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STRENGTHENING PARTICIPATION OF SMALL

BUSINESSES IN FEDERAL CONTRACTING AND

INNOVATION RESEARCH PROGRAMS

HEARING

BEFORE THE

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JULY 12, 2006

Printed for the Committee on Small Business and Entrepreneurship

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/senate

(II)

COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP

ONE HUNDRED NINTH CONGRESS

OLYMPIA J. SNOWE, Maine, Chair

CHRISTOPHER S. BOND, Missouri

CONRAD BURNS, Montana

GEORGE ALLEN, Virginia

NORM COLEMAN, Minnesota

JOHN THUNE, South Dakota

JOHNNY ISAKSON, Georgia

DAVID VITTER, Louisiana

MICHAEL B. ENZI, Wyoming

JOHN CORNYN, Texas

JOHN F. KERRY, Massachusetts

CARL LEVIN, Michigan

TOM HARKIN, Iowa

JOSEPH I. LIEBERMAN, Connecticut

MARY L. LANDRIEU, Louisiana

MARIA CANTWELL, Washington

EVAN BAYH, Indiana

MARK L. PRYOR, Arkansas

WESTON J. COULAM, Staff Director

NAOMI BAUM, Democratic Staff Director

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CONTENTS

OPENING STATEMENTS

Page

Bond, The Honorable Christopher S., a United States Senator from Missouri . 6

Coleman, The Honorable Norm, a United States Senator from Minnesota ....... 15

Enzi, The Honorable Michael, a United States Senator from Wyoming ............. 22

Isakson, The Honorable Johnny, a United States Senator from Georgia ........... 31

Kerry, The Honorable John F., Ranking Member, and a United States Senator from Massachussetts .................................................................................... 3

Snowe, The Honorable Olympia J., Chair, and a United States Senator from

Maine .................................................................................................................... 1

Vitter, The Honorable David, a United States Senator from Louisiana ............. 30

WITNESS TESTIMONY

Bigger, Thomas J., president and chief executive officer, Paratek Pharmaceuticals ................................................................................................................ 107

Sims, Steven, vice president, Field Operations Program, National Minority

Supplier Development Council ............................................................................ 56

Squillante, Dr. Michael, chairman, Small Business Technology Council, New

England Innovation Alliance ............................................................................... 93

Thorson, The Honorable Eric M., Inspector General, U.S. Small Business

Administration ..................................................................................................... 32

Watson, Eugene, program manager, Wyoming SBIR/STTR Initiative ............... 86

Wessner, Dr. Charles W., director for Technology, Innovation, and Entrepreneurship, National Research Council, National Academies of Science ........... 64

Wynn, Joe, executive officer, Task Force for Veterans’ Entrepreneurship, Vietnam Veterans of America .................................................................................... 40

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED

Bigger, Thomas J.

Testimony .......................................................................................................... 107

Prepared statement .......................................................................................... 110

Responses to post-hearing questions from:

Senator Bond ............................................................................................. 153

Senator Burns ............................................................................................ 154

Senator Enzi .............................................................................................. 154

Bond, The Honorable Christopher S.

Testimony .......................................................................................................... 6

Prepared statement (with attachments) ......................................................... 8

Post-hearing questions posed to:

Thomas J. Bigger ...................................................................................... 153

Dr. Michael Squillante .............................................................................. 151

Eugene Watson .......................................................................................... 143

Burns, The Honorable Conrad

Prepared statement .......................................................................................... 134

Post-hearing questions posed to:

Thomas J. Bigger ...................................................................................... 154

Steven Sims ............................................................................................... 141

Dr. Michael Squillante .............................................................................. 153

Eric M. Thorson ......................................................................................... 137

Eugene Watson .......................................................................................... 146

Joe Wynn ................................................................................................... 140

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Coleman, The Honorable Norm

Testimony .......................................................................................................... 15

Prepared statement .......................................................................................... 16

Enzi, The Honorable Michael B.

Testimony .......................................................................................................... 22

Prepared statement .......................................................................................... 24

Post-hearing questions posed to:

Thomas J. Bigger ...................................................................................... 154

Eugene Watson .......................................................................................... 148

Isakson, The Honorable Johnny

Testimony .......................................................................................................... 31

Kerry, The Honorable John F.

Testimony .......................................................................................................... 3

Post-hearing questions posed to:

Steven Sims ............................................................................................... 141

Eric M. Thorson ......................................................................................... 136

Joe Wynn ................................................................................................... 137

Sims, Steven

Testimony .......................................................................................................... 56

Prepared statement .......................................................................................... 58

Responses to post-hearing questions from:

Senator Burns ............................................................................................ 141

Senator Kerry ............................................................................................ 141

Snowe, The Honorable Olympia J.

Testimony .......................................................................................................... 1

Squillante, Dr. Michael

Testimony .......................................................................................................... 93

Prepared statement .......................................................................................... 96

Responses to post-hearing questions from:

Senator Bond ............................................................................................. 151

Senator Burns ............................................................................................ 153

Thorson, The Honorable Eric M.

Testimony .......................................................................................................... 32

Prepared statement .......................................................................................... 35

Responses to post-hearing questions from:

Senator Burns ............................................................................................ 137

Senator Kerry ............................................................................................ 136

Thune, The Honorable John

Prepared statement .......................................................................................... 107

Vitter, The Honorable David

Testimony .......................................................................................................... 30

Watson, Eugene

Testimony .......................................................................................................... 86

Prepared statement .......................................................................................... 89

Responses to post-hearing questions from:

Senator Bond ............................................................................................. 143

Senator Burns ............................................................................................ 146

Senator Enzi .............................................................................................. 148

Wessner, Dr. Charles W.

Testimony .......................................................................................................... 64

Prepared statement .......................................................................................... 67

Responses to post-hearing questions from Senator Burns ............................ 142

Wynn, Joe

Testimony .......................................................................................................... 40

Prepared statement (with attachment) .......................................................... 43

Responses to post-hearing questions from:

Senator Burns ............................................................................................ 140

Senator Kerry ............................................................................................ 137

COMMENTS FOR THE RECORD

Madsen, Marcia G., chair, Acquisition Advisory Panel (with attachments) ....... 156

Office of Government Contracting and Business Development, U.S. Small

Business Administration ..................................................................................... 208

Rice, Patricia, director, Maine Procurement Technical Assistance Center ......... 214

Tibbetts, Roland, former (retired) SBIR program manager for the National

Science Foundation .............................................................................................. 216

Page

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Women Impacting Public Policy (WIPP) ................................................................ 222

Yancey-Wrona, Dr. Janet, director, Maine Office of Innovation, Department

of Economic and Community Development, and Governor’s Science advisor . 231

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STRENGTHENING PARTICIPATION OF SMALL

BUSINESSES IN FEDERAL CONTRACTING

AND INNOVATION RESEARCH PROGRAMS

WEDNESDAY, JULY 12, 2006

UNITED STATES SENATE,

COMMITTEE ON SMALL BUSINESS AND

ENTREPRENEURSHIP,

Washington, D.C.

The Committee met, pursuant to notice, at 10:38 a.m., in Room

428, Russell Senate Office Building, Hon. Olympia J. Snowe, Chair

of the Committee, presiding.

Present: Senators Snowe, Bond, Coleman, Thune, Isakson, Vitter,

Enzi, and Kerry.

OPENING STATEMENT OF THE HONORABLE OLYMPIA J.

SNOWE, CHAIR, SENATE COMMITTEE ON SMALL BUSINESS

AND ENTREPRENEURSHIP, AND A UNITED STATES SENATOR

FROM MAINE

Chair SNOWE. Good morning. The hearing will come to order,

please. Good morning and welcome to today’s hearing on strengthening the participation of small businesses and Federal contracting

innovation research programs. I want to thank all of the small

business representatives for being here today as we examine the

small businesses’ ability to succeed in the Federal procurement

arena and the small business role in innovation through SBIR program.

I particularly want to thank Inspector General Thorson for his

appearance here today. It is his first appearance before this Committee since his confirmation. I want to welcome you.

According to the SBA, the small businesses received a record- breaking amount of Federal prime contracts, $79.6 billion in fiscal

year 2005, a $10 billion increase from the previous year. Moreover,

the SBA reports that these contracts represented 25.4 percent of

Federal prime contracting dollars in 2005, surpassing the overall

Government statutory goal of 23 percent for the third consecutive

year.

This is welcome news. The oversight I have conducted in this

Committee, however, strongly suggests that caution and corrective

legislation is necessary before these numbers may be accepted at

face value.

It has been the President’s goal that all agencies are fair in their

procurement policies and unbundle those contracts that make it

more difficult for small businesses to compete.

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Because small businesses drive our economic growth and job creation, it is critical that these policies are upheld so small businesses have a fair and equal opportunity to do business with the

Government. Small businesses propel our economy by creating jobs,

strengthening communities, empowering entrepreneurs, and assuring economic revitalization in America.

With the help of Federal contracts, small firms create and retain

almost half a million jobs in fiscal year 2004, and taxpayers have

enjoyed a staggering $2.5 billion in savings since 1985 through the

SBA’s program to break out large contracts for competition among

small firms.

The Federal Government’s record of meeting its promises to

America’s small contracts is decidedly mixed. On the positive side,

some agencies have exceeded the statutory small business goal and

the Government has surpassed the 5 percent goal of contracts for

small, disadvantaged businesses. And the goals for aid for small,

disadvantaged businesses.

At the same time, Government data has indicated that small

companies owned by women, service-disabled veterans, and those

located in HUB Zones, historical under-utilized business zones,

have not been given fair access to Federal contracts. Regrettably,

these programs have not received the support they deserved.

I am particularly troubled by the SBA’s decisions earlier this

year to close the office of Federal contract assistants for veteran

business owners. Many in Washington assume that large firms

churn out all the new ideas because they have more people or more

money. The truth is that small businesses are our Nation’s most

innovative sector.

The numbers are indisputable. America’s small businesses hold

40 percent of our national patents. They obtain 13 times more patents per employee than large firms. And their patents are twice as

technologically significant as large firm patents. Government agencies must be diligent about meeting the contracting goals and insuring that these contracts go to small businesses, not large corporations.

It concerns me deeply to hear recent claims that the Government

has included in the small business statistics billions of dollars in

awards to some of the Nation’s largest corporations. Documents released by the SBA’s Office of Advocacy and the Office of Inspector

General has confirmed that the Government has reported billions

of dollars in contracts to large corporations. This type of misleading

reporting must come to an end.

Large firms posing as small must be aggressively prosecuted and

debarred from Federal contracts and the Government must uphold

its obligation to small businesses.

We would be remiss if we simply accepted the status quo of the

contracting environment for small businesses. Our economy flourishes when small businesses partner with the Federal Government.

Today, we will address issues surrounding the vitality of the

small business innovation research program, and its companion,

the small business technology transfer program. Small businesses

face barriers to commercializing their new technologies through

Federal contracts and subcontracts, especially at the Department of

Defense.

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In particular, there is a concern about the proper level of involvement for venture capital investment, and I hope that this hearing

will enable all sides in this debate to achieve a reasonable compromise in this issue. And then we can resolve some of the questions at hand.

As an original cosponsor of the SBIR program legislation, which

was adopted in 1982, I am proud of the program’s record of directing over $21 billion of Federal research and development funding

to America’s small businesses. Unfortunately, the small business

share of Federal research and development dollars has historically

amounted to less than 3 percent.

Practices that exclude small firms from Federal R&D lack foresight and hinder our competitiveness. The SBA proposes for a third

year to eliminate two grant programs for rural outreach and Federal and State partnership, which assists States in preparing their

local small innovators for SBIR competitions. These programs leverage the infrastructure of State technology agencies and nonprofit research incubators to increase the geographic diversity and

competitiveness of small, high-tech firms for States such as Maine,

which have comparatively low participation in Federal R&D efforts.

Clearly, this is a step in the wrong direction, especially at a time

when our key competitors, such as China, are aggressively expanding their technological base by copying the very programs the SBA

is seeking to abolish.

The President’s contract bundling initiative is also presently on

life support. According to reports prepared by the Government Accountability Office and the SBA inspector general report last year,

most agencies claim confusion about what constitutes contract bundling. And the confusion is only compounded by the fact that the

SBA failed to review over 80 percent of the contracts identified as

bundled.

The future economic success of our Nation requires an environment that encourages risk taking and competition. And the programs that we will discuss here today with this panel are an integral part of that effort.

With that, I will now recognize the Ranking Member of this

Committee, Senator Kerry.

OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY,

RANKING MEMBER, AND A UNITED STATES SENATOR FROM

MASSACHUSETTS

Senator KERRY. Well, Chair Snowe, thank you very much for

having this hearing and for your leadership on the SBIR and the

reauthorization effort.

I hope that we will be able to do this in a bipartisan way and

also in a sensible way, measuring some of the issues that are on

the table and some of the information that we are anxious to get.

For instance, the study that is being done, which we will talk about

a little later, which I think is important to resolving some of these

issues.

But, let me just start out by saying that it is important that we

are having this hearing on the SBIR, and the number of the witnesses that are here is evidence of the interest in it and some of

the tensions that exist, with respect to the issues. This is important

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to everybody’s State here, and that is why a number of Senators

are here and interested in it. But I just want to say it has particularly been successful and important to Massachusetts, where we

have had, literally, thousands of Massachusetts firms, including

biotechnology firms that have been able to take advantage of this

program and do well because of it. And it has helped the State and

the country.

We are second only to California in receiving the largest number

of SBIR grants. 840 grants going to Massachusetts firms in 2004,

bringing in about $300 million to small, high-tech firms. That is almost 14 percent of the $2 billion in SBIR grants annually.

So, for obvious reasons, this is an important program to us. But

I think it is important to the country and to the small businesses

that benefit by it. And we need to keep in mind what the dynamic

is between real small businesses and real start-up efforts and the

purpose of the program as we go forward.

I am a little apprehensive, Chair Snowe, about reauthorizing this

program, during what is left of this year, for the simple reason that

SBIR’s authorization doesn’t expire until 2008 and we have got a

$5 million National Academy of Sciences study on SBIR that is due

out later this year. It would be good to put that $5 million to good use before we

jump ahead, and wait until we have the results of the study. I

know that Dr. Wessner is going to address that today, but we

ought to think about that, at least.

Also, I am interested in the idea of working through some kind

of compromise, and we can talk about that later as we go forward.

There is a certain amount of controversy over the role of venture

capital in the SBIR program.

I want to assure both sides that I do approach this with an open

mind, although with a certain set of principles that I think ought

to guide all of us as we think about what this Committee, and what

the SBA does, and about the needs of small businesses in this

country.

We ought to try to do what makes the most sense for small business and for the biotechnology and venture capital community. And

there may be that there is a way to find a middle ground here that

makes sense for everybody.

Obviously, important work is being done by biotechnology firms,

and I have been pleased to champion, as a matter of common

sense, stem cell research, R&D tax credits, and other efforts to encourage their success.

During the presidential campaign, I called for substantial increases in research for clean energy, for medicine, for advanced

manufacturing, for nanotechnologies, stem cell research, and other

priorities.

I wish we were doing that today. Other countries seem to be

more focused and intent than we are. I also called specifically for

increases in funding for life sciences. The biological sciences, biotechnology, diagnostics, and for industrial biotechnology, such as

synthetic biology, which could lead to biodegradable plastics, energy, fuels, chemicals based on agricultural waste rather than oil.

And I have long supported greater Federal support for curiositydriven, long-term high-risk research. That is what makes America

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different and great. So, we acknowledge here today that biotechnology has done a lot for us, and I would like to see a way for

it, with Federal support, to flourish without undermining the small

business aspect of the SBIR program, and we will dig into this a

little bit today. We have to remember that whatever we do here to

change the definition of small business with regard to SBIR is

going to impact all of the SBA programs. And it would be interesting to hear what the SBA’s head of size standards has to say

about that issue. It would be interesting to have GAO’s input.

Their recent study concludes that the program is doing well even

with the recent rule clarification by SBA. Beyond the definition of

small business, there are a number of other issues related to SBIR

that we need to address. Last year, Senator Snowe and I were successful in having an amendment adopted, during consideration of

the Defense Authorization Bill, to create a new commercial pilot

program to encourage and foster the use of SBIR technology by the

Defense Department.

This program has the potential of producing hundreds of millions

of dollars to SBIR companies. We have 20 years of research and development, but we are still struggling to get the agencies to make

the final investment and use the SBIR products.

We also need to discuss increasing SBIR award sizes from

$100,000 and $750,000. We need to discuss Senator Bayh’s proposal to increase the 2.5 percent set-aside for SBIR projects, and

how to increase the geographic diversity of the program.

And let me just say something about Federal contracting, a subject that has come up in a number of hearings recently.

The SBA is meant to be a watchdog for small businesses, with

respect to Federal procurement policy, but evidently it is asleep or

something is wrong. It is just not happening. Report after report

speaks to loopholes in the regulations that allow large businesses

to game the system, and they are, to the disadvantage of legitimate

small business interests in the country.

The SBA continues to drag its feet in correcting the problem, and

this has been noted bipartisanly. Despite the President’s stated

strategy to unbundle contracts, they remain bundled because of

procurement staffing deficiencies’ and small businesses are left to

suffer the consequences. Meanwhile, we read press releases that

tout inflated numbers for the number of small business contracts

as a supposed success story of the Administration.

Yesterday, I filed an amendment to the Homeland Security appropriations bill, which I hope will be accepted, which will actually

repeal the exemption given to the Transportation Security Administration from the Federal acquisition regulations, an exemption

that was granted because we deemed, after 9/11, that we needed

to get going immediately. Well, I think since then we have learned

that we can actually meet those goals and not harm national security while doing so.

And the fact is that when the Administration says that 25 percent of all contracts are given out to small businesses, they are not

even including TSA, which is a vast number of those contracts. So,

we need to get that oversight, Chair Snowe, and I hope that we are

going to do that and we can force that to happen.

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And finally, the SBA has a responsibility to look out for underserved communities, and that includes veterans who are returning

from Iraq, Afghanistan, and elsewhere—disabled veterans, and

woman-owned and socially and economically disadvantaged businesses. That is a purpose of the agency and of this program and

of this Committee.

But Federal contracting goals that have been established for

these communities are never met, and they are disregarded completely by this Administration. The underserved communities are

simply left wondering why these goals are established in the first

place. It is just not acceptable.

