FEDERAL TRIANGLE: SBIR Program Should be Renewed
December 1, 2006
A few months ago, this column discussed Technical Readiness Level (TRL) as a means to describe technology maturity and explained the value of this nine-level, standard system.
A few months ago, this column discussed Technical Readiness Level (TRL) as a means to describe technology maturity and explained the value of this nine-level, standard system. Recall that TRL5 is “validation in a relevant environment” and TRL7 is “system demonstration in a real environment.” The transition phase leading to commercial use is TRL6, which is difficult for a small business to do alone. Therefore, it is often called the “valley of death” and is a topic with national importance. Here''s why.
Under President Reagan in 1982, the government created a Small Business Innovation Research (SBIR) program, which is used by 11 federal agencies and funded by allocating 2.5% of all R&D contract dollars to competitive SBIR project selections – $1.134 billion by the Department of Defense alone during fiscal year 2006 just completed. Great national benefits have been derived. Consider that 54.8% of all U.S.-employed scientists and engineers work for small business. Over the last 30 years, 21.8 million jobs were created by small firms (under 20 people), 1.8 million jobs by medium firms (20 to 50) and just 8% of the total by big business. Among federal SBIR contractors, 450,000 people are employed, and these companies have been granted 55,000 patents since the beginning of this form of contracting (1985). Patent productivity is thirteen-fold greater at small companies versus big business, and these little firms employ three times as many practicing scientists and engineers as academia. But only 4.3% of all extramural R&D contract dollars goes to small business (including the 2.5% from SBIR) while 50.3% of funds go to big business, 35.3% to universities, 10% to nonprofit institutions and 1% to states and foreign countries. Among SBIR contractors, about 90% of company assets are intellectual property, which has led to 785 SBIR firms being acquired or merged as a direct result of their creativity during the past 20 years.
To provide a context of size and scope of the DOD annual SBIR program, that $1.134 billion was allocated to 871 topical areas, for which 13,480 proposals were offered and 2,344 initial phase-one contracts awarded ($100,000 maximum) – plus 1,649 follow-on requests and 999 awards made ($750,000 maximum). 32.8% of all phase-one winners had nine or fewer employees, 55.5% had 25 or less and 71.5% had fewer than 50 personnel. And remember that phase-two contracts are only awarded to those with successful results in phase one.
All things considered, it is evident that the SBIR program is one of the most useful and effective government undertakings to generate useful and needed technical advances. However, that “valley of death” thing must be considered. Analysis of investor motivations is instructive. Banks are not in the business of loaning money because new technology is swell, and they always want repayment guarantees and posting collateral that the small businessman does not have. Venture capitalists usually seek more mature endeavors. It is interesting to examine why deals are rejected, realizing that “people problems,” and not technical issues, are paramount. (See table)
A logical bridge builder across the transition abyss, for government and industrial users, is the big business integrator responsible for system-level products. At a recent conference about these topics sponsored by the Small Business Technology Council (www.sbtc.org), we heard from “big business defense contractors.” My impression was that, while they “talk the talk” about needing and using the results of SBIR work, they have little interest to “walk the walk.” Indeed, the big companies are concerned that dealing with a bunch of “flaky inventors” can leave them holding the bag with little recourse to acquire the technology they want. But then it takes them two years to make up their mind to play or not play with the little guys who starve to death waiting for an answer. Big DOD contractors want incentives to use SBIR developments, and infrequently a disincentive is in place – some DOD contracts require meeting targets to use SBIR results, or they lose a small part of their fee. An excellent commentary that provides the U.S. government’s perspective can be found at www.gao.gov/cgi-bin/getrpt?GAO-06-883. Crossing the threshold of using good work to gain commercial value is an imperative step.
My view is that the SBIR program, which will be a subject for 2007 renewal, should be approved. While funding SBIR work is not government''s job, Congress will blow money in less useful ways. This program is a means to get some value for our taxes.