often difficult because of their higher-priority commitments. We often have to spend more than the amount we were allocated to get the work done in the time allowed, often with no funding extensions.”

Other survey respondents said that the guaranteed funding reduces the RI’s incentive to commit effectively to the project. A respondent wrote, “STTR mandates the minimum amount that must be funded to the university. This made [the RI] care less about producing results needed by the company. It also makes it almost impossible for the company to operate profitably, with more than 30% of revenue given to [the RI] for results that may or may not meet company needs.” Another respondent explained, “It is hard enough getting a technology developed, prototyped, and delivered to a user who cares on limited funds. Having to fund a University makes it extremely difficult to achieve a positive outcome.”

Other survey respondents noted that the mandated division of funding may not be optimally designed for the project: “Under STTR, the small business has less flexibility to determine the optimum split of funding between the

business and the research institution. In some cases, this limitation is not an issue, but in other cases it seriously hampers the small business’ ability to attain the highest level of technology readiness at the conclusion of the project.” Although some companies (such as the one that commented above) complained that research institutions receive funding that could be better spent elsewhere, other companies expressed a wish to provide the research institution with more funding than the maximum allowed, for example, a life sciences company needing to engage a contract research organization with expertise in running clinical trials.

Intellectual Property (IP) and Licensing

STTR awards require that the small business and the research institution reach an agreement on intellectual property (IP). In the case of National Laboratories, these agreements are included in the cooperative research and development agreement (CRADA) and are effectively standardized. Universities, however, can adopt a variety of approaches and policies.

Discussions with both companies and technology transfer offices (TTOs) revealed a wide variation in attitudes and polices at research institutions toward licensing their intellectual property and the IP agreement that is mandatory for STTR awards. One respondent explained, “For an STTR, negotiating the appropriate intellectual property agreement can be problematic. Typically, the intellectual property departments of academic and non-profit research institutes have very little experience in dealing with STTRs. Developing the agreement can be a long process.”⁵

Dr. Ives (CCR) observed that publishing is the primary objective of universities and graduate students. It is therefore important to understand this need and to act accordingly by providing opportunities to publish without compromising company IP. He believes that it is entirely possible to balance these needs, as evidenced by his company’s record of publications related to university collaborations.

A survey respondent was more critical, noting that “Working with Universities on IP issues is typically a nightmare. We now only use Universities for their testing facilities…. University involvement for most of our commercial customers is typically a poison pill and so we only use universities when working on Federally-funded programs.” Another respondent wrote, “Negotiating licensing with the research institution can sometimes be difficult as the technology is usually at the moment worthless and very hard to know what the future market will be.”

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⁵At present, agencies are not set up to evaluate the extent of the ‘STTR-friendliness’ of a technology transfer office, and there are only a very limited number of data points for any individual RI/agency pairing. This means that agencies cannot as yet ‘reward’ technology transfer offices with STTR friendly policies.

Discussions with university technology transfer offices indicated that different universities saw their missions in this area quite differently. Land-grant universities such as North Carolina State saw their mission as explicitly involving economic development within the state. As a result, they were focused more on finding ways to utilize additional funding from SBIR and especially STTR, while still addressing conflict of interest concerns and other issues related to IP. Other universities did not see economic development as a mandate, and were much more cautious about potential conflicts of interest. They saw no structural role for STTR and SBIR, and were deeply concerned about potential problems, for example, faculty employing graduate students in the private sector.

Beyond intellectual property agreements with the research institutions, patenting in general is a challenge for small companies. As Dr. Ives (CCR) noted, his company has historically used patents to protect its IP (see the list of CCR patents in the CCR case study provided in Appendix E). However, he is concerned that the rising costs of patents means that in the future CCR will have to be much more selective about which technologies it seeks to patent. He is therefore a strong supporter of a recent DoE initiative to permit a limited amount of Phase II funding to be used for patent-related costs.

Contracting Concerns

In general, small businesses view contracting as significantly more difficult for STTR than for SBIR. This is especially true when the research institution is a National Laboratory, because the multiple layers of management and the need for signoff by both the laboratory management and the agency can delay matters significantly. Such an arrangement also requires a cooperative research and development agreement (CRADA)—see “STTRs and the National Laboratories,” below.