So, we have got to do a better job in enforcing those goals across

the Federal Government to insure that everybody has got a fair

shot at these dollars. Thank you very much, Chair Snowe. I appreciate it.

Chair SNOWE. Okay. Thank you very much, Senator Kerry. I appreciated that and I am looking forward to working with you on

some of these major questions that important to small businesses.

Now, I would like to recognize my predecessor on this Committee, as Chairs of this Small Business Committee, Senator Bond.

OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S.

BOND, A UNITED STATES SENATOR FROM MISSOURI

Senator BOND. Thank you very much, Madam Chair, and I appreciate the opportunity to be back. It is nice to be home again in

these hallowed halls of Small Business.

Today I want to address particularly the biotechnology industry,

and the ability or inability of it to participate in the SBIR program.

Certainly we are the world leader in innovation in biotechnology

due in large part to the Federal Government’s 20-year partnership

with the private sector to foster growth and commercialization, in

the hope that one day we will uncover cures for diseases like cystic

fibrosis, heart disease, cancer, multiple sclerosis, and AIDS.

However, the biotech industry was dealt a major setback in 2004,

when the SBA determined that venture-backed biotechnology companies could no longer participate in the SBIR program.

Prior to that decision, the SBIR program was an example of a

highly successful Federal initiative to encourage economic growth

and innovation in biotechnology by funding the critical start-up and

development stages of a company.

Now, traditionally, to qualify for SBIR, the small business applicant had to meet two requirements, have less than 500 employees,

and two, the business be 51 percent owned by one or more individuals. Now, according to the SBA, the term individual means natural persons only, whereas for the past 20 years, the term individual included venture capital companies.

As a result, biotech companies backed by venture capital funding

in Missouri and throughout our Nation who were on the cutting

edge of science could no longer participate.

The biotech industry is like no other in the world because it

takes many years and intense capital expenditures to bring a successful product to market. According to a study completed by the

Tufts Center for the Study of Drug Development, it takes roughly

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10 to 15 years and $800 million for a company to bring just one

product to market.

Now, these cutting edge companies must rely heavily on venture

capital funding. It is not a luxury, it is a necessity. Consider

Clorogen, a small biotech company based in St. Louis. Within the

last 2 years, this early-stage company raised its first round of venture capital financing, but, due to the SBIR rules, Clorogen was

forced to abandon an SBIR grant and, with it, the development of

a bio-defense vaccine program that could have produced a new vaccine against anthrax.

The company has fewer than 50 employees, but it is no longer

considered a small business under the SBIR rules, because it had

to get venture capital funding. This story is not unique. Madam

Chair, a California company, trying to target discovery of a project

of a diabetes metabolic syndrome, because they got venture capital

funding, was ruled ineligible and they moved to Australia and they

are doing it there.

A New Jersey company delayed work on the development of an

acting powder for inhalation of Cipro for use against anthrax. It

could be vital, but they could not move ahead without venture capital funding.

A Wisconsin company said that, due to SBIR rules, a project for

air filtering method for production of synthetic genes had to shut

down. Without the funding, these things just do not go. And I

would like to submit these examples, Madam Chair, for the record.

Chair SNOWE. Without objection, so ordered.

Senator BOND. Prior to 2003, 40 percent of private biotech companies had major venture capital funding SBIR grants. Since then,

zero.

The SBIR program has been very successful in developing new

projects with the important Federal grants, and the venture capital

firms play a vital role. I am disappointed to hear that there are

some who say this would just be backing large businesses. That is

just not true. Venture capital firms invest in biotechnology startups for the possibility of future innovation and financial return, not

to take control or run the day-to-day operations.

Dr. Zerhouni, director of the National Institutes of Health (NIH),

has said that these rules undermine the NIH’s ability to award

SBIR funds to applicants who it believes are most likely to improve

human health, which is the mission of the NIH.

And this has widespread support from patient’s groups and medical health advocates, biotechnology and medical device groups who

have written to Speaker Hastert and Leader Frist and, Madam

Chair, I ask unanimous consent that I be able to submit that

record along with my full statement and questions for several of

the witnesses for the record and I will relieve you of hearing all

of my views, but you can read them if you wish.

Chair SNOWE. And we most certainly will, Senator Bond.

Senator BOND. I know you will.

[Laughter.]

Chair SNOWE. Without objection, so ordered.

[The prepared statement of Senator Bond and the materials referenced above follow:]

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Chair SNOWE. Senator Coleman.

Senator KERRY. May I just correct Senator Bond on one thing,

quickly?

I think he said, and he may have misspoken on it, that they are

not allowed to have venture capital, that firms cannot be SBIR eligible if they have venture capital backing. They are allowed, as

long as it is 49 percent.

Senator BOND. When you have the problems——

Senator KERRY. It is majority owned.

Senator BOND. Yes. Majority owned, but when you are talking about $800 million just to bring one product to market, the truly

innovative, the major projects are——

Senator KERRY. Well, I understand.

Senator BOND. But 49 percent is, you know, that is a stump that

is very easily jumped. It is the big investments that we have to

take care of.

Chair SNOWE. Thank you. Senator Coleman.

OPENING STATEMENT OF THE HONORABLE NORM COLEMAN,

A UNITED STATES SENATOR FROM MINNESOTA

Senator COLEMAN. Thank you, Madam Chair. We have a lot of

witnesses. I am just going to just ask that my statement be submitted for the record, and I associate myself with the comments of

my esteemed colleague from Missouri.

Minnesota has medical technology. Our folks in medical technology have experienced the same challenges that Senator Bond

has expressed regarding folks in biotechnology.

So, I will associate myself with his opening statement, and then

just briefly say that I do have deep concerns about the inspector

general’s report and the entire state of contracting. There are some

issues that we have to discuss and I hope that we get to those

today, but with that, I would just ask that my statement be submitted for the record as a whole.

[The prepared statement of Senator Coleman follows:]

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PREPARED STATEMENT OF SENATOR NORM COLEMAN

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Chair SNOWE. Thank you, Senator Coleman.

Senator Enzi.

Senator ENZI. Thank you, Madam Chair. Since I am improperly

seated here, I would defer to the others. I would like to make a

statement, but would allow the people with more seniority on the

Committee to—thank you.

Chair SNOWE. Could somebody go?

OPENING STATEMENT OF THE HONORABLE MICHAEL B. ENZI,

A UNITED STATES SENATOR FROM WYOMING

Senator ENZI. Madam Chair, I do want to thank you for holding

this hearing. Small business innovation and research programs,

and the Federal contracting programs, are vitally important for

strengthening small businesses starting today’s small businesses.

Your attention provides a bipartisan forum for something that

we have talking about at tables from Massachusetts to Wyoming.

And I thank you for allowing part of that discussion to be by Mr.

Watson who is from Wyoming. He is an expert of the best kind. He

is an expert by practice. His lifelong experience with successful

start-up technology business in the recent years, the small business

innovation research program has translated into his role as an advocate for the SBIR program to small businesses around the State

of Wyoming.

As an SBIR consultant to the University of Wyoming, Gene has

consistently worked to make the SBIR program accessible to the

rural small businesses of Wyoming. And he has been successful.

During the first 17 years of this 24-year-old program, Wyoming

small businesses received a total of $5.5 million, or 10 percent of

the national per capita average.

In the last 7 years, since Gene has been working with it, Wyoming small businesses received a total of $23 million from the

SBIR program, or 110 percent of the national per capita average.

The reason for this is that Wyoming’s small businesses are submitting good, competitive proposals. Unlike other programs, the

SBIR program does not include formula funding, but funds the best

proposals.

I appreciate Gene’s success in advocacy for the small businesses

that the SBIR program was meant to serve and look forward to his

comments.

Though most of my comments and questions this morning will

focus on innovation research programs, I want to say that the Federal contracting is vitally important to small businesses. To support

our small businesses, it is in the best interest to introduce resources to our small businesses to help them grow. One of the most

extensive resources is Federal purchasing of goods and services,

and I appreciate Senator Snowe’s comments about incorrect and

improper accounting, as an accountant.

However, most small business owners do not have the time to research the Government procurement process and access this resource. I have hosted numerous procurement conferences in Wyoming to introduce small business owners to the right contacts in

the Federal Government to answer their questions and help them

to understand how to obtain contracts.

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I look forward to working with Madam Chair and other members

of the Committee to insure that small businesses have open access

to Government contracts.

In Wyoming, we are working to stabilize and steadily grow our

small businesses through the utilization of the SBIR program.

SBIR funds the critical start-up and development stages and it encourages the commercialization of technology, product, and service.

By including qualified small businesses in the R&D arena, hightech innovation has stimulated Wyoming’s small businesses, and

those in other rural States.

Given the impact the program has had on Wyoming, I believe

that any suggested change to this program that could alter its impact in rural States should be given serious thought. One suggested

change would allow small businesses that are majority-owned by

venture capital companies to participate in the SBIR program.

Given the lack of venture capital investment in Wyoming, I have

concerns that making this change would harm rather than benefit

Wyoming’s rural small businesses. Ideally, I would like venture

capitalists to consider funding more Wyoming businesses, especially considering their record of achievement.

Now, as Chairman of the Health, Education, Labor, and Pensions

Committee, I also have directly heard the concerns of those industries that are unusually dependent upon venture capital for success.

Under the current SBIR program, small businesses in such industries as biotechnology may have to make the difficult choice between another round of venture capital or continued eligibility for

SBIR grants. It is a complex issue. I look forward to the testimony

today, and hope that the stakeholders can get together and come

up with a solution.

Thank you, Madam Chair.

[The prepared statement of Senator Enzi follows:]

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Chair SNOWE. Thank you, Senator Enzi.

Senator Vitter.

OPENING STATEMENT OF THE HONORABLE DAVID VITTER, A

UNITED STATES SENATOR FROM LOUISIANA

Senator VITTER. Thank you, Madam Chair. And I want to thank

all of the witnesses for being here today. I look forward to their testimony, I will be brief in light of that. I also want to thank Bob

Schmidt of ClevMed, who is in the audience, a leading small businessman that I have been working with on some of these SBIR and

related issues.

I bring two very focused, specific interests to this discussion

today. One is the SBIR program. I think it is very important and

has been fairly effective in the past. But I think in the debate and

discussion, we need to have a very serious discussion about possible increasing the percentage of R&D budgets reserved for small

businesses, perhaps from 2.5 percent to 5 percent. I am actively

working with members on that proposal. I would invite any reaction to that idea from any of our witnesses, but I am certainly

widely interested in the SBIR program and that specific proposal

in the context of the discussion.

I am also very, very interested in small business contracting,

particularly coming out of the, in many ways, frustrating experience of hurricane recovery with Hurricanes Katrina and Rita in

Louisiana. Unfortunately, in so many instances we saw that a lot

of programs and a lot of rules and regulations that were set up to

help integrate small business in the recovery really did not work.

I think we need to take a very hard look at revising certain programs and rules and regulations with that in mind. In so many instances, a lot of the work after the hurricanes was given to very

large entities through very large, no bid, mega-contracts. And this

was hurtful to the taxpayer, because billions, literally billions of

dollars were wasted, and it certainly did not integrate small business adequately into the recovery process, which was very important for the recovery, in terms of getting the economy of South Louisiana and nearby States back up and running.

A good example, for instance, are the blue roof contracts that

were given out to very large entities. Again, no bid, mega-contracts.

And what you had happen there, as in many, many other instances, you had layer upon layer upon layer of subcontracts built

up under these no bid, mega-contracts. Literally, seven, eight, nine

layers.

At the end of the day, the smaller entity actually applying the

blue tarp to people’s roofs, first of all, was getting on the order of

3 percent of the full contract price that the prime got. Now, I know

it takes something to manage a lot of entities underneath you to

manage a large territory. It should not take 97 percent of the contract price. And just 3 percent going to the entity actually applying

the blue roof to a home.

The other thing that is startling about that example is that the

price we paid per square of blue roof was more than the price of

brand new permanent roofing, good quality roofing like is on my

home. Not cheap stuff, but medium grade, good quality roofing.

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We paid more for a blue roof that is supposed to last 2 months

than it costs to put permanent roofing on. And unfortunately, there

are plenty more examples that contracts for travel trailers where

we are paying an average of $70,000 per trailer, counting the cost

of hook up, and on and on.

Senator KERRY. Are they not sitting in another State?

Senator VITTER. A lot of them are—have been.

So we need to do far better in all of these regards. I have introduced a bill, the local disaster contracting fairness act, which would

develop a new model, basically, a project manager model so we do

not give out a huge mega-contract to a prime and allow as many

layers of subs to be built up under it as they want, which inflates

the cost. But we hire a project manager for a focused price, far

smaller than the prime would get otherwise and then direct that

project manager to hire local small businesses under it to cut down

the layers of subs and get more work and more money at a cheaper

cost directly to the local small businesses.

So, Madam Chair, I am very interested in talking about both of

those issues, that and SBIR, and I am interested in hearing from

the witnesses.

Chair SNOWE. Thank you, Senator Vitter. I appreciate those comments and you explained the experiences that have been occurring

in your State, regrettably so. And hopefully we can use the reauthorization process to identify some of those issues that we can address, as well, and incorporate those changes.

Senator Isakson.

OPENING STATEMENT OF THE HONORABLE JOHNNY ISAKSON,

A UNITED STATES SENATOR FROM GEORGIA

Senator ISAKSON. Thank you, Senator Snowe, and I appreciate

very much your calling this hearing. Out of respect for this Committee and especially the distinguished panel, I am going to be

very, very brief and will submit a formal statement for the record.

I associate myself with the remarks of Senator Bond of Missouri

and Senator Coleman with regard to having a keen interest in the

SBIR funds and any unreasonable preclusion of access to those

funds to a legitimate small business, simply because of the percentage of venture capital investment in its ownership.

Having been a part of that in the past, a company that developed

very small and participated in that, I think an arbitrary cutoff

without some other criteria probably might penalize actual good

quality research and development and ultimately, a product getting

to the marketplace.

I am very interested in hearing the testimony today and appreciate the opportunity.

Thank you, Madam Chair.

Chair SNOWE. Thank you, Senator Isakson, and I want to welcome our panel here today.

First, we have Eric Thorson, who is the inspector general for the

SBA and he was unanimously confirmed by the Senate just on

March 31st of this year and has had over 20 years of investigative

experience.

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Next, we have Commissioner Joe Wynn, who is the Washington,

D.C. regional director and a lifetime member of the National Association for Black Veterans.

Next is Mr. Steven Sims, who is the vice president for Programs

and Field Operations Program of the National Minority Suppliers

Development Council.

Next we have Mr. Charles Wessner. Mr. Wessner will be testifying for the National Academy of Sciences. He is currently directing a series of studies centered on Government measures to encourage entrepreneurship and support the development of new technologies.

Followed by Mr. Gene Watson, a consultant to the University of

Wyoming Research Office, and director to the Wyoming SBIR/STTR

Initiative.

And then we have Dr. Mike Squillante, who is currently vice

president for RMD.

And finally we have Mr. Tom Bigger, who has been serving as

president/chief executive officer and director of Paratek Pharmaceuticals since 1999.

We welcome all of the panelists. We ask you to summarize your

statement within 5 minutes and we will incorporate the entire

statement in the record.

And we will begin with you, Mr. Thorson. Welcome.

Mr. THORSON. Thank you.

Chair SNOWE. Thank you.

STATEMENT OF THE HONORABLE ERIC M. THORSON, INSPECTOR GENERAL, U.S. SMALL BUSINESS ADMINISTRATION

Mr. THORSON. Chair Snowe and distinguished members of the

Committee, I appreciate very much being invited today to discuss

our concerns regarding the award of Government contracts to small

businesses.

I am appreciative of the assistance I have had of several of my

staff behind me, particularly of our summer intern, Jessica Smith,

who is making her first visit to the United States Senate, and we

appreciate very much the opportunity for her to attend a hearing

of this important Committee.

The Small Business Act establishes a goal of awarding small

businesses to not less than 23 percent of the total value of prime

contracts issued Government-wide each year. The Act further recognizes SBA’s advocacy role for small businesses and directs the

SBA, in essence, to take all reasonable steps to promote opportunities for small businesses.

However, as discussed in our report of SBA’s top management

challenges, flaws in the procurement process have allowed large

companies to receive small business awards and agencies to receive

small business credit for contracts performed by large businesses.

My remarks today will focus on several problems affecting Government contracting opportunities for small businesses.

First, regulatory loopholes are allowing large companies to perform small business contracts. Studies have found that agencies

count towards their small business goals contracts performed by

companies that have either been acquired by large firms or have

outgrown small business size standards after obtaining the conVerDate 11-MAY-2000 16:54 Sep 14, 2007 Jkt 036593 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 C:\SBA\36593.TXT CELINA PsN: CELINA
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tract, but are exercising subsequent options or task orders as small

businesses.

This is a serious issue for two reasons. First, legitimate small

businesses lose out on important contracting opportunities. And

second, policy makers are deprived of accurate information needed

to assess the effectiveness of those policies.

Although the extent of such over reporting is really unknown, we

believe the problem to be widespread. Another problem relates to

multiple award contracts, under which agencies may obtain small

business credit for using a firm classified as small, even if the firm

is not designated as such for all of the procured goods or services.

This is contrary to SBA regulations, which require that a contractor meets a size standard for each product or service for which

it submits an offer.

A second issue involves large companies fraudulently obtaining

small business contracts or using small firms to hide the fact that

a large business is actually performing the work. In the past 5

years, we have opened 69 cases involving Government contracting

fraud and have obtained 24 criminal fraud convictions resulting in

fines, restitutions, and settlements of over $17 million.

However, we have yet to obtain criminal prosecution of a large

business for misrepresenting its size status in order to obtain a

small business contract. One reason for this is that prosecutors are

reluctant to accept cases where it is difficult to show a financial

loss to the Government.

Unlike where a contractor has falsified invoices, in many cases

of small business contracting fraud, the Government paid for and

obtained a particular good or service that it sought to procure. The

fraud occurred in how the business acquired its contract, not in its

execution.

Nonetheless, there is a definite programmatic and societal loss.

A company that obtains a small business contract under false pretenses deprives the contracting opportunity for a legitimate small

business.

Another issue involves contracting officer error. Efforts to bring

to prosecution cases of small business fraud have been undermined

by contracting personnel at Federal agencies who do not comply or

are simply unfamiliar with small business contracting requirements.

