Dear SBIR Insider,
No, you didn't fall off the list, your SBIR Insider has been silent since February 28, 2013. There is a lot of SBIR news to report but first I owe you an explanation of my absence.
Those of you who are "mature" enough to remember the ever garrulous Howard Cosell, may recall the Larry Holmes / Tex Cobb fight in 1982 that ended Cosell's illustrious boxing commentary career. Because the fight was so one sided, potentially tragic, a public mutilation, and just plain ugly (with the referee refusing to stop the fight), Cosell became so incensed that he fell mute from the middle of the fight on, never to announce another bout.
Looking at the state of congress, the administration, the news media, the networks, the agencies, and yes, even ourselves, I came to understand what Cosell experienced. I didn't plan to go silent, I even wrote to you many times, but didn't publish those because you deserved better than the vitriol that emanated from my fingertips. In spite of being silent, our work did continue to support the SBIR/STTR programs.
In this issue we will address how the choices (or in some case non-choices) of our government are affecting the SBIR/STTR programs, including small business, the agencies, primes, VC, and academia.
In this issue:
Effects of Sequestration and Furloughs on SBIR
One of the Congressional goals in SBIR reauthorization was to speed up the process from solicitation to award. However, this was offset by significant additional overhead brought about by new rules and regulations relating to items such as ownership/VC, fraud, waste and abuse procedures, commercialization rates of awardees, and much more.
Implementing these procedures may have sounded simple, but in actuality they were not. Just looking at the challenges of IT infrastructure, modification and expansion, it was taking far more time and resources than some expected. Consequently not all of the updated procedures of reauthorization are being implemented at this time. Each agency is handling this in its own way.
Sequestration has affected the R&D budgets in the agencies, and not on a linear scale. In spite of congress increasing the SBIR allocation each year, the actual dollar amount available for awards has diminished, or at best is stagnant.
Furloughs for government employees are now a reality. In general many of our federal employees (including those who work in SBIR), are ordered to take Friday off without pay, thereby reducing the worker's time and pay by 20%. (This is generally for an 11 week period)
Not only does this affect the volume work that is being done but it is also affecting employee moral (as one would expect). I've seen several federal employee "out of office" auto-response emails stating something to the effect of "I'm out of the office due to government mandated furloughs. If you need immediate help, contact your congressman who unlike me is still getting paid."
To make maters worse, the agencies forbid these workers to take their work home, or attend to any of their tasks on their own time. Yes, some federal employees are so committed to their projects that they would actually take work home. In spite of that, it is clear that the agencies want projects to be delayed or have them fail, in order to get congress off their posterior to devise a better way to address these budgets and the needed cuts in a targeted manor.
All of this is slowing down the award process from proposal review to contract/grant award. This also puts a great burden on the small businesses who have reserved their resources to make good on commitments for their potential award. In spite of the challenges, awards are being made and the programs are functioning.
Does the Agency want to make an Award to my Company or Not?
This is a question we are receiving somewhat frequently from our small business readers. Quoting from the small businesses; "The agency says they like our proposal and they want to fund it, but they don't have the funds at the moment, but if they get the funds, they say they will make the award. Are they jerking me around?"
The answer in almost 99% of these cases is "NO," the agency isn't jerking you around. An agency traditionally has no problem telling you "sorry, we're not interested," or "your proposal was not selected for funding." The budget problems previously described result in a somewhat unsure level of funding. If/when the agency finds more SBIR funds (which often happens), they want to fund you, and often do.
On the other hand, a small business can't keep their proposal commitments out there for an indefinite period of time, so this creates an extreme hardship for the small business and their partners.
Is the Majority VC Ownership Issue Settled?
For the most part, yes. There are now some extra steps necessary for all small businesses participating in SBIR/STTR. Your company must register (or be registered) in the SBA's SBIR company registry database. This database includes information about your company's ownership and commercialization performance. You can find information on this at https://www.sbir.gov/registration If your ownership structure meets the statutory requirements, the SBA lists you as an eligible company.
Congress gave the agencies the discretion to allow majority VC ownership (actually multiple VCs, hedge funds, and private equity firms). To date, only the NIH has "opted in" for this, and that just started recently with the May 30, 2013 reissuing of their omnibus SBIR PHS 2013-02 solicitation. Note: The VC inclusion is ONLY for the NIH components (not CDC, FDA etc), and is ONLY for SBIR, not STTR. Read their updated solicitation carefully.
