SBIR Gateway

SBIR Insider Newsletter
Trouble in SBA Land
July 2, 2012



Dear SBIR Insider,

After thoroughly studying the SBA's proposed rule (RIN: 3245-AG46), and listening to many experts, insiders, and professionals from other areas of small business, I'm convinced (as are many others) that the SBIR and STTR programs are in great danger.

Long time readers of the SBIR Insider know that we don't like to overburden you with issues and publications, but this edition is the precursor to a very important "call to arms" for our small business community to come together, as you did for SBIR reauthorization. The response time will be short, and the issues complex, and once again we will have to involve Congress.

A critical mass will be required to engage Congress, which will be a tough job in this political climate. However, elections often make candidates "more receptive," and that may include the Obama Administration, whose help may be needed in putting the SBA's wheels back on track to protect and serve America's small high tech innovative businesses.

Once again the Small Business Technology Council (SBTC) is leading the way to help you and other SBIR/STTR participants create the critical mass. For a comprehensive view of the issues, please go to www.sbtc.org and click on:

  1. Congressional Letter RE: SBA Reg Changes [6-29 draft]
  2. Background Paper on proposed SBA Regulation changes

This is not a membership drive and you don't have to be a member to participate in this critical action.

To those who believe the issues we'll discuss below won't apply to you, you are sadly mistaken. The potential fallout (if not fixed) will impact every corner of SBIR/STTR, and also make it much harder, to retain them as small business programs. We will include some examples from small business programs that will knock your socks off!

In this issue:

Foreign Ownership, Small Business Size Standards and Transparency

Be it law or policy, language often misdirects rather than clarifies. In the case of SBA's proposed size standard rule, it does not directly state, but the language allows foreign owned companies a mechanism to compete for SBIR/STTR awards. The relaxed standards for size and affiliations will also allow non-small business, foreign and "domestic" to own SBIR companies.

Also, a loophole is created by the SBA's language that allows participation of VCs, Hedge Funds and Private Equity firms to 100% of SBIR and STTR award dollars, not the carefully worked out (6 years in the making) compromise of 25% for NIH, DOE and NSF, and 15% for the other agencies. Not surprisingly, much of the U.S. VC community loves that part but is against the foreign owned portion, and you can bet they are weighing in on those two points.

Doesn't affect you? Guess again. Can you envision what will happen to the SBIR program if it is actually using tax payer dollars to reduce risk and subsidize foreign entities including the possibility of foreign government owned organizations? Yes, it may create a few jobs, but the IP and spoils will go off shore!

Sounds unbelievable? Buckle up your seat belts and see some actual small business size standard and procurement issues you'd never dream possible. These could take on an SBIR life of their own if the SBA's newly proposed non-transparent provisions are allowed to stand.

Are you aware that a claimed "small minority owned" business received $980m in mostly sole source (no bid) contracts with the U.S. Army? That's great… BUT.. this company, Rosoboronexport, (registered as a small minority owned business) is the Russian arms agency!!

An excellent report of this was in the New York Times on June 18, 2012 by Robb Mandelbaum (see http://boss.blogs.nytimes.com/2012/06/18/russian-arms-dealer-was-classified-as-a-small-business-briefly/ ). Although measures were being taken to correct this "mistake,"at the time of Mandelbaum's article, Rosoboronexport was still listed as "minority owned."

I might add that Rosoboronexport was under American sanctions for its weapons sales to Syria and Iran. Additionally it should be noted that the deal was for the sale of Russian Mi-17 helicopters. Another great article on this can be found at: http://www.iwatchnews.org/2011/08/31/5992/windfalls-war-pentagon-buys-choppers-russia-equip-afghan-iraqi-militaries

Forget about FAR, forget about "Buy American", forget about size standards, but don't forget about the holes that SBA is putting into SBIR eligibility and size standards which will come back to haunt us as people try to exploit the system.

Moving on, did you know that the New York Times was a small business, and therefor eligible for small business set asides? Let's go back to Robb Mandelbaum of the NY Times who wrote about this incident (see http://boss.blogs.nytimes.com/2012/03/15/how-the-new-york-times-became-a-small-business/). They received $56,821 worth of newspaper sales to the United States Military Academy at West Point, N.Y., under the guise of a small business. There is an explanation, but it doesn't help the cause of small business nor the effectiveness of the SBA.

These issues (and many more) were brought to light by Lloyd Chapman, President of the American Small Business League (ASBL) [see www.asbl.com]. Mr. Mandelbaum of the NY Times was not the only reporter to pay heed to Chapman and the ASBL. J.D. Harrison of the Washington Post wrote in his April 4th article on "GSA scandal sheds light on small business contracting fraud:"

"The diversion of small-business contracts to large corporations has gone on for a dozen years, and the only thing the government has done in response is remove the transparency," Lloyd Chapman, president of the American Small Business League, said in an interview.

The federal government has a stated goal of awarding 23 percent of contract dollars every year to small businesses. However, Chapman pointed to his group’s recent analysis of government data that showed that 72 of the 100 companies receiving the highest amount of federal small-business contracts in 2011 were firms that exceeded the Small Business Administration’s size standards for small companies.