Finally, there are the problems with the accuracy of the database

used to develop and report Government-wide statistics to Congress

on small business awards. We have received various complaints

about large businesses being reported as receiving small business

awards.

Sometimes, the problem is related to a small business acquired

by a large business, or a small business that subsequently grew

large. But often it resulted simply from errors in entering information into the database.

So, what can be done to address these problems? To its credit,

in 2003, SBA did issue a proposed regulation to require contractors

performing on multiple award contracts to annually recertify their

small business size.

We believe that this would provide a significant control over the

accuracy and integrity of small business contracting. However,

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while SBA has since issued final regulations regarding agencies obtaining recertification as to size when a contract is sold to another

company, it has now been more than 3 years since the proposed

rule on annual certification has been issued. This rule needs to be

finalized. Alternatively, Congress could amend the Small Business

Act to require annual certification.

SBA has also submitted proposed legislation recommended by

the OIG to clarify that it has the authority to debar a contractor

for size misrepresentation. This is important because in a recent

case the agency was reluctant to proceed with the debarment, because it was uncertain whether it had the necessary authority to

do so. We urge Congress to enact this proposed legislation.

Congress could establish other control processes within SBA. For

instance, legislation could create an office to monitor contract integrity, including determining whether procurement agencies are

complying with small business contracting requirements, and

whether the agencies are accurately reporting those goals.

For our part, in order to ensure that all opportunities are pursued to help small and disadvantaged businesses obtain Government contracts, the OIG will continue to challenge SBA to improve

Government-wide compliance with the goals of small business contracting, to aggressively pursue prosecutions and debarments

where warranted, and to seek creative and effective ways to enhance the ability of small business to work with the United States

Government.

This concludes my remarks, and I look forward to answering

your questions.

[The prepared statement of Mr. Thorson follows:]

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Chair SNOWE. Thank you very much.

Mr. Wynn.

STATEMENT OF JOE WYNN, EXECUTIVE OFFICER, TASK

FORCE FOR VETERANS’ ENTREPRENEURSHIP, VIETNAM

VETERANS OF AMERICA

Mr. WYNN. Good morning ranking member, Chairman Snowe,

and other members of the Committee.

Let me first say what an honor it is for me to have the opportunity to come before you today to share some of the collective

views of thousands of veterans and service disabled veteran owners

on the topic of Federal contracting and procurement.

Though my time of service was many years ago, I still have very

vivid memories of the military experience. For those that swore

that oath to protect our freedoms here in America from enemies

both domestic and abroad, to what do we owe them for their service? And especially those that returned with loss of limbs and other

disabilities.

Though I was fortunate and not commanded to report to combat

zones like Iraq and Afghanistan, I do share in the experience of

many men and women who survived. I still remind myself if not

for the grace of God, go I.

Over the years, there have been many good laws passed in recognition and support of those that served, but it was not until the

drafting of the Veterans’ Entrepreneurship and Small Business Development Act of 1999 that Congress found that: ‘‘Veterans of the

U.S. Armed Forces have been and continue to be vital to the small

business enterprises of the United States; they often face great risk

to preserve the American dream of freedom and prosperity; that too

little has been done to assist veterans, particularly service disabled

veterans, in playing a greater role in our economy; therefore, the

United States must provide additional assistance and support to

veterans to better equip them to form and expand small business

enterprises thereby enabling them to realize the American dream

that they fought to protect.’’

While the framers of 106–50 did a good job of laying the foundation for a program to assist veterans interested in starting or expanding the owners of small businesses, it was not until the Veterans’ Benefits Act of 2003, Section 308, that a Federal Procurement Program for veterans was actually created. Under Section

308, contract officers were given the authority to restrict competition to service disabled veterans.

But even with the foundation of a great program and a new contract vehicle, it has taken an executive order from the President

and follow-up letters from a member of this Committee to get agencies to start implementing the laws.

As we approach the seventh anniversary of 106–50, many members of the veterans business community are still hopeful that institutions, programs or agencies created or directed to assist them

will effect positive results. But while the VA Center for Veterans

Enterprise has been progressing in its data collection and assistance efforts, the SBA seems to be declining in its support.

There have been seemingly very little resources directed toward

assisting veterans with Federal contracting. Few contract awards

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have been given to service disabled veteran-owned businesses. A

strategic plan that has yet to be completed and the operation of an

office to assist veteran business owners with a staff of one, which

only lasted for about 1 year.

Even the SBA Office of Veterans Business Development, also created under the legislation, has reportedly received limited resources to provide assistance to educate veteran, business owners

deployed with the Guard and Reserves.

(We support Senate Bill 1014, Supporting our Patriotic Businesses Act of 2005, introduced by Chairman Snowe of this Committee.)

And in another creation of the law, the National Veterans Business Development Corporation, after more than $12 million in appropriations over 5 or 6 years, and four leadership changes, it is

still struggling to create an identity and make a difference in the

lives of veteran business owners.

Agencies and large prime contractors have yet to meet their 3

percent mandatory goals for procuring goods and services from

service disabled veterans. One of the biggest impediments to increasing contracts to service disabled veterans is the ‘‘Rule of Two.’’

Contracting officers are frustrated with the difficulty of awarding

procurements directly to service disable veterans. They would like

greater discretion in selecting service disabled veterans to meet

their agency’s goals.

Some recommendations, eliminate the rule of two. Under the rule

of two, service-disabled veterans suffer, the Government agency

loses the opportunity to meet its goal.

Create a level playing field for the veteran business owners.

Make the order of priority for contracting among 8(a) and HUB

Zone and service disabled vet programs equal, and tell contracting

officers that they shall use service-disabled veterans.

Do not include service-disabled veterans in the 8(a) program. The

8(a) program was created to help compensate for more than 100

years of wrongful discrimination and exclusion of minorities from

the full benefits of American society, including the Federal marketplace.

The service disabled vet program is intended to be inclusive of

any American, regardless of race, who served in this country’s

Armed Forces, Guard, or Reserves. The service-disabled program

should retain its own identity for those who have borne the battle.

Require agencies to recognize the collective past performance of

service disabled vet teaming when they partner with other preference groups. This will help to expand and develop the pool of capable and qualified businesses.

Small business subcontracting plans submitted by large prime

contractors should be monitored more closely. Liquidated damages

or the elimination of future contracts should be enforced for those

companies that fail to demonstrate a good faith effort to comply

with the plan.

Also, extend the provisions of the proposed HR 3082 to allow the

VA to establish a certification process for service-disabled veterans.

Let’s provide a price evaluation preference of 10 percent for service disabled vets, in acquisitions conducted using full and open

competition.

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Direct the use of mentor/prote ́ge ́ programs in all Federal agencies.

Require SBA to fully utilize its Prime Contracts and Subcontracting Assistance Programs that already exist now, and increase

the number of procurement marketing reps and commercial marketing reps.

And finally, increase the Government-wide small business goals

from 23 percent to 28 percent. Why can’t small businesses have a

bigger piece of the pie? Wouldn’t that really help more American?

Again, thank you for the privilege to come before you and share

these views. This concludes my statement, and I respectfully request that my written statement be submitted for the record. And

I stand ready to assist you.

Chair SNOWE. Without objection, so ordered. And that will be

true for all of the panelists, as well.

[The prepared statement of Mr. Wynn follows with an attachment:]

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Chair SNOWE. Mr. Sims.

STATEMENT OF STEVEN SIMS, VICE PRESIDENT, FIELD OPERATIONS PROGRAM, NATIONAL MINORITY SUPPLIER DEVELOPMENT COUNCIL

Mr. SIMS. Good morning, Chairman Snowe, ranking member

Kerry, and other members of Senate Small Business and Entrepreneurship Committee.

Realizing how tough it is to stay within this 5-minute timeframe,

I am going to try to be as brief as possible.

For those of you that are not aware, the National Minority Supplier Development Council is a 34-year-old organization established

by corporation America to provide access and opportunity for racial

and ethnic minority groups to do business with corporations.

We have most of the Fortune 1000 as members of our organization.

Steve Rineman, chairman and CEO of PepsiCo, is the chairman

of our board.

John Patterson, vice president of worldwide sourcing for IBM, is

our vice chair.

And we provide services to our corporate members and to our

16,000 certified minority businesses through a network of 39 local

operations councils around the country and in Puerto Rico.

We are finding an increase in the number of corporations joining

NMSTC, even in light of the mergers and acquisitions because of

what they perceive is the value that we bring to the table.

I would like to spend a brief time talking about five observations

regarding the Small Business Association. I was at the hearing last

week when you talked to the SBA administrator nominee. I do

hope that, as he mentioned, his tenure will be a change, and a

change for the positive for small minority businesses.

First issue, contract bundling continues to be a serious challenge

to the survival and growth of minority businesses. Not one Federal

contract has been unbundled in the 18 to 24 months since the

President proclaimed support unbundling Federal contracts. And a

GAO report came out saying that there has been no evidence of

cost savings resulting from contract bundling.

Procurement opportunities, as reported by Federal agencies point

to less, not more, utilization of small minority businesses. I agree

with Senator Kerry that the goals have not been reached over the

last 5 years. The bulk of procurement opportunities are going to

smaller and smaller contractors. A number of the contractors that

tend to be larger and larger companies.

A personal issue I have is certification of minority businesses.

For years, we have accused SBA of their program of 25 percent of

their businesses being front companies. And because it is not monitored or managed, they have not been able to refute that.

The failure of monitoring their database and utilization of selfcertification process provides front companies ample entree into

this program.

And the chaos and turf wars that exist among the folks at SBA

is also a barrier that restricts and retards the efforts of the agency

to serve minority small businesses.

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Minority businesses are the fasted growing minority, and

women-owned businesses, are the fasted growing area of small

business, which purports to be the engine driving America. And I

do not understand, if that is the case, how we can provide a census

of these critical businesses only once every 5 years, and then delay

another 2 years while the information is being compiled and analyzed before it is released to the public. There is no private corporation in America that would wait 7 years to ask its customers how

it is doing and what it needs to change.

Focusing on recommendations, Federal agencies need to be

unbundled. But not only focus on unbundling, but then focusing on

increasing capacity.

Secondly, SBA needs more tools and procedures which makes

identification and contracting with small minority businesses easier and not more difficult. SBA needs a reliable, proved certifying

body for minority businesses. What it has does not work. I have offered to debate whoever is in charge of certification at SBA. It has

not worked. It will not work the way it is set up.

SBA needs leadership with strong business acumen and, looking

at Mr. Preston’s background, hopefully he will bring that business

acumen and leadership to the fore. The economic realities require

at least a biannual, at minimum, survey of minority and womenowned businesses so that we can see what their issues are, what

their challenges are, and what their successes are.

Two items not referenced earlier that I would like to talk about

is encourage SBA to continue its effort to establish a disaster response plan which is grounded in reality and utilizes organizations

and procedures that promote small minority business participation

with a focus on local content making local businesses and individuals involved in the process.

And the other thing is, given the amount of money that is going

down for the rebuilding effort, it seems to me the nature of the disaster requires something being done outside the usual methods.

And the notion of greater transparency to make sure that the

money given by the Federal Government to the States and the

counties, et cetera, are actually going where it is supposed to go.

And all individuals and communities are participating.

Since the tragedy did not exclude anyone based on race or ethnic

characteristics, then the clean up and rebuilding should not either.

Finally, we wrestled on the minority business side with this issue

of venture capital participation, and maybe in the question and answering, I could talk a little bit about how we addressed that and

to continue to allow minority businesses to play in the game.

Thank you.

[The prepared statement of Mr. Sims follows:]

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Chair SNOWE. Thank you, Mr. Sims.

Dr. Wessner.

STATEMENT OF DR. CHARLES W. WESSNER, DIRECTOR FOR

TECHNOLOGY, INNOVATION, AND ENTREPRENEURSHIP, NATIONAL RESEARCH COUNCIL, NATIONAL ACADEMIES OF

SCIENCE

Dr. WESSNER. Thank you, Madam Chairman. It is a pleasure to

have the opportunity to address your committee today, and I would

like on behalf of the National Academies to take a somewhat more

conceptual approach to the SBIR program. One of the things I

would like to talk about is how the SBIR program works and try

to impart a better understanding of early stage finance in the

United States. I want to talk a little bit about the Valley of Death,

the role of SBIR in crossing that valley, and the expectations we

should have for such a program.

As all of you I am sure believe, markets are very good and very

powerful institutions. They are certainly better than the alternative. That said, they are not perfect, and one of the things that

is very important to keep in mind is that investors have less than

perfect information.

What I want to address is why do we have this program, and I

think that can be very instructive for some of the issues that will

be raised in the rest of the discussion.

We have what our economist friends call ‘‘asymmetric information.’’ I asked one of my colleagues, a leading economist by the

name of David Audretsch, what he meant by asymmetric information, and he said, ‘‘Well, it means, Chuck, that it is often hard for

small companies to get money.’’ And that is, in fact, why we have

the program.

A point to keep in mind is that the development of new technologies within our national economy is not automatic. The rest of

the world has understood that point. They are taking measures to

attract and develop new industries while in this country we are

rooted in myths about how the United States has developed only

through market actions. The rest of the world is taking an infinitely more practical results-oriented approach, what I would actually call a ‘‘practical Yankee approach’’ of the sort that helped develop our country.

Next, please.

This Valley of Death is what the new entrepreneur encounters.

Now, forgive me for this simple approach, but sometimes pictures

represent a thousand words, and I do not have the time for the

thousand words, nor do you have the patience. But the key thing

is we are putting about $132 billion in Federally funded research

each year. We are spending only about $2 billion, unless you want

to add in the $140 million Advanced Technology Program, to get

the results of the research across this valley and into the market.

Now, you may think, well, don’t we have venture capital? Won’t

the venture capitalists take care of that? Well, if you ask some policy people here in Washington, they will say it will. But if you ask

the venture capitalists, you get a rather different answer. Now,

why is that? Next, please.

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Well, the point is that although our venture capital markets are

the best in the world, they are broad and deep, they nonetheless

have limitations. Venture capitalists actually have very limited information on new firms. They are also prone to fashion. There are

herding tendencies, as any of you who have witnessed the dot-com

boom would remember. Things that are really good ideas, like

Google, are not always obvious at the concept stage. Keep in mind,

Google tried a number of venture capital firms, firms that refused

to fund them (to their infinite regret), before they finally found one

that would invest in them. My point is simply that these investment decisions are not so obvious either in the private or the public

sector.

So the point is that the venture capital market often lacks information on potential information and is not focused on early-stage

firms. Next, please. And if you look at this breakout, less than 3

percent of the $20-plus billion goes to early-stage investments—and

there are only about 3,000 deals overall. So, in fact, the SBIR program plays a really critical role in providing initial start-up funding. I think some of the gentlemen next to me who have actually

started firms would affirm that it is your first million that is the

hardest money to get. It is that first financing you need, to prove

the viability of your ideas and that is the role that SBIR plays.

Now, one of the other things I would like to talk about—next

chart, please—today is what role the SBIR concept plays in the

U.S. innovation system as a source of finance for new ideas and

new companies. What we need to avoid is the old slogan that ‘‘It

is not the Government’s role to be picking winners and losers.’’

With all respect, that is one of the most mindless expressions that

we have on these topics. The irony is that the Government actually

is quite good at picking winners. The losers will take care of themselves. Early-stage technology awards are a lot like shooting baskets.

The point of SBIR is that the Government has needs, and then

the companies come up with ideas to meet those needs, whether it

is an idea to solve the problem of potential bioterrorism, whether

it is an idea like the Silver Fox that we have in use in Iraq today.

A Silver Fox is a very inexpensive—running at $40,000 to $60,000

for a drone that is effectively supporting our troops.

The set-aside funding—and I commend you, Senator Snowe. As

a Congressman, you supported the idea of using a set-aside so that

we have a reliable stream of funding for this program. It is one of

the attributes of SBIR that has attracted attention around the

world.

I should just point out in a parentheses that while we debate

whether we should be doing these things, Senators, the rest of the

world is copying the program, often with larger awards. It is important to keep that in mind, that we do not live in a world where

we determine the frame of competition. The rest of the world is determining what that competition will be.

One of the things that is really important about this ingenious

program is it has tremendous flexibility. It does not use a one-sizefits-all approach. Each agency’s management gets to administer the

program in the way they think best meets their needs.

Next, please.

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Now, when we talk about what the program should be accomplishing, I am tempted to ask, Compared to what? What exactly

should we be expecting from this program? If you look at

biopharma, these are the big guys, lots of smart people, large numbers of people, billions of dollars put into new drug development,

and you are all familiar, I trust with the dreadful X, the one that

shows the cost of drug development going up dramatically and the

one that shows results going down dramatically. So pharma has

trouble getting new ideas developed and into the market. Because

of this, you will hear, I think, later on, the importance that pharma

attaches to these new SBIR-funded companies.

How about private venture capitalists? I enjoy the joke, Madam

Chairman, that, you know, the Government cannot pick the right

company for awards, but the venture capital industry can. They

bring the best and the brightest together; and they succeed 2 out

of 20 times while those poor dumb Federal bureaucrats can only

succeed 1 out of 10. So you see the difference.

[Laughter.]

Dr. WESSNER. The point is that what we have to keep in mind

here is what are the realities of early-stage finance. We have to

recognize that there is a high skew in outcomes, that there will be

few genuine mega successes, but those mega successes are absolutely important. During questions, if you wish, I can describe what

some of those successes are.

In addition to a few major successes, there will be a lot of just

good work done with the SBIR awards. There will also be projects

that do not succeed. But, you know, we learn from failure. Knowing

that this is not a successful line of inquiry tells the Government

you do not want to put hundreds of millions of dollars on this idea.

Dr. Irwin Feller, a distinguished economist who is on our team

of some 20 researchers looking at this program, describes the program as ‘‘a low-cost, technological probe.’’ It actually does lots of

other things, but that is one very apt description.

So I think what we need to do is to bring realistic expectations

to what constitutes success for the SBIR Program. At the same

time, we should recognize that the rest of the world thinks that

this is one of the best U.S. programs. Countries as diverse as Sweden, Taiwan, Korea, the Netherlands, Finland, and the United

Kingdom have all emulated this program, sometimes quite directly,

and they are doing many other things to support high-tech companies. I appreciate the opportunity to appear before you, Senator,

and I look forward to discussing our report with you in the future.

Thank you, Madam Chairman.