Flexibility to Exceed Award Amounts: The initial attraction of VCs to the SBIR program was in the biotech community. That was bolstered by an environment in the NIH (circa 2003) of what two former SBIR superstars (Dr. Chris Busch and Mr. Gene Watson) termed "Jumbo Awards," whereby the NIH made awards far beyond the program's guidelines. A few years back a GAO employee once corrected us when I reported an NIH $8m SBIR phase II. He told me it was actually a $9.2m fast track SBIR, and of course, that amount was an exception, even for the NIH's Jumbo Awards of that period.
Although the SBIR reauthorization opened the doors for majority ownership of a small business by multiple VCs, congress carefully put the kibosh on "Jumbo Awards" and limited an agency to exceeding the new guidelines by 50% (i.e. $225k phase I / $1.5m phase II).
However, an agency (with a little creative measure) can exceed those numbers, but the agency must first request a waiver from the SBA. The request must be topic specific and the agency must provide evidence showing that the limitations on the award size will interfere with its mission and that the research costs for the topic area differ significantly from other areas.
In spite of that provision. The NIH believes it needs more flexibility to award higher amounts in SBIR and that hasn't passed muster with SBA so far. It has been said that NIH is seeking other avenues to try and gain traction to raise their award threshold. We'll keep you informed.
Conferences, Federal Employees, and the News Media
It's well known that some agencies and their personnel put on some outrageous conferences (not SBIR) that were totally indefensible and a disgrace to the industry. However, between the knee jerk reaction of the agencies and congress, coupled with the news media's appetite to over-sensationalize the situation as if it were pervasive in the industry, almost all government conferences became viewed as a pariah and therefor severely restricted.
These restrictions require the hosts (and even the federal attendees) to fill out complex forms of justification that rival IRS code, and even then they are most likely to be rejected. The news media delights in obtaining pictures and video of federal employees attending conferences while the media taints the event as feds getting a vacation at taxpayers expense. This puts additional pressure on the agencies to avoid conferences.
It's not strictly a matter of budget cuts because we have seen numerous times where an agency denies an employee to go to a conference that supports their mission, EVEN if the event is in their own city requiring no travel and no registration fee!
It was a virtual miracle that we had a National SBIR Conference this year. It was held in DC partially because most of your SBIR program managers and their support teams were not allowed to travel to such an event. But since this was considered "local" to many of the agencies, most of the agencies could attend (but not all).
The National SBIR Conference is the most important event for new and intermediate companies wanting to participate in SBIR. These conferences are essential in building new relationships, partnering opportunities, training and helping the small business to better understand the government's SBIR needs.
The logistical problems, as well as agency participation challenges were immense. Kudo's go to three people who without their vision, perseverance and dedication, the event would not have happened. They are John Williams (Director Navy SBIR/STTR programs), Jennifer Rocha and Matt Laudon (TechConnect). Of course their staffs deserve credit also for pulling the conference off. The conference was a great success in spite of the short time available to make it happen.
On the other hand, supporting the aforementioned claim of conference obliteration, the DoD has now cancelled its annual Beyond Phase II conference scheduled for this fall in spite of the cost/benefit ratio being positive. This was an important conference for the mid-level to expert SBIR companies and the primes. It will be missed.
In contrast, after a lot of evaluation and consideration, the Navy held its annual Navy Opportunity Forum in Arlington VA. This event was a culmination of the Navy's Transition Assistance Program (TAP) and a showcase to highlight advanced technologies and initiate relationships with small advanced technology firms.
You simply cannot achieve the connection, goals, business and partnering opportunities, and interaction of thoughts and ideas via a webinar. It requires personal interaction. In fact, at the Forum, Rear Admiral Mathew Klunder, Chief of Naval Research, was not content with speaking from behind a podium, he went out in the audience, spoke directly to the people, reached out and touched them, and had real time interactions with them. It was a delight for those attending, and he made you want to try harder to achieve your (and the Navy's) goals.
To our news media, congressional staffers and agency readers, I challenge you to go to www.navysbir.com and click on the Transition Assistance Program (Navy Opportunity Forum) video and tell me if any of that looks like a vacation. I think you'll see that it is important to bring people together in conferences like this.
We should urge our agencies to support these "reasonable" SBIR conferences, not just national, but also regional. Webinars are often very good and the SBA is doing a fine job with their monthly SBIR webinars. Also several 3rd party providers and states are hosting their own webinars, most of them are good. However, a webinar is not a substitute for a real person-to-person conference.
DCAA, IRS Gestapo? [A threat to Small Business]
As a small business you may get an IRS audit. If you are a small business with a Phase II contract, you will most likely be audited by the Defense Contract Audit Agency (DCAA) which is independent from the IRS.