A survey respondent noted that university participation inevitably complicated the contracting process. Another respondent observed that “the collaboration element is harder to manage… executing a timely subcontract can be difficult as some research institution contracting departments are slow.” Still another noted that “once an research institution is involved, the degree of difficulty for submitting a proposal and managing an award go up significantly.”

Universities also have their own issues and concerns related to contracts administration. A survey respondent observed that “SBIR is always easier where as [sic] with an STTR I have to manage the conflict of interest requirements of the University.”

The administrative burden imposed by STTR awards can be challenging: “Without the help of our experienced principal investigator and to a lesser extent the Project Manager, the rules and reporting requirements can be quite formidable for a small company like ours. I know there are rules and regulations behind why things are done, but simplifying the interface between NIH and the recipient would be helpful.” Forty-five percent of survey

respondents indicated that SBIR was easier to manage than STTR, while only 3 percent thought the reverse was true.⁶

Administrative issues do not arise only in relation to research institutions. Dr. Hersman (Xemed) explained that for one of his company’s projects the DoE contracting officer did not understand the program: “Xemed had received an STTR award at DOE. Then a purchasing agent within DoE unfamiliar with STTR thought STTR could not have an academic PI. The agent halted the grant, and this could not be reversed even though DOE SBIR/STTR program officers agreed that the decision was wrong. I had to mortgage my house, and this almost sunk the company.”

Dr. Hersman also discussed ambiguity in the extent to which the PI can be located at an academic institution provided there is a “special relationship” with the company. In the past, Xemed solved this potential problem by appointing the PI to a position on the company’s advisory board.

The New Commercialization Metrics

It became evident from discussions with company executives that the new commercialization metrics instituted by the agencies after the 2011 reauthorization have had a distinct effect on SBIR/STTR companies. These impose new metrics related to the Phase I/Phase II transition metrics and also mandate that recipients of more than 15 Phase II awards over 10 years show evidence of at least $100,000 in commercialization per award). While these requirements are not especially burdensome, and impact few companies, companies in general clearly feel under pressure to show more commercial activity and results.

Dr. Gary (Adelphi Technology) explained that in recent years the company has completed its evolution from a research-oriented company into a more product-focused company and has redirected its focus on the development and then sale of compact neutron generators. Dr. Ives (CCR) said that the company has recently become more selective about the topics that it pursues, focusing more on commercial opportunities.

The new benchmarks have had an adverse impact at some companies. Dr. Roland Johnson (Muons) said that the new metrics “almost killed us.” Immediately after program reauthorization, Muons’ proposals to DoE were marked as noncommercial and rejected. The company developed more commercial activities, including contracts with Fermilab, Toshiba, and Niowave, and is now, after receiving $3 million in contracts over the past 5 years, again eligible for DoE awards.

Dr. Johnson (Muons) noted that the company changed its approach even for successful projects: its GBeamline software was given away and is in use at almost all the top high-energy physics laboratories worldwide. Muons will, however, license its next product on a more commercial basis, and it plans

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⁶2011-2014 Survey, Question 80.

to spin off a new business focused on software support. Muons is actively seeking funding for a major initiative in partnership with large companies focused on nuclear reactors for the Navy.

Challenge of Indirect Costs

A less obvious challenge in managing an STTR award relates to the requirement that at least 30 percent of project funds must go to the RI, and that typically about 30 percent of this funding is used by the research institution to cover indirect costs.⁷ That amount is therefore not available for the project budget. As one respondent noted, “STTR awards are less valuable to the business because so much of the award is taken by indirect costs at the research institution.” As on average research institutions receive about 40 percent of an STTR award, then the indirect cost or “tax” on STTR projects for research institutions is approximately 12 percent of overall funding: a significant slice of the pie, especially for projects with tight budgets to begin with.