[The prepared statement of Dr. Wessner follows:]

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Chair SNOWE. Thank you, Dr. Wessner. That was a very interesting presentation, and it certainly speaks to the value of the program that we obviously, as you say, should be building on.

Mr. Watson?

Senator KERRY. Sounds like you have already done your report.

[Laughter.]

Dr. WESSNER. Well, we have done these, sir.

STATEMENT OF EUGENE WATSON, PROGRAM MANAGER,

WYOMING SBIR/STTR INITIATIVE

Mr. WATSON. Well, thank you, Chuck, and I rest my case.

[Laughter.]

Mr. WATSON. However, I will take up my 5 minutes. Although,

as Senator Enzi has said, I am a consultant to the University of

Wyoming Research Office, the observations and opinions I am

going to express today are my own.

I appear before you as a confessed but unrepentant serial entrepreneur. Over the past five decades, I have participated as a founder in the formation and launch of eight technology-based start-up

companies, the most recent three receiving seed capital from the

SBIR program.

I have a short list of recommendations to further improve the

program, including Senator Vitter’s and Senator Bayh’s proposals

to increase the funding over the next 5 years, and adjusting the

aware guidelines to keep pace with inflation. But due to time constraints, I will limit my comments to two critical areas: one is the

effect, and the other is the cause.

It is my conviction that a major threat is looming on the horizon

in the form of S. 1263, the Save America’s Biotechnology Innovative Research, or SABIR, Act. This proposed legislation has been

characterized by a former chief counsel for advocacy at the Small

Business Administration as the first effort in the 53-year existence

of the SBA to redefine ‘‘small business’’ to include large businesses—an ominous slippery slope indeed. S. 1263 is devised solely

to benefit businesses owned and controlled by large venture capital

organizations, permitting them for the first time to participate in

the SBIR program—in my opinion, a devastatingly bad idea. It

abandons Congress’ core definition of a small business established

over a half-century ago, to wit: ‘‘A small business is one that is

independently owned and operated.’’ Dozens of Federal laws and

regulations are based on this clear and concise concept. Once an exception to this longstanding common-sense principle is adopted,

others will surely follow.

Further, the assertion that innovative biotechnology R&D is

threatened and needs to be saved is unsupported. Total public and

private biotechnology R&D spending this year will approach $100

billion. Contrasting this amount with the 2006 SBIR budget of $2.2

billion reveals the futility of assigning the role of savior to the

SBIR program, even were one needed.

But there is more. The implication that the SBIR program has

been off limits to venture capital is just wrong, as untrue as the

widely circulated misrepresentation that VC-owned companies, previous SBIR eligible, are now disenfranchised. With all due respect

to those of differing views, let me be very clear. Companies owned

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and controlled by large organizations, including venture capital

companies, have never been eligible for the SBIR competition.

Companies with minority venture capital backing, however, have

always been eligible, and a recent GAO report reveals that since

2002, an increasing number of SBIR awards have been made to

these VC-backed firms. At NIH, such firms generally receive larger

awards and a larger total share of SBIR funds. And VC-backed

firms are receiving an increasing share of NIH’s total SBIR dollars,

up from 14 percent in fiscal year 2001 to 21 percent in fiscal year

2004. Clearly, SBIR funding for VC-backed companies, at least at

the NIH, is robust and growing.

This trend, however, raises troubling issues. In many respects,

the goals of the SBIR program are at odds with the priorities of the

typical venture capital organization. SBIR provides seed capital to

high-risk start-up companies, whereas VC investments are risk

averse. And although often professing to be the funding source as

the start-up gazelles of tomorrow, the facts tell a different story.

According to the PricewaterhouseCoopers Money Tree report, over

the past decade VC investment in start-up companies has gone

from 20 percent to less than 2 percent.

Equally troubling to this rural-State resident is the geographic

concentration of VC investments. Money Tree reports that in first

quarter 2005 nearly 60 percent of VC funds went to two States—

California and Massachusetts, as we have heard from Senator

Kerry. Ten States received 85 percent, with 15 percent shared by

the remaining 40 States. Fourteen States received no venture capital whatsoever. I note that 10 of the 18 members of this committee

represent States receiving either only one or no VC investment

during this period.

From these data, it is clear that as VC participation increases,

the little guys, especially those from rural States, will be crowded

off the playing field. SBIR is, after all, a zero-sum game.

The tensions between SBIR and venture capital are numerous.

Venture capital is risk averse; SBIR is indifferent to risk. Venture

capital is inaccessible to start-ups; SBIR is congenial to start-ups.

Venture capital is impatient; SBIR has no time constraints. Venture capital is geographically and demographically selective; SBIR

has no geographic or demographic bias. Venture capital is technology focused; SBIR is open to all innovative concepts.

Given these polar opposites of missions and priorities, it is clear

that the goals of the SBIR program will be seriously compromised

by allowing unlimited access to VC-owned and -controlled firms, a

serious, unintended consequence of adopting the SABIR legislation.

Now, as to cause, it is my firm belief that the issue of allowing

VC-owned companies unlimited access to SBIR funds has its origins in the recently established practice at the NIH of exceeding

award guidelines, often by millions of dollars. An important component of the genius of the SBIR program is to provide award

amounts sufficient to enable small businesses to develop their innovative concepts while at the same time capping the awards at a

level below the threshold of interest of large organizations, such as

venture capital companies. That this strategy was effective is

proved in the breach. Only when NIH award levels began to routinely exceed the legislative guidelines did SBIR funding become a

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target of VC-owned and controlled companies. Awards exceeding

the guidelines now account for more than 70 percent of the NIH

SBIR dollars.

I strongly urge this committee, through its oversight function, to

work with the SBA and the NIH to bring SBIR awards back into

compliance with the legislative guidelines. Doing so will resolve

critical issues that are before this committee today.

Thank you, Madam Chairman, for allowing me to speak.

[The prepared statement of Mr. Watson follows:]

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Chair SNOWE. Thank you, Mr. Watson.

Dr. Squillante.

STATEMENT OF DR. MICHAEL SQUILLANTE, CHAIRMAN,

SMALL BUSINESS TECHNOLOGY COUNCIL, NEW ENGLAND

INNOVATION ALLIANCE

Dr. SQUILLANTE. Thank you, Madam Chair, Senator Kerry. I appreciate the opportunity to speak at the committee this morning.

I am kind of nervous. This is my first time doing this, it is certainly exciting.

I am vice president of research at Radiation Monitoring Devices,

Incorporated, in Watertown, Massachusetts. At RMD we perform

research on nuclear, biochemical, optical, and magnetic sensors,

and we manufacture products based on these sensors. In the last

few years, we have begun to apply our high-performance sensors to

homeland security applications.

I am also the chairman of the SBTC, and it is the SBTC that I

am representing here today. SBTC is the Nation’s largest non-profit organization for high-technology businesses. It is a council of the

National Small Business Association, which is the oldest advocacy

organization for small businesses in the country, which serves over

150,000 companies. Since its founding in 1995, SBTC has been very

involved in SBIR issues. More than 300 current members of SBTC

have received SBIR awards. No other organization represents more

SBIR companies than SBTC.

SBIR has been extremely successful. Over the past 25 years, it

has yielded over 45,000 patents, tens of billions of dollars of economic activity, and has solved thousands of technological problems

for Federal agencies. The technologies that are invented and developed under SBIR are saving lives on the battlefield and saving

lives in the operating room. Technologies are improving the quality

of life of many millions of Americans.

Today, more than half of the scientists and engineers employed

in the private sector are employed by small technology companies.

And as mentioned by Chair Snowe, they produce 13 times more

patents per employee than the patent-producing large corporations.

It is this tremendous success of SBIR which brings me here

today. It is an important program, it is working, and we need to

keep it working in the future. Congress recognized the need to support small companies which have the flexibility, the talent, the innovation, and the creativity to solve problems when it enacted the

SBIR law 25 years ago.

Also, in regard to the SBIR, I would like to take the opportunity

and SBTC would like to take the opportunity to thank you again

for further improving the SBIR program with the pilot program,

which is already having an effect in trying to improve the transition of technologies into use by the Department of Defense.

Also, as was mentioned, the reauthorization is coming soon. This

meeting will be a good first step to taking stock of the program,

examining what is working well, looking at what needs improvement, and determining what should not be changed in the program.

SBIR is successful because it funds—as we have heard, it funds

small, high-risk, high-payoff, early-stage research. It does not try

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to pick the next blockbuster product. It tries to fund innovative research which will solve agency problems.

The SBIR program is transparent and extremely competitive. It

proceeds through the natural path of R&D: a small amount of

funding for proof-of-concept research, further funding for further

development and prototype development, and then finally it moves

on to Phase III and commercialization. It does a good job of protecting intellectual property rights of small businesses, and it recognizes the parts of the innovation process that small high-tech

companies do really well.

But I am here because of a serious concern that there are proposals to make fundamental changes in the SBIR program, and the

heart of this is whether or not large venture capital firms will be

allowed to participate in a small business program. There are other

larger program that venture capitalists can participate in, including at the NIH, which are larger and have more money than the

SBIR program and which do not have restrictions on the size of the

corporations that participate.

But even in the SBIR program, venture-backed firms are receiving more than 20 percent of NIH funding. The number is not 0 percent. Currently, venture capitalists of any size that control less

than 49 percent of a firm can participate in the SBIR program. If

the venture capital meets the statutory guidelines of SBA and

SBIR, they can control more than 49 percent.

The proponents say this change is necessary. We disagree. Not

only is this change not necessary, it will have significant detrimental effects on the SBIR program. SBIR stands for ‘‘Small Business Innovation and Research.’’ The proposed changes will take the

‘‘small’’ out of SBIR, and it will take the ‘‘innovation’’ out of SBIR.

We believe that if these changes are implemented, it will make

awards at NIH less competitive and less transparent. It will undermine the character of the Phase I awards as high-risk, early-stage

research. It will also, because of the size of the awards, dramatically reduce the total number of awards that NIH can make, making it that much harder. One in 11 Phase I awards are issued now.

It will be much worse if these changes are made. It will inexorably

shift the NIH focus away from new cutting-edge innovation and toward research to solving problems which have mass markets. It

will crowd out many, if not most, of the small life science and biotechnology companies whose innovations are the key to the future

health of the Nation. It also goes against the strong preferences of

the vast majority of small companies that are participating in the

SBIR program now, including many biotechnology companies.

SBTC had a poll where we polled 2 years’ worth of NIH award

winners, and of those responding, 90 percent were opposed to these

changes.

We do understand that the venture capital firms have an important function and do critically important work. SBTC does not

stand for Small Business Innovation Research Council. It stands

for the Small Business Technology Council. We are willing to work,

and we do work with anyone who has an interest in Federal R&D.

We will work with the agencies, we will work the venture capital

firms, we will work with their representatives. But we will not

work with them to destroy the SBIR program.

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For 25 years, it has been the intent of Congress to capture the

talent, creativity, innovation, and flexibility of small technology

companies to efficiently and quickly solve technological problems.

The costs to the Government of a scientist in a small company is

less than 10 percent of the cost of an engineer or scientist at a

large company. It is an extremely efficient, fast way to get research

done.

Again, please do not take the ‘‘small’’ out of SBIR and please do

not take the ‘‘innovation’’ out of SBIR.

Thank you.

[The prepared statement of Dr. Squillante follows:]

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Senator THUNE. Madam Chair?

Chair SNOWE. Yes, Senator Thune.

Senator THUNE. I have a statement I could submit for the record.

Chair SNOWE. Absolutely. Without objection, so ordered. Would

you care to make any comments?

Senator THUNE. No. I just thank you for holding the hearing as

we lead up to the reauthorization, and I thank our panel for their

excellent testimony.

Chair SNOWE. We appreciate it. Thank you.

[The prepared statement of Senator John Thune follows:]

PREPARED STATEMENT BY SENATOR JOHN THUNE

Madam Chair, other members of the Committee, I would like to thank you for

holding this hearing today in anticipation of the upcoming SBA reauthorization. It

is important that, as a Committee, we provide oversight to the many programs SBA

uses to help create and strengthen small businesses across our country.

The programs we are focusing on today are important to our small businesses. Although small businesses employ half of the private workforce and make up 99.7 percent of all employers, they would not get their share of government contract work

without help. The SBA works to ensure that Federal contracts are not only going

to the big guys, but the little guys as well. We need to make sure that small business contracting regulations and systems are up to date and effective, but not overly

burdensome. There will always be a handful of bad actors who try to game the system, so we need to be vigilant to make sure these contracts are actually going to

the small businesses as intended.

We are also focusing on the Small Business Innovation Research Program (SBIR)

and its effectiveness. I am glad to see that we have a witness from my neighboring

State of Wyoming here today. Mr. Watson, thank you for coming to testify today

about your experiences with this program. Unfortunately, when there are research

and development dollars that need to be invested, rural America is not always the

first place that comes to mind. Although I think people that live outside of the city

limits are often some of the most innovative and entrepreneurial folks we have in

this country, venture capital dollars and R&D resources rarely make their way out

there.

The SBIR program, which reserves a specific percentage of Federal R&D funds

for small businesses, has helped reverse that trend somewhat. It is my hope that

we can come to a consensus on how to best fashion the SBIR program so that it

doesn’t create a chilling effect in the biotech industry. And make sure it does not

further shut out rural entrepreneurs from the already scarce R&D dollars out there.

Finally, I would like to thank all the witnesses for their willingness to testify before the Committee before we begin the important work of reauthorizing the programs of the SBA. Your input, along with that of all of our constituents that we

hear from day in and day out, gives us the information we need to make these policy

decisions. Decisions that will hopefully help strengthen America’s small businesses.

Chair SNOWE. Mr. Bigger, welcome.

STATEMENT OF THOMAS J. BIGGER, PRESIDENT AND CHIEF

EXECUTIVE OFFICER, PARATEK PHARMACEUTICALS

Mr. BIGGER. Thank you. Chairwoman Snowe, Ranking Member

Kerry, and members of the Small Business Committee, thank you

for providing me with the opportunity today to testify before you.

My name is Thomas Bigger, and I am the president and chief executive officer of Paratek Pharmaceuticals. Paratek is a privately

held, venture-backed biopharmaceutical company located in Boston,

Massachusetts. Paratek was founded in 1996 by Dr. Stuart Levy,

a professor at Tufts University School of Medicine, and Dr. Walter

Gilbert, a Nobel Prize-winning professor emeritus at Harvard University.

Paratek’s primary mission is to develop novel antibiotic and antiinfective agents that overcome the critical worldwide problem of

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bacterial resistance. Today, however, I am here to testify on behalf

of the Biotechnology Industry Organization, BIO, an organization

representing more than 1,000 biotechnology companies like myself,

academic institutions, State biotechnology centers, and related organizations in 50 U.S. States and 31 other nations. BIO members

are involved in the research and development of health care, agricultural, industrial, and environmental biotechnology products.

As a representative of one of the most innovative, high-growth

sectors of our Nation’s economy, one in which the United States

maintains a global leadership position, my testimony will focus on

the urgent need for reforms in the current eligibility rules of the

Small Business Innovation Research (SBIR) program. Senator

Bond has introduced legislation, Senate bill 1263, the Save America’s Biotechnology Innovation Research Act, which would make the

necessary reforms to the SBIR program. These reforms are essential in providing early-stage biotechnology companies with the opportunity to compete for, as they did for over two decades, and participate again in the SBIR program. Without reform, we could seriously jeopardize America’s innovation leadership and competitiveness in the global biotech marketplace.

Small biotech companies often rely on SBIR Phase I and II

grants to fund research in areas that most private investors or venture capitalists will not fund because they consider these areas to

be either too early-stage to fund, too risky from a market opportunity standpoint, or simply lacking in sufficient commercial returns.

For the first 21 years of the program, the SBA interpreted individuals to include individual entities or investment groups, as long

as they are majority-owned by Americans. However, in 2001 and

2003, SBA changed the eligibility rules which denies majority venture-backed companies from participating in the SBIR program.

Paratek has experienced firsthand the detrimental effects of this

rules change. In 2003, due to the changes in the SBIR eligibility

rules, we had to turn down a Phase II grant and shut down a key

antibiotic therapy research program, where ultimately we had to

lay off 10 employees. This program was originally started with

Phase I SBIR grant funding in 2001, and the NIH had urged us

to accept the grant despite the eligibility changes in order to continue this valuable research.

Some have raised the question that biotechnology companies that

are majority owned by venture capital companies are somehow no

longer small businesses. Nothing could be further from the truth.

Paratek, with 66 employees, is a small business, regardless of

whether we get funding from a bank, from a venture capitalist, or

from individuals. What separates biotechnology companies from

less capital-intensive industries is the sheer amount of money, the

length of time necessary for development, and the required FDA

approvals to bring a product to market. As such, private investment is not an option. It is an absolute necessity.

It is also critical to make it clear that venture capitalists invest

in biotechnology companies and programs because they hope to realize a return on their investments. These managers invest in a

wide range of companies so as to diversify their risk. Their job is

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managing money, risk, and return, not running a business, and

certainly not running a business to obtain SBIR grants.

As an example, at Paratek the management and individual investors own approximately 45 percent of the interest in the company. We have 15 different private investment groups who own at

most 5 percent each. Only one of these firms out of the 15 has a

board seat, and we can safely say that Paratek’s management controls the day-to-day management and direction of the science.

Some have also argued that the recent changes in the SBIR eligibility rules are consistent with the goals of the SBIR program. The

congressional record indicates otherwise. The SBIR statute and its

legislative record demonstrate that Congress intended to encourage

venture financing of SBIR awardees.

Paratek embodies what Congress originally intended with respect to the SBIR program. We employ highly educated and skilled

scientists that would like to make contribution to the treatment of

diseases in areas where there are significant unmet needs, but

where the commercial value is too low to justify private investment

at early stages of research. We believe that we have the technology

that can be put to use in areas such as the treatment of malaria,

filarial disease, anthrax, spinal muscular atrophy—which is a severe disease that affects a small population of children—and other

orphan and niche diseases. However, without SBIR funding to advance our research in these areas, it is unlikely that we will be

able to pursue potentially compelling treatments. As a result, much

of this innovative technology will sit on the shelf.

So, really, the time is now for this committee to consider and

support SBIR eligibility reform. Senator Bond has introduced Senate bill 1263. We urge all the members of this committee to support

Senate bill 1263 and to include it as part of the SBA reauthorization act this year. SBIR reform is critical now in order that U.S.

biotechnology companies can continue to innovate and remain competitive in the global marketplace.