Chapman has his detractors who maintain that he overstates his case, but so far we've seen no evidence to support that. In fact, J.D. Harrison's Washington Post article goes on to state:

In October, the SBA’s inspector general published a report acknowledging that small-business contracting was the agency’s most serious management and performance challenge. Specifically, the report stated that "procurement flaws allow large firms to obtain small business awards and agencies to count contracts performed by large firms towards their small business goals."

My question is "Where are the IGs?" They are all geared to clean up what is being treated as the biggest cesspool in government fraud, the SBIR program. Yet where are the convictions from the fraud being committed by large business posturing themselves as small business? The amount of dollars by comparison are likely to be 100 to 1.

You can view Harrison's Washington Post article at:

http://www.washingtonpost.com/politics/gsa-scandal-sheds-light-on-small-business-contracting-fraud/2012/04/03/gIQAJUOtuS_story.html

Proposed Change to Eligibility from "At time of Award" to "At Time of Submission"

In the last issue we included a view on this subject from Dave Metzger, one of the most respected SBIR resources in the land (see http://www.zyn.com/sbir/insider/sb-insider6-19-12.htm#three ).

I can tell you that by far the majority of comments we have received have been with Metzger, against SBA making the change to "at time of submission." In fact this has been echoed at the 3 roundtables hosted by the SBA, Washington, DC, Austin, TX and Boston, MA.

However, I want you to hear a portion of an alternate view in favor of "at time of submission" from Jonathan Pearl, a small business owner in Racine, WI.

I fully support the proposed change to determine eligibility at the time proposal (Section 121.704). Some argue this may be a hurdle to university or large corporation employees who prepare proposals while retaining the comfort and security of a day job, then jump ship or spin off when a proposal is selected. SBIR is strongest in providing support for great ideas that might otherwise languish.

Those committed to building a long-term sustainable business based on innovative R&D are not cowed by the risks involved in striking out on their own, while many of those coming from industry or university settings might simply fold and return to their pre-SBIR status. With determination at time of award: A corporate or university employee may propose an SBIR, get selected, take a leave from their post, conduct a Phase I, then a Phase II. Towards the end of the Phase II, they make some phone calls to their old employer, pitch the new technology to them. They like that the government has paid the salary for a few years and has taken all the risk of the early-stage out of the picture. They agree to acquire the SBIR firm and hire the employee back.

The inventor moves from the comfort of a secure job to the temporary certainty of a government contract or grant. After a few years, the ostensible small business is simply reabsorbed into the large corporate structure. How is that different from the government simply contracting directly with a small division or team at a large prime? I don't believe that that is the intent of the SBIR program.

See http://www.regulations.gov/#!documentDetail;D=SBA-2012-0008-0026 for the full text.

What's Next"

The deadline for comments on the size standard issues we've discussed is July 16, 2012. The SBTC will be publishing their letter in a few days, along with instructions on how you can sign on to the document.

If you read their document and agree, I urge you to sign on to it. All it will take is a simple short email from you giving SBTC your permission to include your name on the letter.

I will be sure to send this information out to you all as soon as they are ready, then the ball is in your court.

Any day now, the SBA will be releasing their proposed policy directive (PD) for the SBIR and STTR programs. This is different from the size standard issues in that it deals with the overall implementation of the programs.

Unlike the size standard issues which won't take effect until a final rule is published (expected near the end of this calendar year), the proposed PD will become effective immediately upon it publishing for comment.

This is most unusual, and in light of how the SBA handled the size standard issues (in many cases deviating away from congressional intent, and sound small business practices) much of the SBIR community is holding its breath.

As with the size standard issues, there will be a 60 day time period to comment on the PD. After digesting much of the PD, we will have some informed comments for you from the community, plus we would like to hear some of yours as well.

Closing Thoughts

At this point I am mystified by what I'm seeing come from the SBA. There are some great people there who work very hard, and get few accolades. But, for reasons known only to those folks that work there, the SBA has had consistently the lowest (or second lowest) employee moral of any government agency.

It's easy to criticize people or an agency, but it is harder to find out why the subject of your criticism occurred. For example, the SBA published in the Federal Register (see https://www.federalregister.gov/articles/2012/05/22/2012-12463/small-business-size-regulations-small-business-innovation-research-sbir-program-and-small-business#h-10 ) that one of the roundtables (Austin, TX) was scheduled for June 19 at 10:00a est. Many found out that it was actually held on June 18, instead (no corrections or apologies offered).

The fact that the original webinar and 2 of the roundtables were listed on the Federal Register, suggested that was the place to learn of any changes or added roundtables.

A third roundtable was added in Boston, but people who didn't have local connections or friends on the inside didn't learn of it, and unlike the other change, it was not published in the federal register.

The last time SBIR size standards were changed was in 2005. At that time the SBA Office of Size Standards, under the direction of Gary Jackson, ran 11 regional hearings, with a stenographer present to record all dialog between stakeholders and the agency. This dialog was published shortly thereafter. You can see the front work that was done by visiting http://www.zyn.com/sbir/bnews2005.htm#sba05-2 Also the format of how the SBIR size standards were done at that time can be seen at http://www.zyn.com/sbir/sba/

Gary Jackson has since retired and his former assistant Carl Jordan succeeded him. Did Jordan not have the enthusiasm to do what Jackson did for developing SBIR size standards, or did top level management defer and/or reduce the size standard tasks to someone else?

Whatever the case, it doesn't look good for SBA, and it doesn't serve the small business community well.

We'll be back soon with the SBTC letter information.

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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