SBIR Gateway

SBIR Insider Newsletter
April 5, 2009 Edition



Dear SBIR Gateway Insider,

We have an interesting potpourri of SBIR related topics for you including extended coverage of the Senate Committee on Small Business & Entrepreneurship's (SBE) confirmation hearing for SBA Administrator nominee Karen Mills. This is notable because the hearing demonstrated that many of your calls and comments of concern about the SBIR program have gotten through to important Senators.

It also showed that Ms. Mills is familiar with some of the important SBIR issues, not the least of which is SBIR eligibility for entities that are majority owned and controlled by Venture Capital Companies/Syndicates.

Ms. Mills, a VC and CEO of a private equity firm, has now been confirmed by the full Senate and will assume the role of SBA Administrator soon.

In this issue:

Four New England Congressmen Seek To Preserve SBIR Eligibility Requirements

The SBIR program continues to get accolades for its success and the fact that it meets and accomplishes its goals and congressional mandates. Then why is SBIR reauthorization so tough?

By far, the most talked about and contentious issue in SBIR reauthorization is that of small business eligibility (the VC majority ownership & control issue). The view held by the House Small Business Committee (SBC) leadership and some on the House Science & Technology Committee is to change the small business size standard to allow VC ownership & control (sometimes disguised under the term of "VC backed small business").

This deeply concerned four SBIR champion Congressional Representatives, Edward Markey (D-MA), Niki Tsongas (D-MA), Peter Welch (D-VT) and Paul Hodes (D-NH). They have circulated a "Dear Colleague" letter throughout the House to get cosigners for a letter they are sending to House Small Business Committee (SBC) chair, Nydia Velazquez, supporting SBIR reauthorization and requesting that eligibility requirements remain the same. The letter to Velazquez states:

"As you continue your work on the reauthorization of the Small Business Act, we are writing to seek your support for the preservation of the eligibility requirements in the current statute for the Small Business Innovative Research (SBIR) program. These requirements are focused on funding meritorious projects submitted by genuinely small companies, and we believe that they have proven effective in accomplishing the goals of the. SBIR program, namely to ensure that our nation's small, high-tech, innovative businesses are a significant part of the federal government's research and development efforts."

The Small Business Technology Council (SBTC) has an action plan to assist in obtaining additional support for the letter to Velazquez. The SBTC action plan outlines how you can make the biggest impact on helping these Representatives help you. The file can be found at: http://www.zyn.com/sbir/insider/SBTC_SBIR_Legislative_Action_Guidelines.pdf

The bottom line is for you to contact your Representative and ask them to be a co-signer of this letter. They can contact Mitchell Robinson with Rep. Ed Markey's office at 5-2836, Mitchell.Robinson@mail.house.gov or Kate Lynch with Rep. Tsongas at 5-3411, Kate.Lynch@mail.house.gov.

They need to complete this task by Friday, April 10.

The SBA, Federal Procurement, And The "Greater Small Business Community"

The SBIR program is basically a small business set aside of 2.5% of a federal agency's extramural R&D budget (agencies with less than a $100M R&D budget are exempt). This equates to about 2.5 billion dollars per year and includes 11 agencies.

The greater small business community (all small businesses doing business with the federal government) is supposed to have a 23% set aside for all federal government contracting. This amounts to almost 100 billion dollars per year.

It is estimated that every year, tens of billions of these small business dollars are being diverted from small business to large corporations (many fortune 500) posing as small businesses. According to Lloyd Chapman of the American Small Business League (www.asbl.com), misrepresenting yourself as a small business is a felony, yet the SBA has never prosecuted a single firm.

In the entire history of the SBA, majority ownership and control of a small business by a VC or VC syndicate made the entity ineligible for federal small business set aside $$$, and that includes SBIR. However, for the last several years, powerful lobbyists from the large financial community have worked both sides of the aisle to pressure congress to "modernize" small business law to allow large ventures to own and control small businesses.

In 2007, almost a year before attempting SBIR reauthorization, the House leadership and the Small Business Committee pushed to get legislation passed to allow a small business to be majority owned and controlled by a VC or VC syndicate, and compete for ALL small business set asides (H.R.3567). That bill overwhelmingly passed the House with 325 Ayes and 72 Nays. Fortunately the Senate didn't concur, and the bill died.

In 2008, the same people tried the same thing in the House for SBIR reauthorization (H.R. 5819). Although this bill was limited to SBIR only, the greater small business community feared an exception for SBIR would create a slippery slope for all federal small business contracting. Nevertheless, the big money people had their way with the House and the vote was even more overwhelming with 368 Ayes and 43 Nays. Once again the Senate did not concur and the bill died.