Thank you.

[The prepared statement of Mr. Bigger follows:]

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Chair SNOWE. Thank you, Mr. Bigger, and I want to thank all

the panelists here today. Obviously, we are addressing an array of

issues as we proceed to the reauthorization of SBA, and as well,

we hopefully will be able to resolve some of the issues here today

I think reflected in your testimonies as well and your varying perspectives because these are, obviously, critical programs in the absence of support for small businesses.

Mr. Thorson, let me just begin with you on the question of contract bundling. Obviously, we have heard your perspective here

today as inspector general. There was a report that was completed,

you know, prior to your taking this position back in March on the

questions, and what you are speaking here today. And last time we

received testimony from the Office of Government Contracting and

Business Development contradicting some of the issues. And I

would like to have you explain to us here today, because I think

it is important. The contract bundling has been a vexing challenge

for the small business community in America. It is problematic to

me on a number of fronts, not the least of which, of course, is that

the SBA has not reviewed these contracts, in spite of what I think

has been said here in this testimony, which they claim that they

have reviewed the preponderance of contracts before they were

awarded. But I think that that is the question as to whether or not

they were actually reviewed at that process or submitted and gone

to OMB and already awarded and, therefore, never reviewed in

terms of their compliance with the bundling obligation.

Secondly, the President did say, you know, 18 months ago, that

there is a huge problem with these contracts and the massive requirements. And it seems to me that agencies have really moved

in a diametrically opposed position. They have now decided to

avoid the requirements of contract bundling by claiming they are

existing modifications or they are indefinite—I guess what you

have described as indefinite delivery contracts and, therefore, do

not qualify as new contracts, as a way of avoiding the whole contract bundling question.

Could you speak to those issues here today? And, also, I would

like to have you tell us what you think we ought to be doing in

the reauthorization, because I do think we should have some severe

penalties in law for those companies, those large companies, you

know, that sort of masquerade as small companies, you know,

using small businesses as fronts for getting access to these Federal

contracts. And we have already had one company, Insight, which

was a multinational, publicly traded corporation for misrepresenting itself as a small business for Federal contracts, and it had

a workforce of 4,000 employees and annual revenue of $3.3 billion.

And its predecessor company had been misleading the Federal Government as to their small business status for over 10 years.

How does this come about? And what can we do to resolve these

questions once and for all?

Mr. THORSON. On the bundling issue, first of all, we will take

kind of a simplistic approach to a rather complex issue, and that

is, we know that there were in one case over 200 issues reported

to OMB and about 20 to SBA. Now, the OMB reports are after the

fact, as you pointed out, and in SBA you are reporting it beforeVerDate 11-MAY-2000 16:54 Sep 14, 2007 Jkt 036593 PO 00000 Frm 00121 Fmt 6633 Sfmt 6601 C:\SBA\36593.TXT CELINA PsN: CELINA
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hand because you are asking for an analysis and, in a sense, permission.

At best, we felt that SBA ought to find out why there was a discrepancy. Clearly, there is something wrong here. The very best

case is people have made a mistake in reporting the bundling, and

I think in their statement they refer to the fact that we do not

know this was bundling. Probably true. But find out. Why not find

out?

And if the IG can go find out and if the OIG can go find out in

a very short period of time to see what was reported to OMB, our

position was that SBA should really do the same.

If it is a matter of an error, then we believe that some education

is required to clear up this process, because there are reports of

bundling that are incorrect.

If it is not an error and those truly were bundled contracts that

were reported to OMB, then we have another problem that is probably even bigger, and that is, the motivation as to why they did not

come to SBA first. And I think the obvious reason there is they did

not want to have to go through that particular process. We do not

know that, but it is a good guess.

So, again, going back, the simplistic view is our position is that

SBA needs to find out where this discrepancy arose from and why

it is there and what they can do about it.

Chair SNOWE. Well, you know, do these companies have to recertify each time they are submitting a bid? I mean, you know, if they

are going to try to bypass the whole process in one way or the

other, then obviously we have got a loophole and we are going to

have to figure that one out. And the first question, Is there a requirement that they would have to recertify every time they submit

a bid?

Mr. THORSON. Well, the final ruling that SBA has issued is regarding companies that are sold to large companies, and at that

point, they must recertify.

Our position is we would like to see annual recertification. We

think that exerts the best control. I do not believe SBA is 100 percent behind that particular viewpoint.

Chair SNOWE. Well, I guess what you are saying is essentially

SBA is not being a strong advocate and certainly not being aggressive on this question, and that is why we have massive inroads into

the current—you know, by large companies or otherwise that have

really eroded small businesses’ ability to even access these contracts.

Mr. THORSON. That is right, and we do believe that there is better control over this by enforcing some form of recertification. Our

position is 1 year because that is the tightest. If companies are required to do that, then it makes it very difficult for them to try and

slip under the wire on some of these other things as other contracts

come up.

Right now I believe the issue is for 5 years, and so for 5 years,

assuming for sake of argument the first contract causes you to

move into the large business category, for the next several years

you are going to be able to continue to bid. And I think that is the

point that was being made by our position on annual recertification.

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Chair SNOWE. And why has the rule proposed by SBA language

for 3 years? You know, what are the barriers there? Agencies?

Other agencies?

Mr. THORSON. The one that we referred to that has been 3 years

before?

Chair SNOWE. Yes.

Mr. THORSON. I really cannot answer that. That question is one

that we continue to ask.

Chair SNOWE. To which you have received no answer?

Mr. THORSON. Yes.

Chair SNOWE. Okay. Also, on suspending or debarring companies

from Government contracts based on violation of the SBA procurement size regulation, you have asked Congress to give SBA that

authority. Frankly, I think that this is a direction that we obviously ought to move and incorporate some of these strong penalties

within law. Yes?

Mr. THORSON. I am sorry. I couldn’t quite hear the question.

Chair SNOWE. Oh, I am sorry. It was concerning—you asked Congress to give SBA the authority to prosecute, to debar companies

who engage in fraudulent activities and disguising, you know, their

status as a small business company.

Mr. THORSON. Right. On the debarment issue, first of all, I think

there is a general reluctance to want to go down that road, anyway,

on behalf of the agency. But the issue really became one of, well,

do we really have the authority at SBA? Or is the procuring agency

the one that needs to pursue that? And then each looks at the

other to follow that path and nothing gets accomplished.

What we are looking for here is a clearance so that SBA truly

has the very clear understanding that they have that authority and

that they can pursue it when it is warranted.

Chair SNOWE. But I gather on some of the—I mean, I think in

terms of the promulgation of that rule, that some of the major

agencies, such as GSA and Defense Department, had objected to it.

Mr. THORSON. Yes. Actually, a lot of the definitions and the regulations and the issues as we read them, really do create an issue

of unenforceability.

If you are looking for a way not to pursue a difficult path—which

certainly these are difficult—they are confrontational. They are

sort of against the general trend of, ‘‘We are supporting the small

business here.’’ They do not necessarily want to get into that role.

It is easy to duck it because of the fact that the regulations really

are such that it is difficult to enforce.

Chair SNOWE. Yes, and I think that we really do have to

strengthen the enforcement one way or the other. I think as your

office indicated and your testimony, over 80 percent of these bundled contracts have not been reviewed. I think that is a startling

statement. Now, they do not try to, you know, disagree with that,

but I think the evidence is in the numbers. And the fact is it illustrates that we have got a serious problem and that small business

being denied access to Federal contracts, you know, in many ways

and in many forms.

Mr. Sims, would you care to address this question at all?

Mr. SIMS. I was just going to say I support the notion of recertifying annually. And a parallel in the minority business side, we do

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certification for corporate America, and we have come across these

new constructs of businesses where a major corporation will buy 49

percent of a minority-owned business; therefore, they get 100 percent of every contract they are able to bring in and 49 percent that

the minority business brings in.

We have sat down and put a task force together to look at the

criteria to ensure that these new businesses meet not only the content of the law but the spirit of the law. And the notion of having

someone come as a front—it is nothing more, nothing less—jeopardizes and threatens the integrity of the entire program. So we

are looking at how do we go about ensuring for minority businesses

that they remain in charge and remain in control of their own destiny. And I think that that is something that may be taken under

advisement and consideration.

Chair SNOWE. I appreciate that, because I think that is a very

critical point as well.

Dr. Wessner, you offered some very interesting testimony and

presentation on the value of the SBIR program, and obviously that

is at the heart of the question here today, particularly the role that

venture capital firms should play or could play in the SBIR program. And you illustrated the point in your presentation that large

U.S. venture capital markets are not focused on early-stage firms.

I would like to have each of you address this, because we are trying

to figure out where is the middle ground here, making sure that

we have venture capital firms that can play a role, but at the same

time don’t dwarf, you know, the smaller firms, the individuals, or

the States that do not have large venture capital firms so that it

inhibits their ability to participate in this program.

Mr. Bigger, I know you represent pharmaceuticals, and, again,

pharmaceuticals generally—it is a long-term investment, but generally it is in the later stages as Dr. Wessner indicated in his statement about the fact that large venture capital firms do not focus

on early-stage development.

Is it possible to create sort of a post-Phase II, you know, that

concentrates perhaps more in-depth to the commercialization, the

potential commercialization of a product and whether or not it

would be able to be brought into market? And it would address

your question, Mr. Bigger, without, I think, intruding on the value

of the program and the essence of it originally and the way in

which it was designed.

Dr. Wessner, do you think that is possible? I mean, do you think

that that would work?

Dr. WESSNER. Thank you, Senator.

Chair SNOWE. If you would answer that question, then we will

defer to Senator Kerry because he has to go to the floor.

Dr. WESSNER. Certainly. One qualification first is that we are addressing here today the concept, its virtues, and how the markets

actually work. I am sensitive to Senator Kerry’s observation that

our work is grounded in previous analysis that we have before us,

but the report itself is not out.

To answer your question, I can, therefore, only give a partial answer. The Academy is not yet prepared to make a recommendation,

but there are two key points. One is that we have with the agencies, as a result of the interest that they have brought to this proVerDate 11-MAY-2000 16:54 Sep 14, 2007 Jkt 036593 PO 00000 Frm 00124 Fmt 6633 Sfmt 6601 C:\SBA\36593.TXT CELINA PsN: CELINA
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gram, you have at NSF, for example, a Phase IIB program that

brings in additional funds and a Phase IIB Plus, we like to joke,

not to be confused with Phase III, of course.

[Laughter.]

Dr. WESSNER. But it does seem to bring additional funds forward, and for the Phase IIB and the Plus, they are required to provide matching private sector funds. So that, I would simply suggest

from our observation, shows one avenue forward.

But if I may, Senator, the most disturbing thing about this debate is that it is characterized by the absence of research and data.

And we have been in discussions with the NIH to try and get a better view on what the facts of the matter are. And I would say,

without taking a view of either those who favor venture capital

participation or those who do not, it would be very helpful if we

knew what we were talking about. And I think the program is sufficiently important, the question is sufficiently important that we

should encourage the NIH to engage in some research, which I

think could be done in a fairly timely manner. It is not that hard,

and I am distressed that it has not been done already.

Chair SNOWE. Yes, that is a good suggestion. I know that GAO

did a study but did not evaluate the majority-minority participation.

Dr. WESSNER. It may not be a surprise to you, Senator, but we

think the National Academies might be more qualified to carry out

that study.

[Laughter.]

Chair SNOWE. Okay. Thank you. Point well taken.

Senator Kerry?

Senator KERRY. Chair Snowe, thank you very much for accommodating me. I apologize to the witnesses, but there is an amendment

on the floor that I need to go and be involved in. Let me press a

couple of quick points, and then I will leave some questions for the

record, if I can.

Mr. Thorson, just coming to you quickly, first of all, thank you

for your testimony and thank you for this oversight, which is important. Senator Snowe has already gone into the fraudulent component, so I will let that stand. But let me address your second

point, the contracting officer error. You say that good cases have

been undermined by contracting personnel at Federal agencies who

do not comply or are just unfamiliar with small business contracting requirements.

Now, how can you be a contracting officer and be unfamiliar with

the requirements?

Mr. THORSON. The small business regulations—well, first of all,

you are correct. But, in fact, we find that there are contracting officers who deal regularly with very large corporations and——

Senator KERRY. In which agencies?

Mr. THORSON. Well, I hesitate to name any particular ones because as soon as I do that, I will end up——

Senator KERRY. Well, isn’t that your job? Aren’t you supposed to

name them?

Mr. THORSON. But, there are those who do not know the small

business regulations or the 8(a)——

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Senator KERRY. Well, that is just a fundamental function of leadership. I mean, if you do not—somebody has got to sit them down

and say: Here is the protocol; you do not issue any contract without

checking off this list.

Mr. THORSON. Right.

Senator KERRY. This is pretty simple.

Mr. THORSON. Sometimes it is as simple as exactly that, and

one——

Senator KERRY. But it does not happen. Why?

Mr. THORSON. I cannot tell you exactly why, but I do feel that

part of what we have suggested is——

Senator KERRY. I just find it shocking.

Mr. THORSON [continuing]. That where this happens, the SBA

needs to become involved in some kind of training aspect if this is

really the problem we think it is.

Senator KERRY. Why the SBA? Isn’t each agency responsible for

living up to these standards? You go through a list here, and I applaud you for it. But listen to this: Agencies accepted bids from contractors on small business contracts even though the contractors

had not certified that they are a small business.

Nobody who does not certify should even get it, period, end of

issue.

Mr. THORSON. Right.

Senator KERRY. It is like going to get a bank loan. Without full

disclosure, you do not get it. I mean, this is—it is sort of—I am sitting here and I am saying, ‘‘What is going on here?’’ Other errors

have included failing to request size certification from a business.

Mr. THORSON. Right.

Senator KERRY. I mean, there just ought to be a fundamental

checklist, and you do not go forward with your application if you

do not check off the list. It seems like there is a willing complicity

in this process, frankly.

Chair Snowe, I think we have got to ask for something more

from the leadership of these agencies and the administration. This

is just unacceptable. This is why it goes on and on and on and on.

Nobody enforces it. Nobody cares. Nobody puts it in place. This is

not a joke.

Mr. THORSON. And this is exactly why we specified these things

in our testimony, because a lot of people, if you talk about these

things, they just cannot quite believe it is that simple that people

cannot follow these particular rules.

Senator KERRY. It is just stunning to me.

Mr. THORSON. And that is exactly why we have put this into the

testimony, because we wanted you to see the kinds of things that

we find.

Senator KERRY. Has anybody been fired for failure to do these

things?

Mr. THORSON. Not that I am aware of.

Senator KERRY. Well, they ought to be.

Senator KERRY. Let me continue through your testimony. You

say, ‘‘What can be done to correct the problems with small business

contracting?’’ You talk about the final regulation. Then you say,

‘‘However, it has now been more than 3 years since SBA issues its

proposed rule on annual certification.’’

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Mr. THORSON. Right.

Senator KERRY. Three years.

Mr. THORSON. In fairness—and this gets back to what Senator

Snowe asked me also—there are a lot of agencies giving input into

this, and this is a very controversial element to——

Senator KERRY. Sir, with all due respect, we cannot take 3 years

to do these kinds of things. This is what drives the average citizen

nuts. This is Washington.

Mr. THORSON. Right.

Senator KERRY. I mean, we cannot do that. Three years to decide

about an annual certification, which is accountability.

Madam Chair, I would like to ask you, I think we ought to ask

for a deadline from the SBA as to when this is going to be either

decided or not decided.

Chair SNOWE. Well, I would concur. I do not think there is any

rationale for it, and GAO has, you know, even indicated it could

improve certification for small businesses every year. It is very simple.

Mr. THORSON. Right.

Senator KERRY. Finally, you say, ‘‘Congress could also establish

control processes within the SBA.’’ You know, we cannot—are we

going to micromanage? I mean, this is crazy.

Mr. THORSON. Yes, sir.

Senator KERRY. You have to demand this. As the inspector general, you have to require that they are going to live up to the

standard, and we in the oversight hearings ought to demand it,

and we ought to have an oversight hearing on this and demand it.

It is just—you know, I have been around here long enough to understand what can be done and what cannot be, and this is just unacceptable. It is a matter of administrative leadership. You bring

your people in, you set the standards, you hold accountability, you

measure the standards at the end of a month, at the end of 2

months, and people who do not meet them do not work anymore

at that agency. That is how you run it.

Mr. THORSON. Yes, sir.

Senator KERRY. And somebody ought to do that.

Mr. Watson, before I have to leave, I thought your testimony was

succinct and very comprehensive, and it was terrific testimony.

And I just want to ask you and Dr. Squillante to debate with Mr.

Bigger here. It may be inadvisable to get into a debate with a guy

by that name, but anyway.

[Laughter.]

Senator KERRY. You described S. 1263 in pretty Draconian

terms. It is going to really undo the system. It is going to hurt. On

the other hand, Mr. Bigger, you say, American competitiveness is

at stake here, we have got a really divergent point of view.

The Chair has appropriately pointed out this later-phase financing with respect to what VC gets involved in and does not get involved in.

Isn’t there a legitimacy to the notion that SBIR is getting people

starting up and getting them to a point where, if they have got

enough legitimacy and enough credibility in what they are doing,

they are going to get VC money; but that you should not undo that

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already too small a pot of distribution to those entities that need

it by creating competition for VC stage financing.

I am asking that. I am not certain, and I am really trying to figure this out. But it is hard for me to understand how a company

that can attract $78 million worth of VC investment has enough

credibility to do that but it cannot go to the next tier with the next

product, or whatever it is.

So I want to hear you guys go at it a little bit, if you can.

[Laughter.]

Senator KERRY. I mean, what do you say—you have not responded to Mr. Bigger’s testimony, so what is your response to his

notion that this is going to hurt American competitiveness?

Mr. WATSON. Well, I understand that there is a problem that the

biotech people have, which is to bring a pharmaceutical product to

market takes tens, even hundreds of millions of dollars. But that

is not a role that the SBIR program is equipped to address or satisfy. And if that is a real problem—and I cannot say whether it is

or not—but if it is real, it needs another solution, not the SBIR solution.

Senator KERRY. And, Dr. Squillante, you sort of argued the same

thing. You agree with that.