The DCAA provides an important function within government to audit costs on government contracts (primarily but not totally DoD). DCAA is supposed to follow, and spread the word on "Generally Accepted Government Auditing Standards." However, reports to your Insider suggest that the DCAA often act more like the "SS" than the "US".
The problem that I'm hearing from small businesses participating in SBIR is that DCAA has a large corporate mentality that they apply to small businesses who don't have multitudes of internal auditors. This DCAA methodology creates a disproportionate regulatory burden on small businesses who don't have the resources to fight or mitigate the problem. In fact it appears as if the DCAA has little to no interest in mitigation.
Why should they? It certainly appears from actions and reports that DCAA rates their audits (and auditors) on percentage of dollars collected from audits. They can (and have) changed their mind in midstream, disallowing many charges that have been allowed for years. As a result, we are now seeing several of our SBIR companies facing severe downsizing, or perhaps even going out of business.
Most of us want to have reasonable regulatory compliance and we don't want to see our government ripped off, but we are hearing of auditors that are totally unreasonable and unwilling to accept anything but their own decision. The more they extract from the small business, the better it is for the auditor and the DCAA, but not the country. The small business has nowhere to go.
Jere Glover, former Chief Counsel for Advocacy at SBA told us he'd rather deal with the IRS than the DCAA. Even the IRS has a "Taxpayer Advocate" and it's well displayed on their web site at http://www.irs.gov/Help-&-Resources In fact, their policy states: "If you have an ongoing issue with the IRS that has not been resolved through normal processes, or you have suffered, or are about to suffer a significant hardship/economic burden as a result of the administration of the tax laws, contact the Taxpayer Advocate Service."
DCAA has no guidance at all concerning disputes. In fact, when DCAA disagrees with the findings of a DoDIG report on their procedures , DCAA simply states "Nonconcur" and state what they are still going to do. There needs to be better oversight.
Because of the urgency of this situation, a joint committee has been formed by the Small Business Technology Council (SBTC) and the National Defense Industrial Association (NDIA). They need more companies to step forward with their DCAA problems/experiences so they can try to get some situations resolved for small businesses.
If you are interested in helping, finding out more and/or talking with the joint committee folks, please send an email to me at [email protected] with your contact information and I'll respond with the joint committee leader's contact info.
SBIR Alerting Service to Close Down
After almost 2 decades of important and excellent service to the SBIR community, Pacific Northwest National Laboratory's (PNNL) SBIR Alerting Service, will cease publication on September 30, 2013. The decision was based on budget cuts at their facility. Believe me, just because a publication is free to you, it can be very costly to the publisher. It's a lot of work.
The Tibbetts Award winning team of Gary Spanner and Richard Fowler from the Economic Development Office of PNNL have consistently produced their high quality bi-weekly email alert concentrating on SBIR and STTR solicitation announcements, news and information. They have been like clockwork.
Also of note in the Spanner/Flowler team is Jim Greenwood of the Greenwood Consulting Group, Inc. Jim has been the author of countless advice articles within their publication and never tried to leverage the publication to sell his services. Jim is an excellent SBIR resource and a true gentleman of the industry.
It is not known at this time if the service will be taken over. The SBIR Insider has received more than a dozen emails asking us to take over the publication but I talked with Gary Spanner and told him that we would support whatever they decided to do with the publication. I want them to do what they feel is best.
If we were to take it over, it would not be part of the SBIR Insider. It would be a separate free publication published bi-weekly trying to keep the same standards as Gary and Richard have had. If they ever get their budget back, I would want to transfer it back to them, at their discretion. The email list would remain protected just as we have done with the SBIR Insider for the last 20 years.
In February we told you that SBA Administrator Karen Mills announced she would be leaving SBA as soon as they found a replacement. To date a replacement has not been found, and Administrator Mills has announced that she is leaving the SBA effective August 31, 2013. Still no word of a replacement. The replacement will require Senate confirmation, and we know how that is working….
Over the period of her tenure at SBA, Mills became more and more of an SBIR fan, and she was just glowing at the Tibbetts Awards in a manner we hadn't seen before. More on that in the next issue.
Last night the House passed their version of the Defense Appropriations Bill, H. R. 2397. This would fund the DoD through the end of FY-2014 (September 30, 2014). We'll see what the Senate does in return, but I wouldn't hold my breath at this point.
Thanks for understanding (or trying to understand) our absence.
40 Alderwood Dr.
Sequim, WA 98382
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