Issues similar to these are being addressed elsewhere. For example, the European Union has instituted a firm flat rate of 25 percent for its 2020 Horizons research program, and Japan’s government programs pay 30 percent.⁸ Some survey respondents indicated that they would support imposition of such caps on indirect costs for STTR. A respondent describes the essence of the issue at a particular agency: “NIH should allow us to exclude indirect costs from the budgets of research institutions (as the agency does for RO1 basic research awards). Indirect costs at most research institutions exceed 50% at this point and they take a significant bite out of the research institution side of the budget. Another alternative would be that taken by NIH to limit indirect costs to ~20% of the research institution budget for SBIR/STTR applications.”

Limits of Commercialization Under STTR

Some survey respondents suggested that efforts to focus STTR more closely on commercialization are misplaced. They noted that universities are often poorly positioned to support commercialization and present barriers to its successful pursuit. A survey respondent suggested that the program should focus on other benefits of small business-STTR interaction: “Typically Universities are way too far away from being ready to commercialize a technology for these questions to be valid. The questions should have focused around ‘did the STTR provide the opportunity for the Small business to: Gain experience in a new technology area? Work with graduate students who later became employees? Access assets that a small company could not typically use in conducting R&D?’ It is here that the value of the STTR program lies.”

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⁷Heidi Ledford, “Indirect costs: Keeping the lights on,” Nature, November 19, 2014.

⁸Ledford, “Indirect costs.”

STTR can have profound impacts that are not measured in standard commercialization metrics. For example, Dr. Warburton (Xia) explained that the company has sold approximately $20 million in instruments for synchrotrons. The latter cost $500 million to build and approximately $200 million per year thereafter, and a large percentage of the research undertaken with these systems required Xia instruments. Fluorescence experiments would not run at all without them, and overall productivity would be maybe 10 percent of what it is today. Similarly, Xia developed instruments for measuring background radiation that have been used for validating compliance with nuclear test-ban treaties—another market with minimal sales but potentially large social impacts.

Are Research Institutions Value for the Money?

Some survey respondents clearly preferred SBIR because the company itself is more efficient in conducting commercially oriented research. Dr. David Walsh (Vista Clara) explained that while he does not object to partnering with academic institutions on occasion, in most cases Vista Clara would have done a better job without them. According to him, in only one out of the seven to eight partnerships formed for SBIR/STTR did the university add real value.

A survey respondent echoed his point: “Rather, in about 3/4 of the cases, my company would have had better value if the topic was an SBIR topic and award, rather than an STTR award. This is primarily because company staff could have performed (all or a portion of) the research more efficiently than the university.”

Case study interviewees were asked whether, if they had a choice, they would prefer to use SBIR or STTR as a vehicle for research. There was a strong preference—especially among researchers with considerable STTR experience—that they would prefer to retain more control of the project by using SBIR.

UNIVERSITY PERSPECTIVES

Clearly, STTR can be very beneficial to academics seeking to transition their technologies from the laboratory into a commercial company. Ekso Bionics found that early STTR awards allowed key staff to transition from the university to the company while principals retained their positions on the faculty at University of California, Berkeley. Dr. Allen-Hoffman stated that she was able to act as PI on some key research projects funded by STTR while retaining her post at the University of Wisconsin.

However, the perspectives of university technology transfer offices are not as clear. Although the focus of this study has been on the small business concerns and the agencies that provide STTR funding, a preliminary set of discussions were held with selected technology transfer offices. Perspectives on STTR (and SBIR) vary widely. Some technology transfer offices focus on what might be called Phase 0, that is, preparing academics to submit successful

SBIR/STTR awards or finding alternative funding for very early-stage development. Other technology transfer offices—such as that at the University of Washington—were developing a full set of supports that connected spinoffs from the university to SBIR and STTR across the entire range of program activities and beyond. Other universities had different mechanisms for providing that type of support—for example, the Wisconsin Alumni Research Fund (WARF), in parallel with STTR and SBIR, supported Stratatech’s development of path-breaking treatments for burns.