Dr. SQUILLANTE. Yes. I think that it is clear that venture capitalist firms have a long, expensive road to go, but it is not what

SBIR is about. And it is not the $100,000 and $750,000 awards

that these companies are after. They are after awards that are 10

times that size. They have access to other funding. They can participate in SBIR if they own less than 50 percent. If they only meet

the statutory requirements that everybody else in the SBIR program has to meet, they can own more than 51 percent. And I agree,

these venture capital-funded firms have a lot of great ideas that

could have an impact on the future health of the citizens of the

country. But so do the eight to ten other small companies which

will be eliminated from the SBIR program for each one of these

very large awards that are awarded.

Senator KERRY. Mr. Bigger?

Mr. BIGGER. Yes, I think what you need to do is really split this

thing up in terms of where venture capital puts their money and

what other research goes on. And I will speak to my own company,

but it goes beyond just my company. I think we are just an example.

Venture capital is basically supporting big ideas that they view

as having large market potential, great returns to them as an investor. There are a lot of other programs. For instance, most of my

money that I have raised for my company has gone to developing

a broad-spectrum antibiotic for the treatment of bacterial infections

that are resistant to current drugs. Okay? That is a huge opportunity. I have spent probably $50 to $60 million already doing that.

I am going to spend another $250 to $300 million bringing it

through Phase III. So that is where the venture capital money

comes in.

However, there are instances, where my technology actually can

be used in things other than infectious disease. For instance,

tetracyclines now can be use for the treatment of multiple sclerosis.

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We plan on entering the clinic at the beginning of next year with

a potential oral treatment for multiple sclerosis. How did we find that out? By using grants of $250,000 to $500,000 to do that basic research, not——

Senator KERRY. Well, let me try to get at this a little bit. First

of all, we are all anxious to go down those avenues of exploration,

and we are all anxious to try to excite as much investment and exploration in those as possible. This is our future. Life sciences is

one of the most, hopefully, promising job creators and solid parts

of our economic future. But here is the dynamic.

With a small pie to be divided up, is this the best use of that

pie from this particular sector of our Government? Or do we need

to be thinking in larger terms or a different term or, to pick up on

what Senator Snowe said, is there some sort of alternative phase

of financing that we might consider being engaged in and then

pulling out of at a certain point? Is there a different way to skin

this cat?

Mr. BIGGER. I actually believe there is. But I also believe that

there are some real advantages to using a venture-backed company

because there is information that has been developed. You can leverage the infrastructure to do things on other projects that typically would not be funded.

For instance, a lot of the work that goes on in my company, we were able to do it for $250,000, $500,000 on these grants because

we have leveraged the larger infrastructure that somebody paid

money for from an investment standpoint.

So I think you actually get more bang for your buck when dealing with some of these firms because they have infrastructure, they

can do things that you typically cannot do.

The other piece to this that deals with where the money goes, is

that it does go outside of the Boston and California area, I can tell

you that we had four SBIR grants. Every one of them involved a

university helping us do some of the testing of the drugs (animal

testing and in vitro testing). They were done at universities outside

of Boston. One of them happened to be in Kansas; the other in

Georgia; and one of them was in California.

But, again, there is money that goes into other parts of the country other than just into these two areas, and it goes through, is

funneled through the companies.

Senator KERRY. Well, I appreciate it, Chair Snowe. Thank you

for you——

Mr. WATSON. Could I add a comment?

Senator KERRY. Yes, sir.

Mr. WATSON. SBIR takes 2.5 percent of the total funding; 97.5

percent is at another door. My recommendation is that they look

to that other door at the NIH, which NIH is the institute that is

affected here. And we have already proposed or we are in the process of proposing a compromise solution that goes in that direction.

Senator KERRY. Well, thank you very much, Mr. Watson. We are

interested, obviously, in trying to work this through and be helpful,

and I think Chair Snowe and I would like to see if there is a way

to get a compromise here that does what we both want to do. We

want to excite the biopharma field, and we also want to preserve

SBIR’s ability to work.

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Dr. Wessner, I know you were trying to get a comment in. I am

trying to get to the floor. Competing interests.

I trust, incidentally, when you are talking about Yankee principles, you are talking about Maine and Massachusetts, not the

New York——

[Laughter.]

Senator KERRY. Not the New York kind of Yankee.

Mr. WATSON. I think now I can safely say yes, sir.

Senator KERRY. Mr. Wynn, I cannot stay to hear the answer, but

I am interested and maybe you could submit it for the record. I just

really want to know what you think we can do to more effectively

meet the service-disabled veteran procurement goals. I think that

is really important.

Mr. WYNN. By all means, sir.

Senator KERRY. Thank you, sir. I appreciate it.

Chair SNOWE. Thank you, Senator Kerry.

Senator KERRY. And thank you all very, very much. And, Mr.

Thorson, I just want to say, I think what you did—when we asked

those questions of you at your confirmation, whether you are going

to draw the line between yourself and the SBA, I think you did

that in this report, and we really appreciate it. And I think that

is a great start, so thank you.

Mr. THORSON. Well, thank you, sir.

Chair SNOWE. Yes, thank you.

Dr. Wessner, did you want to continue? Did you have any comment to make?

Dr. WESSNER. Yes. If I may, I think the discussion we just had

illustrated a point. You know, how many of these firms actually

have venture capital? And how many of these firms have what sort

of venture capital? And how many of them are working on the

same thing for which they have the venture capital?

I could go on, but I think you take my point. It is just simply

we do not really have a very good grasp of the parameters of this

issue.

Chair SNOWE. You know, it is an interesting question at this

point as to whether or not we defer consideration of any changes

until we can get a factual report that indicates exactly, you know,

what are the numbers, who is participating, you know, how would

it affect the whole program. And I think that is the question.

On the other hand, SBA has made a decision, and, you know, we

are concerned because, obviously, there is a difference of opinion on

this committee. But I do not think it is, you know, so far apart that

we cannot, you know, sort of resolve those issues. And the question

is whether or not we proceed with that now.

For example, Mr. Bigger, on the question of having venture capital participation, you know, with venture capital companies, not

individuals, what about—as I think even Dr. Zerhouni said at the

NIH, indicated in a letter that just having that requirement, allowing that requirement for venture capital participation, but to comply with the small business affiliation of 500 employees or fewer,

how would you react to that?

Mr. BIGGER. Well, I think if you look at most venture capital

groups, they are relatively small organizations. There are a few

large ones. But in general, they own somewhere between 5 and 20

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percent of a company they invest in, and even if you probably

added up all the people that work in the venture capital companies

that have invested in my company, you probably could not even

come to 500 people, combining the employees of Paratek and all the

investors employees. Venture capital people have a difficult time

within their own firm agreeing on plans and coming up with the

direction they would like to take with a company, never mind trying to convince 10 other venture capitalists to all agree in terms

of the directions of where their company could go.

So I just do not think you can look at a venture investor as a

big company. It is not. It is really individuals within a company

who come and observe board meetings or participate on a board.

It is not an organization of hundreds and hundreds of people, as

venture capitalists are small organizations. And they do not run

my company and their involvement in my company is not very different than they are with some other portfolio companies. They

may have 20 companies in their portfolio, each one having a different area of expertise or whatever the case may be.

Chair SNOWE. Well, but they do have the ability now—I mean,

NIH, for example, has the ability to waive the guidelines. DOD

does. They can go to SBA to waive the guidelines. I think, Mr. Watson, you indicated—isn’t it 70 percent of the NIH grants that went

to——

Mr. WATSON. Were in excess of the guidelines.

Chair SNOWE. Yes, were in excess of the guidelines, have gone

above the guidelines, so there has been that flexibility.

You know, Dr. Wessner is right. We do not have the facts on

what companies and what size and so on, and that obviously would

be very useful in this discussion. But what we do not want to do

is to really undermine the original intent of the program when it

was, you know, established, which was to allow the entrepreneur

the innovation that needs—you need to nurture that, because otherwise that will be overwhelmed if, you know, potentially large

companies can be involved in this process and, you know, change

the form of the program. And it ultimately could. It could change

the whole direction. I think it is a question of where do we find,

you know, the right balance in this program to ensure that you get

both. But at the initial stages, you certainly want the small business and you want to be sure that it is not always concentrated in

just a few States across the country. I mean, very few States have

large venture capital firms. You know, my State has maybe one or

two small ones. But most of the, you know, venture capital is concentrated in very few States, about 10, as I think Dr. Squillante’s

testimony indicated, that about 85 percent of it in 10 States. That

is a major concentration.

Yes, Dr. Squillante?

Dr. SQUILLANTE. Thank you. And following up on this point, I

think that the question of affiliation and size is an area where we

almost certainly have grounds based on these comments, where we

can move forward on a compromise.

I do want to point out that Senate bill 1263—take for granted

that, let’s say, you need to change SBIR. Let’s assume that. That

is not what Senate bill S. 1263 does. It does not change the rules

on affiliation or numbers. What it does is Section 3 of that bill very

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specifically waives those requirements for venture capital firms.

And to do that is to set special rules for a special group of people,

and that is definitely wrong.

Mr. BIGGER. I think that that is where a compromise could be

reached. I think it is important to understand that, you know, a

lot of the research that is being done by companies like Paratek

and so forth are truly entrepreneurial. You know, they are venturing into areas that venture capitalists are not going to put

money into. And if you look at where venture capital is located, it

is pretty much where all the major money markets of the country

are and the world are. And so you just need to follow the money

and find out where they are going.

But if you attend a biotechnologies annual meeting, you will find

that almost every State in the Union now is trying to attract biotechnology into their State, and they are very seriously trying to

utilize the universities to do that. And I think it is a great way,

and that is how I think you are going to get some diversity in

terms of where money goes into States such as Wyoming and other

States that do not right now have a lot of venture capital money.

But I think it is unfair to exclude a company, just because you

have venture capital investors. In order to develop a big drug for

different diseases today, it takes a lot of money right from the beginning. And you can literally just by starting a company be over

the 50-percent ownership of venture capital, and you have not done

anything at that point in time.

So I think there has got to be some way to define what the affiliation needs to be or that type of thing, and not just make a blanket

rule that says any venture capital backed company that is 51-percent owned should not be that way. Because today, based on the

rules, Madam Chairman, I could license myself as a management

group, can start a new company, and call it Bigger Pharmaceuticals, license the technology out of Paratek, and then apply for

a grant back to SBIR, have all the work done at Paratek, then give

a royalty-free license back to Paratek, and no one would be the

wiser. I would be legal in terms of what I did. But I think that is

not what the intent of the law is or intent of what Congress wanted.

I think it is important that we somehow compromise as to where

we are and how we can maximize the money that the NIH has

through the SBIR program. How do we maximize that? And I think

it is a win-win for both groups. You know, I think we have a difference of opinion as to affiliations and venture capital. But I think

in the end we are trying to improve the innovation and where the

United States stands in terms of innovation worldwide.

Chair SNOWE. Well, would you agree with the affiliation requirement that they be 500 or fewer, the small business affiliation requirement?

Mr. BIGGER. But, again, how do you define that with multiple

VCs that have multiple companies they invest in—do you combine

all of their portfolio companies employees and say that is the 500?

Chair SNOWE. We obviously would have to come up with a definition?

Mr. BIGGER. Yes, I think that that is a way to go that would not

penalize some small companies. Paratek is a 66-pension company

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which has had to return three SBIR grants that, believe me, would

not be funded by venture capital—one for the treatment of anthrax,

one for the treatment of malaria, and another treatment for spinal

muscular atrophy. But I have been forced to return the grants. And

I think it wrong that because Paratek is 55-percent owned by venture capitalists, it does not qualify as a small company.

Chair SNOWE. These are not because of individual investors?

Mr. BIGGER. Yes, 45 percent of my investor base is individuals.

If you look at it in terms of U.S. investors, including VCs and so

forth, I am probably in the 65 percent range. So easily qualifying

for the SBIR, but unfortunately, the 20 percent of the venture capital is not included because they are not individuals.

Chair SNOWE. Yes, Mr. Watson?

Mr. WATSON. I would like to remind everyone of the longstanding

eligibility requirement that says ‘‘independently owned and operated,’’ and that has been the criteria. And I think it should stay

that way.

Chair SNOWE. In the Small Business Act, yes.

Mr. WATSON. Absolutely.

Chair SNOWE. Yes. Dr. Wessner?

Dr. WESSNER. Just again a small observation. I think the line of

questioning you have is intriguing. It underscores the need to know

the dimension of the issue, as I have mentioned. But also one of

the points that I think is relevant that we documented in this first

volume is maintaining the flexibility of the program. You may want

to—if the numbers are not large, there may be an opportunity for

the agencies on a case-by-case basis to ask for some exemption. But

that simply illustrates why we need to know more about the dimensions of the issue, my point being there may be some happy

middle ground where we could work through that.

Chair SNOWE. I appreciate that. Yes, we try to find them these

days, although not easy.

Dr. Wessner, while we have you here, I wanted to ask you, obviously you spoke, I think very eloquently, to the value of this program and how, you know, other countries are emulating this program and possibly go beyond it. The Office of Management and

Budget on their expectmore.gov website indicated that over half of

the SBIR program has not demonstrated results.

Can you speak to that issue at all? Do you think that OMB has

the resources, the expertise to conduct the kind of quality assessment that is required?

Dr. WESSNER. Thank you, Senator. You ask penetrating but complicated questions there. I am not prepared to discuss specific recommendations of the Office of Management and Budget for reasons

that you would understand. I think the question you are asking is

a perfectly valid one. One of the things that we have documented

here—and I do not mean to be self-serving, but this is the methodology that we are employing and it is public.

There is sometimes the risk that an agency takes a view, and I

think institutionally it is important to understand—and this is a

personal opinion, not an Academy opinion—that the Office of Management and Budget likes a program that is in the budget that it

manages. And the SBIR is not. So I am not sure you can instituVerDate 11-MAY-2000 16:54 Sep 14, 2007 Jkt 036593 PO 00000 Frm 00133 Fmt 6633 Sfmt 6601 C:\SBA\36593.TXT CELINA PsN: CELINA
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tionally expect love and affection from OMB with regard to this

program.

Chair SNOWE. It may not be the exception, either.

[Laughter.]

Dr. WESSNER. If I may, let me just very briefly, if I could, in a

few paragraphs answer your question. One of the things that you

have to recognize when they ask whether there has been significant accomplishment is the diversity, first, of what they are trying

to do. Different agencies have different missions. They have different philosophies. They have different types of topics. They have

different roles in the solicitation. And they have different expected

outcomes. NSF is trying to do something dramatically different

from the Department of Defense, and when we find those

grouped—and if I am not mistaken, you may well be quoting from

one of the studies of Defense. So there is this wide variety of

things.

When we say is it commercially a success, well, again, without

trying to—what do we mean by ‘‘commercial success’’? For example,

if a firm comes up with a new and better nuclear trigger, do we

really expect that to be sold widely commercially? Well, probably

not. We would not want to encourage that, I think.

It is important to keep in mind that in some cases you can have

a very significant accomplishment by the program in a Phase I.

They answer the question. In some cases, they can come up with

an algorithm that can have important security accomplishments,

but the $100,000 Phase I solved that, done. There is no commercial—no apparent commercial application afterwards. And that illustrates an underlying problem. We talk about SBIR, but within

the agencies these things are not stamped ‘‘SBIR.’’ As one researcher put out, there is no SBIR shrine either in the agency or

necessarily in the company.

I think one of the points that was illustrated is often a series of

awards go to build a capacity in a company where the company

then does something different than the project. So we can come

along with our researchers: Did your project work? Were there any

sales? No. If we do not ask anything else, he will not tell us, Oh,

but that actually enabled us to do the thing we did succeed with.

I do not want to be, seriously, an apologist for the program.

Things can be improved. But it is very important to understand the

complexity of what we are asking. And if I may just illustrate that

with a recent real experience down in New Orleans with Governor

Blanco, a very distinguished and intelligent State official from Virginia turned to me just before I spoke, and he said, ‘‘Does this program really work, do you think?’’ And then he got up and he wanted to talk about the new developments in Southern Virginia by a

company called Luna Innovation—which, of course, was funded by

SBIR. And I think that illustrates the sort of gap that we sometimes get.

You know, ‘‘It is my company, that one worked. But does the program work? I don’t know.’’

So that type of thing I think has to be taken into account, and

we will hopefully document it. But sometimes I think emulation, as

I discussed earlier, is the highest form of flattery for a program

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and the fact the rest of the world is doing it may suggest we are

on to something.

Chair SNOWE. And I think you make the point that you have to

measure the original goal, and it is in our interest and the Federal

Government’s interest to encourage and nurture this culture for,

you know, R&D that otherwise the Government cannot do, but to

support it and hope the innovations can be, you know, applied, you

know, whether it is in DOD or elsewhere, Department of Energy

and so on, but in the commercial sector as well, depending on what

it is all about. But I agree with you—or a pharmaceutical. So, I

mean, it is in our interest, and that is not measured, I think, by

OMB. It just looks at the end result of whatever it is but not where

it ends up going or, you know, what was the original purpose.

Mr. Wynn, a final few questions here. On veterans contracting,

do you think that there should be a formal certification for servicedisabled veterans?

Mr. WYNN. Chairman Snowe, that has been discussed among the

veteran business community, and right now it is being supported

by many of them to use the Department of Veterans Affairs to

come up with a certification program for service-disabled-veteranowned businesses.

Chair SNOWE. And I think it is unfortunate about dismantling

the Office of Federal Contracting Assistance for Veterans and the

Advisory Committee as well for Veterans Business Development.

So I gather you are recommending that we ought to reverse those

decisions?

Mr. WYNN. Well, we would like to see more Federal contracting

support for veteran business owners out of the SBA, whether it be

that office or now they are talking more about the Office of Veterans Business Development, which had already been there but

had not been providing a great deal of assistance in Federal contracting. So we would like to see more support from there.

Chair SNOWE. Is that what you are recommending, 23 to 28 percent?

Mr. WYNN. Yes, ma’am.

Chair SNOWE. Yes. It may be a challenge, but I understand why

you are recommending it. And I think that obviously we are going

to have to really concentrate on, you know, what has gone wrong,

as a matter of fact, in providing more support for our veterans,

frankly, you know, especially when they return from, you know,

serving in Iraq and Afghanistan, a lot of them small business owners and coming home. We need to provide them the assistance that

they deserve, getting back on their feet and making, you know,

that transition as well.