Consequently, many in the greater small business community are fearful and would not be supportive of an SBIR reauthorization compromise on the VC issue. Many of these folk are already uncomfortable with the new SBA administrator coming from the ranks of large venture capitalists.

Senate Confirms Karen Mills As SBA Administrator

The Senate Committee on Small Business & Entrepreneurship (SBE) held a confirmation hearing on April 1, 2009 for the appointment of Karen Gordon Mills to be the next Administrator of the Small Business Administration (SBA). Ms. Mills' background is executive management of private equity investments, managing director of Solera Capital, NY based VC, and lead director for Scotts Miracle-Gro. The SBE unanimously confirmed Ms. Mills, and full Senate confirmation took place by unanimous consent in the late hours of April 3 following the Senate's exciting "Voterama."

In spite of Mills' congressional support, there is a great deal of "suspicion" in parts of the small business community (including the SBIR community) due to Ms. Mills background and ties to large entity finance and VC communities. There was similar concern when Steven Preston was brought in from ServiceMaster to head the SBA in June of 2006, but by most accounts, he received reasonably high marks for his work at SBA, and although he was from big business, he was opposed to the BIO/NVCA VC SBIR initiatives.

Although SBIR is such a tiny portion of the SBA's work, there was some interesting SBIR rhetoric in Mills' hearing. We'll highlight some of that below and provide some SBIR specific video clips of the hearing on our sister site www.sbir.tv

Due to the fact that the first week of April, was very busy for the Senate, and that Mills was considered an excellent choice by most on the committee, the confirmation hearing was not well attended. Senators taking part in the questioning were, committee chair Mary Landrieu (D-LA); ranking member Olympia Snowe (R-ME); Evan Bayh (D-IN); Benjamin L. Cardin (D-MD); Kay Hagan (D-NC); and Jeanne Shaheen (D-NH).

Shaheen:What can the SBA do to make sure that those government contracts really do go to small business?
Mills:I'm a believer in the government contracting program for small business because I believe it is a win – win situation. It is very good for small businesses to have that set of contracts that allows them to get to the next level and after that they can build their commercial business, their export business. And I believe it is good also for the purchaser of those goods and services because when you contract with the small business you can get the most innovative products, you can get the CEO and the leadership to work with you, and many woman owned business and minority owned businesses get a good start in this as well…. So, I think the program this is win-win, I think the programs are for small business they are not for big business, so we have to insure that we do not have slippage and that we monitor and have transparency about who's getting the contracts and make sure that the small business set aside is for small business.

Shaheen:The concern among some of those businesses in New Hampshire is, What is your commitment to support long term reauthorization of the SBIR program in its current form which they, and I think many people would agree has been very successful?

Mills:I have to agree and I know you just had many specifics, but I have to say a couple more… because this is an extraordinarily successful program, and over its time, small businesses in general make 12 to 14 times the number of patents per employee as large companies. This is where innovation comes from. Over 50% of the SBIR phase II companies have a product that goes to commercialization, so how do we turn innovation into jobs? SBIR plays a critical role.

And there is also data, I know the National Academies has a very good study out recently supporting this program and saying it meets the objectives of congress and also has very strong success in creating innovation and creating jobs, but the great metric that says the SBIR companies do 4 times the number of jobs and grow 4 times as fast as in a comparable sample. That was a separate study that I thought was really powerful.

So we would want to […].say that the form that it is in now that is distributed into agencies as some flexibility on how each agency does it, and is competitive, is also very powerful. So I would be very supportive of continuing this program.

Shaheen:I'm sure you are aware that one of the concerns about the program ongoing is whether small businesses in which VC have more than a 49% stake, should be eligible for SBIR. Given your background I'm sure you have particular thoughts about that particular provision. Can you reassure people who may be concerned about changes there, what you would support relative to that issue?

Mills:Yes, I can. I think there are two important principles that we have to think about. The first is that this program is for small businesses. It's not, once again for big businesses and we can't do something that crowds out the small business. On the other hand, the second principle is that we want the very best businesses. So we don't want to somehow, because of arbitrarily or in some way restrict ourselves from small businesses who somehow get excluded, but they are some of the most promising business and should be included. So in those two principles I think they are using those principles, I don't have a fixed view, but I do know that the National Academies is coming out with a suggestion and that this committee has in the past looked at various suggestions which include thresholds of restricting what percentage of the allocations in various areas can go to venture capital majority owned businesses and thereby not have the crowing out program. So I do not have a fixed point of view but I do those two principles should guide us as we think it through.

Bayh:There is a proposal to try and double the amount of money that goes to the set asides by government entities for [SBIR] from 2.5% to 5%. To really focus on these most rapidly growing companies where a lot of the innovation does take place. I'd like to ask if you have an opinion about that proposal to double the amount of resources going to SBIR?

