A New Year's resolution for the SBIR program

While many in the SBIR community are celebrating the five-year extensions of the Small Business Innovative Research (SBIR) & Small Business Technology Transfer (STTR) programs as part of the National Defense Authorization Act for Fiscal Year 2017, it is time to refocus the programs as catalysts of economic growth, instead of an entitlement programs! In 2015, the Small Business Administration (SBA) announced a new slogan for the SBIR program - “America’s Seed Fund”. Perhaps 2017 will be the year that we start to use the SBIR/STTR program like a seed fund.

You have probably heard that Qualcomm (a $97.5-Billion-dollar company) received 4 Phase II SBIR awards in their early days! You may have also heard that Symantec, iRobot, or Intuitive Surgical had a few SBIR awards in their early days. And then you thought – what a great program. But did anyone ever tell you that that the Physical Optics Corporation has won 1,223 Phase I and 453 Phase II awards worth over $435 million. Oh…you have never heard of the Physical Optics Corporation??? Ok, well how about Physical Sciences, Inc, who has won 824 Phase I awards and 343 Phase II awards worth over $323 million??? No, then what about Creare who has won 672 Phase I awards and 355 Phase II awards worth over $304 million – surely you have heard of them??? Intelligent Automation (629 Phase I awards, 227 Phase II worth $226 million)??? Radiation Monitoring Devices (503 Phase I awards, 250 Phase II awards worth over $234M??? I give up!!!

The point is that this is not seed funding – unless your planting the seeds of entitlement! These companies have been receiving SBIR/STTR funding for over 30 years. This is not a seed investment! This is not the kind of growth that the SBIR/STTR programs should be funding. In fact, 28% of Phase II awards have gone to firms that have 25 or more Phase II awards. To be clear, most companies are using the program for its proper intent. But 28% of a $2.5 Billion annually is serious waste! A number of firms are grossly misusing the program. Reallocating that 28% to firms who are trying to grow to become sustainable companies will have tremendous economic benefits.

It is in the best interest on the nation to create commonsense limits on the number of awards that a company can receive. First, it is important to recognize many of these projects are very-high risk endeavors and it is legitimate to receive multiple Phase II awards. For instance, iRobot received 10 Phase II awards on the way to becoming a $1 Billion company. At the same time, it is safe to say that if a firm has received 25 Phase II SBIR/STTR awards and cannot fund its own R&D – it’s quite likely it never will be able to. At that point, the federal government is not stimulating innovation – it is engaging in corporate welfare. Maybe that number should be 20 or 15 – but let’s start somewhere.

It’s time to take off the training wheels. We don’t allow welfare recipients to receive funding perpetually – we shouldn’t allow businesses to either. The programs need a structure that encourages innovation, enables partnership with private capital, creates a public/private partnership and enables a transition from an R&D company to a self-sustaining part of our economy.

[Note: The next two paragraphs are for the policy geeks – everyone else feel free to skip ahead]

Placing a limit on the number of awards that a firm can receive did not received much attention in the last round of reauthorization. Partially because the matter was addressed in a highly misleading manner in the National Research Council’s 2008 “Assessment of the SBIR Program”. The authors concluded that multiple award winners were not a significant problem as many of the top awardees had high Commercialization Achievement Scores based on commercial sales and additional investment. The dirty little secret about this “investment” is that it is often follow-on research contracts from the federal government. Consider the case of Creare, Inc, which at the time of the National Research Council report had received 190 Phase II awards (and since then another 165 Phase II awards). Only two of these had received over $10 million in sales and investment – almost all of which is investment from follow on federal R&D contracts (see data below from National Research Council report). 

Project: Reliable Long-Lifetime Closed-Cycle Cryocooler for Space
Sales: 1,212,529
Investment: 39,417,294
Project:  Three-Phase Inverter for High Speed Motor Drive
Sales: 37,403
Investment: 15,662,926

Surprisingly, Creare scored a perfect 100 on the Commercialization Achievement Index. A Phase II award represents almost $1 million-dollar investment in taxpayer dollars. Taxpayers should not be giving more funds to a firm that has received 190 investments of ~$1 million, of which only two went on to receive more than $10 million in follow-on sales and investment – especially considering the fact that both these projects where hideous failures in any sane framework of business success. A project with $40 million in investment and $1 million in sales is no way to run a business.

[Note: End of policy geek speak]

How does this happen??? If you are an idealist, you can just think that this problem has just slipped through the cracks in Congress. Or if you are a cynic, you might just follow the money and find interesting coincidences like the Ranking Democrat on the U.S. Committee on Small Business and Entrepreneurship is Senator Jeanne Shaheen from New Hampshire and Creare has received 355 of 647 Phase II awards (55%) ever (over the 30+ years of the SBIR program) granted to firms from New Hampshire. I’ll let you decide whether to be an idealist or a cynic.

So here is the perfect New Year’s Resolution for everyone to fix this problem.

  1. If you are a Member of Congress – Just fix this. It won’t cost a dime of new money and it will add significant economic growth. It doesn’t need to be a 1000 page law. Here I will give you a draft. “The SBIR/STTR reform Act of 2017. No company may receive more than 25 SBIR awards.” Bam! Done!
  2. If you are Donald Trump (hey…I hear he likes social media #DonaldTrump) – sign above law.
  3. If you run a Federal SBIR/STTR program – Stop funding SBIR mills!!!! (Hats off the program managers at the National Science Foundation for doing a great job of not providing funding to serial SBIR winners).
  4. If you are an employee of an SBIR mill – seek redemption. Quit your job and start a real start-up.
  5. If you are in a start-up dedicated to bringing serious innovation to market. Resolve to be better than the SBIR mills. Put in better proposals and outcompete the SBIR mills! Don’t ever become an SBIR mill.
  6. If you are anybody else who cares about economic growth and innovation – write your congressman and/or senator and demand change!  Share this article with others!