Mr. WYNN. Could I make a comment on one other thing, too, if

I may? If it is in some way possible to eliminate what we call the

Rule of 2 to provide more ease of contracting with service-disabledveteran-owned businesses, we believe that this would really increase the number of contracts awarded to service-disabled veterans. And it should not, in the opinion of many, be very difficult

to do that.

Chair SNOWE. Okay. Thank you.

Mr. Thorson, we just got a response from SBA that e-mailed us

that on the 3-year delay of the rule, they are saying it is because

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the SBA inspector general—obviously not you since you just arrived, so you can breathe a sigh of relief. But what is the issue

here? Because, obviously, we want to get to the bottom of it, and

I think it is going to be absolutely essential that we do. But, you

know, what would be the justification for their suggesting that it

is the inspector general’s office that is delaying the rule?

Mr. THORSON. I am sorry, ma’am. For some reason I am having

trouble hearing you. I apologize.

Chair SNOWE. Okay. The SBA e-mailed us saying that the delay

in the promulgation of the rule, you know, that has been delayed

for 3 years was because it was held up by the SBA’s Office of Inspector General—not you, of course, because obviously you just arrived, but obviously the previous inspector general.

[Pause.]

Mr. THORSON. Obviously, I was not involved in that at this time

so I am not real sure, but we do circulate those internally. But I

really have a hard time understanding that they feel that we held

that up.

Chair SNOWE. Right.

Mr. THORSON. That is not our position.

Chair SNOWE. So you do not have any idea why they would have

suggested—why the inspector general’s office would have been responsible for that?

Mr. THORSON. No.

Chair SNOWE. Okay. Well, obviously, we need to get more answers, and I think very aggressively so on these issues. I am very

disturbed, frankly, by the violations of law, the fronting of companies. We have got, you know, large businesses that are fronting the

small businesses, you know, replete with examples, and also the

fact that people are just, you know, continuously violating flagrantly contract bundling. And we are just going to have to get to

the bottom of it. And I think that have strong penalties in law and

setting examples for prosecution is going to be essential. But I am

just very—and even some very well established contractors, you

know, have been named by the GAO as potential beneficiaries of

fronting. I mean, they are fronting small businesses, I mean major

contractors, which I think is extremely disturbing, and it just

shows to me a flagrant violation and dismissive attitude, you know,

about what the rules and regulations, not to mention the statute

requires.

So I am going to explore a legislative solution, and I think that

your office should continue investigations regarding these issues.

And I would do it immediately because we would like to move forward in trying to get to the bottom of it and we are able to make

sure that this does not continue, this pattern of behavior.

Mr. THORSON. Right. And to go back to Senator Kerry’s point for

a minute on the contracting error, when you involve the people

from other agencies, that obviously hinders our ability to go into

that. So we have been working with the other IGs and actually

have created a Small Business Review Guide in order to help the

OIGs of other agencies to be able to look at these situations as

well. And I think that helps to address what Senator Kerry was

talking about as well.

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Chair SNOWE. Well, I agree, you know, and their statement that

they submitted last night says that SBA’s ongoing review of the

underlying is that firms receiving these contracts were legitimate

small businesses at the time of the award but great to be large or

were acquired by large businesses over the life of the contract. And

I am thinking, well, how long is the contract? I mean, that would

all have to happen sort of quickly.

Are you familiar with that argument? Are you, Mr. Sims? Have

you heard that one before?

Mr. SIMS. Yes, I have heard that. But if you think it is bad for

small businesses, when you get to minority businesses it is even

worse.

Chair SNOWE. I can only imagine.

Mr. SIMS. I spent several months with folks at SBA looking at

a third-party certification program. At the end of that 7 months,

somebody was transferred over—and this was in the last administration—from the White House, who sat in the room and designed

a third-party certification program on their own with no experience. And when they had the bidders conference, there were only

two organizations that had certification experience in the room:

NMSDC and WBENC, the Women’s Business Enterprise National

Council. Everybody else was a minority supplier looking at a revenue stream, and the certification program set up by SBA was a

failure. At one point they expected after the first year 30,000 businesses in their database. They had 3,000. They had to go to the Department of Transportation and get their folks and other agencies

because it was an abysmal failure.

Two years ago, they did another RFP on third-party certification.

Ten days before they applications were due, they pulled it off and

canceled it. And they recently, last year, came up with another

third-party certification attempt. But the only people eligible were

8(a) firms. And so the craziness is that the notion of having one

8(a) firm looking at your financials, looking at your customer base,

and then determining whether you are eligible, that is why I said

there is chaos and turmoil over SBA. And I am not surprised at

the tap dance of saying it is the inspector general’s office that is

holding this up. It is not surprising.

Chair SNOWE. Okay. Mr. Thorson?

Mr. THORSON. It was a little surprising to us.

[Laughter.]

Chair SNOWE. Welcome to your job.

Mr. THORSON. The point that you also made as far as the companies growing and being recertified as to the issue of 1-year recertification is controversial and we know that. I mean, there are positions that break down politically. There are positions that break

down in any other ways as well. But the truth is, if you use that,

that gives you the tightest rein of control on this. And whether

companies are growing large or not, it really comes down to, with

annual certification, you really do exercise a much better element

of control.

I think it also affects, frankly, some of the errors that we are

talking about, and I keep coming back to Senator Kerry’s question

because I was taken aback by it because it was such an obvious

one. Well, how can you not realize as a contracting officer that

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somebody has not certified one way or another? That was a hard

question to answer. I do not know.

Chair SNOWE. It was too logical, that is why.

[Laughter.]

Mr. THORSON. And so those are the kinds of things that I think

if the certification is required more frequently to the point of annually, then I think you do eliminate a lot of these things.

Chair SNOWE. I would agree with that. I think that is absolutely

right. I think that is obviously a frustrating point, and I think we

recognize some of the changes that need to be made very shortly,

and I appreciate it. And I know it is frustrating, but I think you

understand the tasks at hand in your department, do you not?

Mr. THORSON. Yes.

Chair SNOWE. That is right. It is a great initiation. But I think

that this is a good way to start in understanding the dimensions

of the problem, hearing others here today speaking to these questions, and we would like to tackle it very shortly, if possible, and

do as much as we can in the reauthorization, which we expect to

accomplish by the end of this month. But, you know, so we hope

that we can get your input to the degree that you can, and others’

as well, as we proceed on these questions.

I would also like to say that Senator Enzi had to meet with the

leaders and that is why he had to depart, but I am going to submit

questions on his behalf as well.

I appreciate your input, your patience, your testimony, your guidance here today, and also sharing your perspectives of your experiences and background. It has been very helpful, and I am hopeful

that we can resolve some of these questions here before this committee on these vital programs that certainly can and do make a

difference. And we want to make sure that we can preserve the integrity of them as well. So I thank you all for being here today and

for taking the time to participate and testify before this committee.

With that, the hearing record will remain open until the 14th of

July for any additional questions or comments or testimony. In the

meantime, this hearing is adjourned. Thank you.

[Whereupon, at 12:53 p.m., the committee was adjourned.]

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APPENDIX MATERIAL SUBMITTED

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RESPONSES BY ERIC M. THORSON TO QUESTIONS FROM

SENATOR JOHN F. KERRY

Question 1. Contracting Officer Failure. In your response to my question regarding the failure of contracting officers to comply with small business contracting requirements, you stated that you do not know why this occurs, that you can not understand why this type of negligence is allowed to continue unaddressed in Federal

procurement procedures. You also commented that you have been working with Inspector Generals of other Federal agencies to remedy the problem. • Will you formally commit to looking into this issue, and providing the SBA with

recommendations on how this issue can be addressed?

Answer. The OIG’s Management Challenge 1 identifies that errors by contracting

officers in small business procurement is an important issue that the Agency needs

to address to improve small business contracting opportunities and prevent the performance of small business set-aside contracts by large businesses. Action Item 4

in that Challenge tasks SBA to ‘‘Develop and take steps to provide reasonable assurance that agencies are providing adequate training to contracting personnel on

small business contracting procedures.’’ We are working with the Agency on steps

to increase training that is provided to Federal contracting personnel. In addition,

we have developed a small business procurement guide and provided that guide to

other agency OIGs to encourage these offices to assess compliance with small business contracting requirements in procurement audits. We will continue our efforts

to look into the reasons for contracting officer error and work with SBA to identify

additional recommendations to solve this problem.

Question 2. IG Role in Closure of the SBA Veteran’s Contracting Office. In May,

the SBA made the determination to close its Veteran’s Contracting Office. This office served a vital need to the service disabled veteran small business community,

and the decision did not sit well with the community. • To what extent was your office aware of the decision to close the office?

• Since the office was shut down, has there been any effort to look into the impact

of the decision? If not, do you intend to do this?

Answer. Our office was not consulted on the Agency’s plan to eliminate this office

and did not become aware of the closure until after it was reported by the news

media. We have not looked into the impact of this decision because the office, prior

to its closure, had a staff of only one person, and because agency personnel have

advised that the functions of that office are being transferred to the SBA Office of

Veterans Business Development. Given our understanding of this matter, we do not

plan to open a review of this decision at this time.

Question 3. Relationship with New Administrator. In his confirmation hearing,

Administrator Preston spoke to the importance of maintaining the independence of

your office, and about his intention to work with you as a partner in policing and

improving operations at the SBA. • Has the new Administrator approached you about his intention to work closely

with you and to enforce your findings and recommendations? • Has he stated his intention to follow through on any of the recommendations

made with respect to improving the SBA’s ability to serve as a watch dog for small

businesses in Federal contracting?

Answer. I have met several times with Administrator Preston, who has advised

that he values and respects the contributions of the Office of Inspector General and

plans to work closely with my office in implementing OIG recommendations. I have

presented our concerns regarding Federal small business contracting to Administrator Preston, and I am greatly encouraged by his significant level of interest in

this important subject. We will continue to work with the Administrator to implement the OIG recommendations in this area.

Question 4. Implementation of Women’s Procurement Program. The SBA has

dragged its feet for 6 years following Congress’s enactment of a women’s procurement program. Although regulations have been issued and are under review, there

is some doubt expressed by the women’s small business community as to whether

this program will ever be implemented.

• Has your office looked into this delay and the reasons behind it?

• What is your understanding of why this program has not been implemented,

and what can be done to ensure that it is?

Answer. We are generally aware that the Agency has had studies performed regarding the nature of industries for which it would be appropriate to encourage

women-owned business contracting, as required by Public Law 106–554, Section

811(m), and has issued for comment proposed regulations to implement the Women’s Procurement Program. Beyond this, however, my office has not looked into the

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issue of the delays in the establishment of this program. The Agency would be in

the best position to respond to questions about the timing of the program.

RESPONSES BY ERIC M. THORSON TO QUESTIONS FROM

SENATOR CONRAD BURNS

Question 1. SBIR Program.

1. What efforts are underway at SBA, if any, to monitor SBIR awards given to

venture-capital backed firms? Based on a recent GAO study, much of the impact of

VCs occurred in NIH. What impact has this had on non-VC-backed SBIR applicants?

2. Has the SBA considered, as some states have implemented, a Phase 0 award,

as a precursor to Phase I?

Answer. My office has not looked into these issues. The Agency would be in the

best position to respond to these questions.

RESPONSES BY JOE WYNN TO QUESTIONS FROM SENATOR JOHN F. KERRY

Question 1. Closure of the SBA Veterans Contracting Office—The SBA decided in

May to shut down the Veterans Small Business Contracting Office, which at the

time had a full-time staff of only one. Given the Administration’s stated commitment to veterans, this decision seems like another example in a line of decisions to

save pennies on the dollar at the expense of an entire underserved community.

• Can you speak to how this decision affects the veterans community of small

business owners?

• What services were provided through this office, and how are veteran small

business owners adversely affected by the decision?

Answer. The decision to dismantle the Office of Federal Contracting for Veteran

Business Owners affects the veteran small business community tremendously. It

leaves a void in a program that is still in its infancy and sorely needs a leader to

ensure its implementation. While the Task Force for Veterans Entrepreneurship has

been voluntarily performing the role of advocacy and oversight of the Veterans Procurement Program, as defined by PL 108–183, long before 2003; it was believed that

the SBA, with the appointment of Ms. Lewis as an Assistant Administrator to this

newly created office, had accepted its role as the Federal agency to ensure compliance.

But after a whole year of operation, SBA never provided any additional staff to

work with Ms. Lewis, and later reassigned her to other duties. While it may very

well have been the prerogative of the new SBA Associate Administrator of the Office

of Government Contracting to reassign the duties under her purview, it’s appalling

to find that Ms. Lewis was forced to abruptly change her career and receive a reprimand as a result after doing so much with so little. (Many TFVE members request

that your office seek to remedy any wrongful complaint or persecution of Ms. Lewis).

By restructuring the office, the SBA essentially took away an experienced contracting professional; who also happened to be a female veteran with years of experience with the SBA Minority Business Program and one who also participated in

the development of the implementing regulations for the Veterans Procurement Program. Such an individual will be hard to replace. Ms. Lewis’ dedication to the ideals

of the program and proactive initiatives to educate agency personnel and veteran

business owners were without parallel. She not only helped to match SDVOBs with

procurement opportunities, she also was persistent in encouraging agencies to comply with the law.

Below is a list of the primary services that were provided by the Office of Federal

Contracting for Veteran Business Owners:

• Outreach to the veterans community, participating in small business and veterans’ conferences, and providing information about the Veterans Procurement Program under PL 108–183 to SDVOBs.

• Provide briefings to agency procurement officials and contracting officers on the

implementation of Section 308 of PL 108–183 of the Veterans Procurement Program.

• Oversee the implementation of each agency’s strategic plans as defined by Executive Order 13–360 and report on their progress or lack thereof.

• Provide information about filing a protest if a contract is awarded to a small

business that has misrepresented itself as a SDVOB.

• Coordination of SBA business development resources for veterans interested in

starting or expanding a small business for Federal contracting.

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If the Veterans Procurement Program is to be successful, it has to have ownership

by some agency or entity that will ensure that agencies are doing their best to meet

the mandatory procurement goals. Oversight and accountability is necessary, whether it comes from the Office of Federal Contracting for Veteran Business Owners or

some other agency.

This program is not just about Federal contracting to another preference group.

It’s about providing for those ‘‘who have borne the battle.’’ As was referenced in the

Congressional findings of PL 106–50, ‘‘the United States has done too little to assist

veterans, particularly service-disabled veterans, in playing a greater role in the

economy of the United States and thereby must provide them with additional assistance and support to better equip them to form and expand small business enterprises, such that they may realize the American dream that they fought to protect.’’

The program needs a parent and a Champion to lead the cause!

Question 2. Procurement Goal—As you stated in your testimony, the Veterans

Benefits Act of 2003 made it mandatory for Federal Agencies to meet the goal of

3 percent procurement for service disabled veteran small businesses. Yet, despite instituting a set-aside program for this community, year-after-year the Federal government falls woefully short of attaining this goal. Last year, only .38 percent of

Federal contracts went to service disabled small business owners.

• What explanation is given by the Administration to the service disabled community for the inability to reach this goal?

• What is the SBA doing to implement the Service Disabled Veterans Procurement Program under PL 108–183 and Exec Order 13–360?

• You presented several proposals to fix this problem that could be accomplished

legislatively. Please explain how SDVOBs would benefit from eliminating the ‘‘Rule

of Two’’ and how a level playing field could be created among SDV, 8a, and Hubzone

Programs.

• What steps could be taken immediately by this Administration, in terms of staffing increases, outreach, etc. to ensure that these numbers increase?

Answer. From the perspective of the Federal contracting community, the

OSDBUs, the Contracting Officers, and the Procurement Officials, PL 108-183 provided the contract vehicle that was missing in the previous legislation, PL 106–50.

But even with the authority to restrict competition to SDVOBs, agency representatives say they are still unable to meet the goals because (1) they are unclear about

the application of certain parts of the statute, i.e. when to use sole source versus

when to use set-asides; (2) conflict over the use of ‘‘may’’ set-aside contracts for

SDVOBs versus ‘‘shall’’ set-aside contracts for the 8a and Hubzone programs; (3) locating capable and qualified SDVOBs is too difficult and there is no directive to assist SDVOBs with business development; (4) many construction contracts are large

so very few SDVOBs meet the bonding requirements; and (5) many contracting officers still don’t know the SDVOBs that are out there.

While there may be some validity to these reasons for not meeting the goals, it

appears that the SBA is doing very little to help remedy the situation. They were

directed by Executive Order 13–360 to (a) designate an appropriate entity within

SBA to coordinate with the Veterans Affairs’ Center for Veterans Enterprise, to provide information and assistance to SDVOBs with Federal contracting, (b) advise and

assist heads of agencies implementing their strategic plans to increase contracting

opportunities to SDVOBs; and (c) make training in Federal contracting law, procedures, and practices available to SDVOBs. But as was mentioned in response to

question 1, the SBA started an office to assist veteran business owners with Federal

contracting, but then dismantled it less than a year later.

Since the designated agency to assist veteran business owners with Federal contracting, (the SBA) is lacking in its responsibility, it is hoped that the Senate Small

Business Committee will support recommendations for the following legislative solutions: (1) Eliminate the ‘‘Rule of Two’’; (2) create ‘‘Equal Parity’’ among the use of

SDV, 8a and Hubzone programs; and (3) provide a ‘‘Price Evaluation Preference’’ of

10% for SDVOBs in acquisitions conducted using full and open competition.

The Rule of Two as introduced under PL 108–183 is contained in Part 19 FAR,

and the Code of Federal Regulations (CFR) 13 CFR, Part 125. The Rule of Two

states if a contracting officer knows of two or more SDVOBs that can do the work,

then the requirement must be competed and a sole source award cannot be made.

If sole source cannot be made, then the requirement may be competed among

SDVOBs only under restricted competition.

As stated in my testimony, contracting officers are often under pressure to get certain requirements awarded quickly, especially in the last two months of the fiscal

year, and although there may be a SDVOB that can do the job, they routinely go

to an 8(a) company using the non-competitive (sole source) authority under that proVerDate 11-MAY-2000 16:54 Sep 14, 2007 Jkt 036593 PO 00000 Frm 00144 Fmt 6601 Sfmt 6621 C:\SBA\36593.TXT CELINA PsN: CELINA
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gram. Thus 8(a) firms can be rewarded for their self-marketing activities under FAR

Part 19. There is no such authority under the SDV Program. In these cases, the

Government does not have time to even consider restricted competition among

SDVOBs because of time factors.