In some cases, however, technology transfer offices were much less engaged with STTR than with other issues, which stemmed in part from strong university conflict of interest rules. For example, faculty of the Massachusetts Institute of Technology (MIT) are not permitted to use university laboratories to support any research needed by a professor’s for-profit company, and the professor must remain a full-time faculty member. As a result, according to Lita Nelson (director of MIT’s technology transfer office), STTR and SBIR play a very small role in commercialization of MIT technologies.⁹

The issue of conflict of interest has to be addressed at every university, as do university policies on royalties and other payments for IP. As Dr. Ives (CCR) observed, some universities understand how to conduct business with small businesses, and others do not. Demand for high levels of payment up front, immediate reimbursement of patenting expenses, and uncertainty about royalty payments can make universities less attractive partners for small businesses. In contrast, the University of Minnesota has developed a very clear roadmap defining how small businesses can utilize university IP, and as a result the number of agreements with industry partners has grown rapidly since the new program was announced.¹⁰

STTR AND THE NATIONAL LABORATORIES

At DoE, about one-third of STTR awards involve partnerships with National Laboratories. This is not the case for other agencies, although all have STTR awards for which a National Laboratories is the research institution partner.

Linking small businesses and the National Laboratories involves substantial structural difficulties. The latter are usually operated by government contractors—nonprofits such as Battelle—rather than directly by government staff. For the National Laboratories, even a Phase II STTR award is a small amount of money. Thus, while scientific staff may be enthusiastic about working with an small business on an exciting project, administrators may see only the burden rather than the opportunity. Administrative costs for the

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⁹Lita Nelson, director, MIT Technology Licensing Office, interview on September 15, 2015.

¹⁰Jay Schankler, director, University of Minnesota Office of Technology Commercialization, interview on September 15, 2015.

laboratory can effectively swallow all of the funding that might be provided to the laboratory under a Phase I award.

More generally, there are few incentives for National Laboratories to collaborate with small businesses. Dr. Warburton (Xia) said, in the best of cases, the laboratory scientists see STTR as a means of supporting their research program, in exchange for providing the company with technical support. In other cases, laboratory staff see the program as a means to generate funds, and often have no interest in commercial outcomes or even their partner’s interests.

In addition, laboratory procedures are cumbersome. All teaming agreements require a CRADA, and in the case of SBIR-STTR, each phase requires a separate CRADA. Furthermore, although the basic structure of the CRADA almost always follows the standard Stevenson-Wydler model contract, according to Dr. Johnson (Muons), any change to the statement of work must be approved not only by the laboratory staff but also by the DoE cognizant officer who controls laboratory activities on behalf of DoE.

Cumbersome procedures can lead to substantial delays. In fact, as Dr. Johnson pointed out, CRADA approvals can take months. As a result, small companies working with National Laboratories must develop mechanisms for managing substantial volatility in funding flows, which could be disastrous. He also noted that delays by the laboratory in approving a change to the statement of work could result in the laboratory and the small business working on different timelines, and therefore the laboratory being a year behind the agreed timeline.

Working with the National Laboratories presents other challenges as well. Several interviewees explained that, as laboratories are fundamentally research organizations, they work on principles oriented around the free exchange of information and ideas, eventually leading to peer-reviewed publication of scientific and technical advances. The small business may, however, need to maintain closer control of IP developed under an STTR award, either through patents or trade secrets, and this need to control the flow of information can create significant cultural tensions with normal laboratory operations. Dr. Warburton (Xia) noted that each laboratory has its own culture; Xia worked quite successfully with Pacific Northwest National Laboratory and Lawrence Livermore National Laboratory, but not with other laboratories.

Several survey respondents and interviewees noted that STTR agreements with National Laboratories were less enforceable than SBIR subcontracts. Under SBIR, the small business concern can simply refuse to pay or switch to another supplier if the laboratory fails to deliver the technology or work.

Under STTR, the small business concern is committed to the research institution for the entire Phase I/Phase II cycle and has no recourse if the research institution fails to deliver. As Dr. Johnson (Muons) noted, in such circumstances, the small business would have to do the work itself—it could not fire or sanction the research institution. Dr. Warburton (Xia) said that his company’s collaboration with Brookhaven National Laboratory was especially

poor, with no accountability for the project at the laboratory. The Laboratory’s role was to develop a specific mechanism, but it did not deliver.