Mills:As I said earlier, the SBIR is an incredibly successful program and it does seem that we could have greater capacity [...] that we could use greater capacity in many of the areas. So it would be something that I would like to work with the committee on and see what the appropriate level would be.

Cardin:Let me put my expectation on the table. That we will have an Administrator who will be the advocate for small business, not just within the administration, but with congress. That you will not only look for ways to use the tools you have available directly [making loans] but also will work aggressively with federal agencies on the procurement laws.

Hayden:My question relates to how you plan to work with Dept of HHS to insure that the stimulus funding provided recently by congress for critical health research is utilized in keeping with SBIR and STTR requirements.

Mills:As I understand it, that the new funding does not have the same SBIR set aside, and one of those things before us is now to try and do what I talked about, to show in those competitions that the benefits of including small businesses proactively you know the numbers are very strong in terms of patent production, they really lead the commercialization… One of the things we care about… when we care about job creation is not just to spend money in research and development but actually take it through commercialization and create jobs. And that's the place that small companies actually have a very important role. So I think in this case it will be a matter of leveraging some of the existing programs that are out there in the infrastructure that's out there already for SBIR which allows small companies to get support and access to some of these grants and to know that they exist even if there is no formal set aside.

HHS/NIH Responds To Inquiry About NIH SBIR ARRA (Stimulus) Exemption

In our March 11, 2009 issue we noted that the Senators Mary Landrieu and Olympia Snowe (chair and ranking member of the Senate SBE) sent a letter to Charles E. Johnson, Acting Secretary of Health and Human Services (the parent of NIH), to express their concern over the $8 billion in ARRA funding exempted from SBIR.

The letter was answered by Raynard Kington, acting director for the NIH. You can read a copy of this letter at www.zyn.com/sbir/insider/hhs_response_sbe09.pdf . Fred Patterson (The SBIR Coach) posted a very interesting response to the NIH letter on his blog at http://sbircoach.blogspot.com Look for his April 3, 2009 posting. It's definitely worth reading.

A notable comment by Dr. Kington was:

"Although the number of applications for the program has dropped significantly over the years (about 40 percent since FY 2004) resulting in a climbing success rate, we expect to have sufficient high-quality applications to expend these funds appropriately."

Some in the NIH suggested that the drop in SBIR applications since FY-2003 was due to the SBA changing the rules on VC ownership. There are two myths to this claim. Myth #1 – The SBA didn't change the rules, they merely enforced them; Myth #2 – It is unsupportable that there were enough companies excluded to cause the 40% drop Dr. Kington refers to.

What I can tell you is that many small businesses tell us that the NIH SBIR application process is far too cumbersome, complex, and expensive for companies new to SBIR. As far back as 2004, I recall Dr. Chris Busch (one of the top and most respected SBIR consultants, and himself a great SBIR success) advising small businesses in the rural states, not to waste their time and resources applying to the NIH SBIR.

One of the important goals of SBIR was keeping the phase I application process as simple as possible for small businesses. This is a tall order, but one may ask "Why are we not seeing similar drops in applications within the other SBIR agency programs?"

NIST Announces FY-2009 Technology Innovation Program (TIP)

The National Institute of Standards & Technology (NIST) has announced its 2009 Technology R&D Competition to Address Civil Infrastructure, and Manufacturing. TIP is the program that morphed from NIST's former Advanced Technology Program (ATP) and the venerable Marc Stanley remains at the helm as TIP Director.

In the area of Manufacturing, TIP officials plan to allocate approximately $15 million in first-year funding for R&D projects in manufacturing that would enable better, more cost-effective use of advanced materials in innovative products.

In the area of Civil Infrastructure, TIP officials plan to allocate approximately $10 million in first-year funding for the civil infrastructure category of the competition.

Small and medium-sized businesses, institutions of higher education, nonprofit research organizations and national laboratories are eligible for TIP support, with some restrictions on the size of companies, ownership and the types of research that are eligible. TIP awards are limited to no more than $3 million total over three years for a single company project and no more than $9 million total over five years for a joint venture.

NIST is holding a series of four proposers' conferences, the first of which starts on April 8, at NIST's HQ in Gaithersburg, MD. This conference will be webcast.

For more information visit NIST's TIP web site at http://www.nist.gov/tip/

Congress has left the building…. they're off for their Easter break and will be in their "State Work Period" mode until they reconvene on April 20. You may have an opportunity to meet with them, or voice your opinion at one of their "town halls" in your area. Check it out.

Sincerely,

Rick

Rick Shindell
SBIR Gateway
Zyn Systems
40 Alderwood Dr.
Sequim, WA 98382
360-681-4123
rick@zyn.com
www.zyn.com/sbir

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