Still, interviewees and survey respondents provided cases of highly successful STTR partnerships with National Laboratories. These seemed especially likely to succeed if the small business had a deep understanding of the laboratory. In several cases—such as Muons—at least one small business executive had worked for many years within the National Laboratory in question and therefore was highly knowledgeable about laboratory culture and procedures.

Finally, commercialization is not the only positive outcome from STTR. When working with the National Laboratories, some companies view their mission as largely outside of commercialization. Dr. Johnson (Muons) said that his company focuses on serving the technical needs of DoE and in particular the laboratories, much as some SBIR companies serve DoD. He believed, based in part on his extensive experience as a laboratory employee, that a small firm could provide creative solutions that were difficult or impossible inside the laboratories. For example, Dr. Ives (CCR) said that his company partnered with the SLAC National Accelerator Laboratory to improve the performance of cavity resonators used in linear accelerators. Stronger electric fields within the resonators means accelerators can be shorter, potentially saving millions of dollars in construction costs. However, these cost savings did not show up in the commercialization data.

Although this report is not an assessment of the National Laboratories, it is worth noting that some survey respondents see significant changes in the laboratories’ attitudes toward STTR. Dr. Johnson (Muons), for example, observed that the laboratories had traditionally seen STTR (and SBIR) as a tax on research funding, but this perspective has changed in recent years. His view is that the laboratories have become more interested in finding ways to use STTR (and SBIR) awards to meet their technical needs.

STTR IN PERSPECTIVE

The STTR program was created in 1992 to improve the participation of research institutions in small business innovation. Making the case for STTR, Jon Baron noted at the time that “the purpose of the program is to create an effective, systematic vehicle for moving commercially promising ideas from the nation's research institutions to the marketplace.”¹¹

This review of the STTR program is the first to assess the performance of this vehicle since the passage of the legislation. This study finds that while STTR does make the grade in addressing its legislative objectives, its potential to transfer technology is not being fully realized because STTR is hard to use. As information from the case studies, survey responses, and agency interviews

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¹¹Jonathan Baron, “The Small Business Technology Transfer (STTR) program: Converting research into economic strength,” Economic Development Review, 1.4 (Fall 1993):63.

presented in this report show, small business entities often find that partnership requirements for STTR are onerous and agencies find STTR cumbersome to administer.

Small Business Perspectives

The case studies and survey of small businesses underscore contrasting perspectives on the value of the STTR program. Some note that STTR can act as a bridge between research institutions and small business concerns: For example, Dr. Hoffman of Stratatech points out that STTR performs an important bridging function. She adds that this bridging function was not available through SBIR because of the 51 percent requirement for the principal investigator to work at the small business. Other case studies show that STTR strongly encourages a range of linkages between the small business and the research institution. For example, Dr. Ives of Calabazas Creek Research notes that bringing graduate students in at an early stage benefits small businesses in several respects, as they bring new energy and ideas and in some cases could be recruited to become employees at a later stage.

On the other hand, the case studies and survey responses show that, overall, STTR projects are harder for small businesses to manage than SBIR projects. In particular, the mandatory connection with a research institution, required for STTR—and especially the required intellectual property agreement—is a significant challenge for small businesses, where the success of this collaboration depends to a large extent on the commitment of the research institution to the project. This can be especially problematic where the research institution is not familiar with or particularly interested in the STTR mechanism.

Many small businesses find SBIR easier to use than STTR. Referencing 2011-2014 Survey question 80 (See Appendix C), 45 percent of the 211 survey respondents who had sought and received both SBIR and STTR awards, found that STTR was harder to manage than SBIR. Only 2.8 percent found STTR easier to manage than SBIR.

Typically, STTR technologies are at a very early stage of development when it is not clear how commercially successful they will be or what the size of the relevant market will be. Yet some universities require significant royalty payments upfront, as well as payment for patenting costs and other expenses. Small businesses find that this approach to licensing makes it difficult for them to work with universities, making a successful partnership through STTR less likely.

The case studies also illustrate how STTR can be a useful mechanism through which scientists and engineers at National Laboratories can pursue exciting but less advanced ideas. However, small businesses also expressed frustration with the difficulties of holding National Laboratories (as well as other research institutions) accountable for STTR deliverables. Small businesses also highlighted the cultural differences between the more open

culture of some universities and the relatively closed commercial culture private businesses.

Agency Perspectives

The contracting agencies (DoD and NASA) use STTR and SBIR for strategically different purposes than the other three agencies that operate STTR. Program managers at NASA and at DoD (in particular the Army and Navy) see STTR as filling a gap between basic research and acquisition programs. STTR is now used by the Navy and Army as a means of addressing potentially valuable technologies at lower technology readiness levels (TRLs) that are not necessarily aligned immediately with the needs of the acquisition programs. In effect, STTR is used at DoD to undertake preliminary work on technologies that may eventually become extremely valuable. In contrast, the SBIR program is increasingly aligned with the immediate needs of the acquisition programs at DoD.

NASA similarly uses different mechanisms to develop topics for STTR, and strategically focuses STTR on lower technology readiness levels than SBIR. As a result, NASA and DoD program managers view the STTR program as a significant conduit between their agency and leading research universities. Program managers tell us that the STTR program provides a mechanism through which these procurement agencies can explore cutting-edge technologies in a research environment.

In contrast, granting agencies (NSF, NIH, and DoE) see little strategic difference between STTR and SBIR. Their SBIR and STTR programs do not, in practice, focus on different objectives, and to the maximum extent possible managers at these three agencies operate their SBIR and STTR programs in parallel or even a combined entity where feasible. As a result, there is minimal or even zero operational differences in the management of the STTR and SBIR programs at the granting agencies. There are no separate sets of topics, the application process is identical, and award management is essentially identical. DoE goes further in allowing companies to apply simultaneously for SBIR and STTR.

SBIR and University Links

When STTR was established, it was believed that SBIR did not address the need to transfer technologies from universities and other research institutions. Jon Baron argued that “Whereas SBIR exploits commercially promising ideas which originate in the small business community, STTR will use the successful SBIR approach to exploit a vast new reservoir of commercially promising ideas which originate in universities, federal laboratories, and nonprofit research institutions.”¹² At that time, there was no data on the extent of SBIR’s role in reaching out to research institutions.

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¹²Ibid.

Recent assessments by the Academies show that SBIR actively connects innovative small businesses to research institutions. The 2008 summary report on the SBIR program found that 36 percent of survey respondents across the five major agencies reported involvement with a research institution in their SBIR project.¹³ The Academies 2015 report on SBIR/STTR at NIH, reports that 63 percent of SBIR Phase II respondents participating in the NIH SBIR program indicated a university connection.¹⁴ And the Academies 2015 report on SBIR at NSF, finds that 58 percent of SBIR Phase II respondents participating in the NSF SBIR program indicated a university connection.¹⁵

This strong level participation by research institutions in some SBIR programs comes despite the fact that the legislation governing the SBIR program requires that the principal investigator be employed at least 51 percent time at the small business concern. This can cause significant conflict for faculty whose contracts with their institution often require that they be employed at least 51 percent time at the university or laboratory. STTR permits a lower level of employment but, as noted above, poses other obstacles for participation.

To improve the transfer of technologies from research institutions to the marketplace, existing impediments for collaboration between research institutions and small business concerns must be tackled. As discussed in Chapter 6, this would include reducing difficulties in developing and maintaining contractual agreements within STTR. Changes to SBIR, such as selective waivers to the SBIR 51 percent small business employment requirement, may also be considered.

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¹³National Research Council, An Assessment of the SBIR Program. Washington, DC: The National Academies Press, 2008, p. 245.

¹⁴National Academies of Sciences, Engineering, and Medicine, SBIR/STTR at the National Institutes of Health, Washington, DC: The National Academies Press, 2015, p.124 of the pre-publication report.

¹⁵National Academies of Sciences, Engineering and Medicine, SBIR at the National Science Foundation, Washington, DC: The National Academies Press, 2015, p. 100.