Elimination of the Rule of Two under the SDV Program is also cited in recently

passed legislation, HR 3082, ‘‘Veterans Small Business and Employment Promotion

Act of 2006’’, Title I, Section 101, subparagraph (b) ‘‘Use of Non-competitive Procedures for Certain Small Contracts,’’ which states that, ‘‘a contracting

officer... may use procedures other than competitive procedures... for an

amount less than the simplified acquisition threshold.’’ And subparagraph (c) ‘‘Sole

Source Contracts for Contracts Above the Simplified Acquisition Threshold,’’ which

states that, ‘‘for purposes of meeting the goals . . ., a contracting officer . . . may

award a contract to a small business concern owned and controlled by veterans

using procedures other than competitive procedures . . .’’

The technical changes to the Small Business Act to eliminate the Rule of Two

from the SDV Program could be made in the following manner:

In subparagraph 36(a)(1) of the Small Business Act (15 U.S.C. 657(f)(a)(1)), strike

the last portion of the subparagraph that reads: ‘‘and the contracting officer does

not have a reasonable expectation that 2 or more small business concerns owned

and controlled by service-disabled veterans will submit offers for the contracting opportunity.’’ The remaining subparagraph 36(a)(1) will read: ‘‘(1) such concern is determined to be a responsible contractor with respect to performance of such contract

opportunity;’’

To create Equal Parity among the SDV, 8a and Hubzone programs, is to give the

same level of precedence to each. At present, many contracting officers consider the

authority that says you ‘‘Shall’’ before those that say you ‘‘May’’ with regard to preference programs for small business contracting. So more contracts continue to go

to the 8a and Hubzone programs before being considered for the SDV program. The

order of priority for contracting preferences among the three groups should be equal.

The technical changes to the Small Business Act to create this Equal Parity could

be made in the following manner: Amend subparagraph 36(a) of the Small Business

Act (15 U.S.C. 657(f)(a)(1)), by striking ‘‘may’’ and inserting ‘‘shall.’’

As for the Price Evaluation Preference, it could be implemented in the following

manner: Beginning on the date of enactment of this Act the head of each Federal

agency shall extend a 10 percent price evaluation preference in full and open competitions to any small business concern owned and controlled by service-disabled

veterans. By eliminating the Rule of Two, creating Equal Parity, and implementing

a, Price Evaluation Preference, the SDV Program would be strengthened by increasing contract awards, resources, and support without including SDVOBs into the 8a

program. The 8a program was created to help alleviate the more than 100 years of

wrongful discrimination and exclusion of minorities from the full benefits of American society, including the Federal marketplace. The SDVOB program is intended

to be inclusive of any American who served in this country’s armed forces, guard

or reserves. The SDVOB program should retain its own identify for ‘‘those who have

borne the battle.’’

In addition, there are steps that could be taken by this Administration now to increase the number of contracting opportunities to SDVOBs:

• More outreach to veteran and veteran business community. Create more opportunities to build relationships between agencies, primes, and SDVOBs.

• Require contracting officers to certify as to knowledge and implementation of the

Service Disabled Veterans Procurement Program. The senior designated official

under the agency’s strategic plan should be the Chief Operating Officer or some

other such official who also has command authority over the Chief Operating Officer. Managers should have written in their performance evaluations, progress toward SDVOB goals and should not receive any bonus, merit increase, or Presidential award.

• Provide funding to non-profit, Veteran Service Organizations within the community to educate, train, and assist veterans interested in participating in the Federal

marketplace.

• Comply with the President’s Executive Order 13–360 in its entirety. Complete

the required Strategic Plans, evaluate their effectiveness on at least a semi-annual

basis, and provide semi-annual reports to the public.

• Increase the use of Mentor-Prote ́ge ́ Programs.

• Encourage and support the use of teaming and joint ventures among SDVOBs.

Also recognize the past performance of the team and not just the past performance

of the SDVOB prime.

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• Increase the use of the SBA Commercial Marketing Representatives and the

Prime Contracting Representatives for the Subcontracting and Prime Contracting

Programs.

Question 3. Certification—Discuss your position on the need for a certification program for SDVOBs and who should administer it.

Answer. What is being referred to as a Certification Program for Service-Disabled

Veteran Business Owners is really intended to be merely a ‘‘Validation and

Verification’’ process. It is recommended that the status of the individual claiming

to be a service disabled veteran be verified by the Department of Veterans Affairs

and not by the SBA. The VA or DOD would provide documentation to validate the

veteran’s disability status and the percentage of disability compensation.

It is not recommended that the VA take over the role of verifying a businesses

eligibility to operate as a small business based on size or number of employees. Nor

is it intended that the VA should verify the eligibility of ownership or business formation. Since SBA has already been performing small business certification functions, it is no reason why they should not continue to do so.

Question 4. Subcontracting—Since large Prime contractors are also failing to subcontract a minimum of 3% of their work to SDVOBs, what can the agencies do to

increase subcontracting opportunities to SDVOBs and to improve the performance

of large Prime contractors?

Answer. To increase subcontracting opportunities to SDVOBs, large Prime contractors must be held accountable for failing to comply with the subcontracting

plans submitted as part of the contract proposal and award. Compliance with the

plans should be reviewed by the Contracting Officers and OSDBUs on a quarterly

basis with the results reported and made available to the public.

Prime contractors who consistently fail to meet their subcontracting goals, should

receive negative past performance evaluations and be required to correct any subcontracting defaults prior to any approval of contract options. Primes who consistently meet their subcontracting plans should be rewarded by receiving priority in

future contracts and positive past performance evaluations.

Prime contractors should be encouraged to participate in mentor-prote ́ge ́ programs

with SDVOBs and those that do, should be given an incentive for doing so.

We believe that prime contractors who blatantly disregard making a good faith

effort to submit or implement subcontracting plans as required, should be barred

from Federal contracting for a certain number of years and liquidated damages

should be imposed if applicable. However, this is unreasonable and would be deleterious to the United States. Oversight should be established to ensure that Small

Business Plan requirements in the Small Business Act, are carried out by Contracting Officers. Contracting Officers and OSDBUs should be held accountable for

reviewing, reporting and enforcing compliance with the subcontracting plans.

Question 5. Survivorship—Presently, a SDVOB will lose its preference status if

the SDVOB majority owner passes and the new owner is not a SDV also. How is

this issue impacting the SDV community? Please explain your position on whether

a firm should maintain its status as a SDVOB after ownership passes to a non-SDV

owner.

Answer. We propose the following legislation:

Treatment of Businesses After Death of Veteran-Owner—

(1) If the death of a veteran causes a small business concern to be less than 51

percent owned by one or more veterans, the surviving spouse of such veteran who

inherits ownership rights in such small business concern shall be treated as if the

surviving spouse were that veteran for the purpose of maintaining the status of the

small business concern as a small business concern owned and controlled by veterans for the period described in paragraph (2).

(2) The period referred to in paragraph (1) is the period beginning on the date

on which the veteran dies and ending on the earliest of the following dates:

(A) The date on which the surviving spouse remarries.

(B) The date on which the surviving spouse gives up an ownership interest in the

small business concern.

(C) The date that is ten years after the date of the veteran’s death.

RESPONSES BY JOE WYNN TO QUESTIONS FROM SENATOR CONRAD BURNS

Question 1. The assumption is often that the presence of venture capital—and the

private confidence that it signified—is a good measuring stick for the viability of an

idea. Good ideas tend to attract private funding. On the other hand, SBIR was deVerDate 11-MAY-2000 16:54 Sep 14, 2007 Jkt 036593 PO 00000 Frm 00146 Fmt 6601 Sfmt 6621 C:\SBA\36593.TXT CELINA PsN: CELINA
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signed to support good ideas that might not be attractive in the marketplace. How

do we go about making SBIR as effective at choosing good ideas as possible while

maintaining its ability to fund good projects that might not otherwise be developed?

Question 2. Should the presence of venture capital factor into the likelihood of receiving an SBIR award?

Response to Questions 1 and 2. I respectfully decline to offer any response to the

above questions 1 and 2 from Senator Bums since I did not include any information

in my testimony on SBIR. My testimony was confined to the Service Disabled Veterans Procurement Program and associated activities and/or programs. However, if

there is additional time, other members of our Task Force for Veterans Entrepreneurship could share their views on SBIR.

Thank you for allowing me the opportunity to further clarify my views and the

views of the many members of the Task Force for Veterans Entrepreneurship on the

above referenced issues which are so important to our veterans and veteran business owners. I am available for additional comments if needed.

RESPONSES BY STEVEN SIMS TO FOLLOW-UP QUESTIONS FROM

SENATOR JOHN F. KERRY

Question 1. What should be done to place ANCs on an equal playing field with

other 8 (a) firms?

Answer. The miraculous growth of contract dollars should have raised question

some time ago. The leadership responsible should be prosecuted to set an example

and so those tribes and individuals not responsible are not unjustly targeted. This

solution is one the ANC’s not part of this hoax should be recommending. Given the

GAO report which speaks to ANC’s being used as a past through, and those responsible not even showing the smarts to use other ANC’s as subcontractors, so native

peoples benefit in some way the punishment should be extreme. The Minority Business Summit Committee (a consortium of MBE business organizations) makes this

recommendation reluctantly. ANCs should have their status in the world of 8 (a)

be reduced to the same status and competitive entity as other 8 (a) firms.

Question 2. Net worth threshold (NWT) for 8 (a) firms—Does the current NWT

prevent legitimate SDB’s from participating in the 8 (a) program?

Comment. Before answering, I would like to raise a couple of issues:

1. Because access to capital is so important and difficult for many small firms,

particularly minority businesses, it is imperative that they have as strong a cash

position as possible. Limiting their net worth appears to be more an impediment

to growth than tool certifying the eligibility of small minority businesses to participate in this program.

2. The income limits have neither been adjusted nor modified since the program’s

inception. This restricts and retards the opportunity for growth, development or success on the part of the minority business.

Answer. Yes, the NWT does restrict or prevent legitimate SDBs from participating

in the 8 (a) program. I would think that some research and then adjustment to income thresholds based on challenges of the industry and small business size standards would be Senate response useful. At the least, NWT should be tied to inflation

over the period since the last adjustment. While not exactly leveling the playing

field, it would provide some relief to those in or entering the program.

RESPONSES BY STEVEN SIMS TO FOLLOW-UP QUESTIONS FROM

SENATOR CONRAD BURNS

Question 1. Should venture capital factor into receiving an SBIR awards?

Answer. I believe venture capital should be factored into the determination of an

SBIR award. I do not believe the VC should be a majority owner and still receive

the SBIR. My recommendation would be the same as NMSDC has implemented in

the private sector for minority businesses needing venture capital to grow. The business must be certified as a small business or small minority owned business. Once

certified, the business is allowed to hunt for institutional investors who might be

interested in participating in the venture. The business is able to give up equity but

not ownership of the venture and must remain in control of the business and must

manage the business for it to receive and maintain the SBIR award. A true VC is

interested in return on investment and not management also they come in looking

for an exit strategy and thus is betting on the jockey not the horse in the race.

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RESPONSES BY DR. CHARLES W. WESSNER TO QUESTIONS FROM

SENATOR CONRAD BURNS

Question 1. The assumption is often that the presence of venture capital—and the

private confidence that it signified—is a good measuring stick for the viability of a

new idea. Good ideas tend to attract private funding.

On the other hand, SBIR was designed to support good ideas that might not be

attractive in the marketplace. How do we go about making SBIR as effective at

choosing good ideas as possible while maintaining its ability to fund good projects

that might not otherwise be developed?

Answer. The question posits that the presence of venture capital is ‘‘a good measuring stick’’ for the viability of an idea. While venture funding is certainly one measure of an idea’s viability, it s not necessarily the only good measure. What is more,

many venture supported business models do not succeed; hence the tautology that

‘‘good ideas tend to attract private funding’’ may be an overstatement. As the dotcom boom demonstrated, many bad ideas can also attract private investment.

It is also that there are good ideas that do not attract private investment. Nuclear

power, GPS, and the Internet are examples of good ideas that certainly did not attract private funding at their origin, or indeed during their long gestation. Private

markets are, of course, amazingly effective at exploiting these platform technologies

but, historically, this has often been the case only after substantial Federal investments. A virtue of SBIR is that it can help create and signal information about new

ideas, and in this way help private venture capital markets work better. The basic

point is that Federal investments in research, combined with effective public-private

partnerships, such as innovation awards, can help well regulated private markets

create new welfare enhancing technologies.

Making SBIR as effective as possible at choosing good ideas has to take into account the diversity of program objectives and agency needs. A virtue of SBIR is that

in many respects it can act as a ‘‘low cost technological probe,’’ enabling the government to explore ideas that may hold promise. The second phase of the program enables the successful ideas to be developed further. Transitioning to the next phase

of development sometimes occurs through the action of private markets, sometimes

through procurement. Some government needs can be met by the ‘‘answer’’ provided

through the successful conclusion of the phase I or phase II award with no further

research required or a product (e.g. an algorithm or software diagnostic). Other

awards can provide valuable negative proofs, identifying dead ends before substantial Federal investments are made. And yet other awards require substantial additional funds to meet testing and certification requirements. Recognizing this diversity and the need for flexibility is key to understanding the program and to its effective operation.

Question 2. Should the presence of venture capital factor into the likelihood of receiving an SBIR award?

Answer. The key determinant for receiving an SBIR award should be the quality

of the research proposed and its correspondence to agency needs or interests.

As emphasized during the testimony, additional research is needed to determine

the number of companies that have received SBIR awards and have venture capital

and the outcomes of these awards. This would enable us to have a better understanding of this relationship and therefore what new policies, if any, should be

adopted. The absence of such data-driven analysis makes it hard to formulate effective policy on this question.

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RESPONSES BY DR. MICHAEL SQUILLANTE TO QUESTIONS FROM

SENATOR CHRISTOPHER S. BOND

Question 1. In your testimony, you refer to the ‘‘unlimited venture capital presence’’ in the SBIR program that you suggest S. 1263 would achieve. Yet does not

my legislation limit any since venture capital to a minority stake in an SBIR company? Doesn’t my bill specifically exclude venture capital companies that are controlled by big businesses, such as corporate venture funds? In addition, doesn’t my

legislation maintain the existing 500-employee limitation as well as the U.S. citizenship test? In fact, I believe my bill is a narrowly tailored approach that allows companies with multiple venture investors to participate in the SBIR—as these companies had for 21 years until the 2003 ruling.

Therefore, my question is this: If you are confident in the scientific merits of your

research, why does it appear that you are unwilling to compete on a level playing

field against other companies? Do you have reason to believe that NIH awards SBIR

grants on anything other than the scientific merit of the grant application?

Answer. I appreciate the opportunity to testify before the Small Business and Entrepreneurship Committee and the further opportunity to provide additional information. We are all after the same goal: improving the SBIR Program.

My concerns are that the proposed changes will alter the SBIR program, shifting

its focus toward development and clinical studies and away from innovative research and scientific breakthroughs. I am also convinced that the change will result

in many fewer, much larger NIH awards. This will make it very much harder for

small companies that do not have access to other funding to receive SBIR grants.

Thus, a change in the Affiliation Rule will precipitate a paradigm change in Small

Business early stage support, thereby impacting the national economy by discourage

the start-up and growth of small businesses that are demonstrated to be one of the

most effective means of creating new jobs. Given the large contribution that small

businesses are making to the nation’s economy, a major change in the Affiliation

Rule will have a negative impact on the economy over the long term.

I have divided your first question into its several parts:

First, as written S. 1263 very specifically does not limit venture capital firms and

the small companies they control to 500 employees plus affiliates. Never, in the entire history of SBIR, have any firms with more than 500 employees including affiliates been legally allowed to participate, whether venture capital funded or not. S.

1263 would, for the first time, waive this critical affiliation rule. This is my most

serious concern to S. 1263.

One thing is very clear; a change in the Affiliation rules that permits large venture capitalists to take advantage of the SBIR Program for clinical trials and product development will unleash major paradigm shift in the means available for techbased small businesses to get support for new innovative technology and R&D

projects. As the pathways for small businesses are whittled down until the passageway is too narrow and unattractive, we will have effectively choked off one of the

best engines for economic growth that the nation has going for it.

If the intent of S. 1263 is truly to preserve the 500 limit, why does it specifically

waive the affiliation rule for venture capital firms? Why only for venture capital

companies, why not for other ownership?

Second, in addition, some proponents of S. 1263 have publicly stated that they are

not satisfied with $100,000 Phase I program and $750,000 Phase II programs. They

state they need $1,000,000 in Phase I and $10,000,000 in Phase II. This will reduce

the number of SBIR award by a factor of 10 to 12. If awards like this are routinely

made, the odds of wining will plummet and it will drive 90% of small, high tech

companies out of SBIR. SBIR will very quickly become the venture capital Supplemental Development Insurance Fund.

Would you be willing to support a firm, absolute cap on the size of awards? Possibly the limit could be one and one half to two times the limit recommended in

the legislation? For example, the present limit is $750,000 and the cap would be

$1,125,000 to $1,500,000. If the limit is raised in the reauthorization to $1,000,000

then the cap would be $1,500,000 to $2,000,000. These would still be huge awards,

but they would not cripple SBIR.

Third, also, allow me, respectfully, to point out that if venture capital controlled

firms participated in SBIR prior to 2003, they did so illegally. Venture capital controlled firms were never lawfully permitted to participate in SBIR. They did so prior

to the ruling either because they did not provide the proper certifications (which violates the law) or agency administrators ignored the ownership of the firms either

through laziness or negligence.

Fourth, related to the question of multiple venture capital ownership, the question

is not whether a venture capital firm owns less that 49%, it is whether or not the

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‘‘individual’’ owns more than 50%. It is not clear how multiple venture capital ownership affects the question. However, I assume that no one would allow a company

controlled by a foreign venture capital firm to participate. In the event that a company was controlled by multiple venture capital owners, and some of the them are

foreign, how much SBIR funding should go to benefit foreign investors?

Fifth, I am willing to compete with any companies ‘‘on a level playing field’’, that

is as long as the same rules apply to me and to those I compete with. Section 3

of S. 1263 provides a special waiver to the affiliation rule only to venture capital

funded companies. They would have a significant advantage over real small companies that do not have access to the capital and equipment that the venture capital

firms provide. Do the venture capital firms need special rules that only apply to

them in order to compete?

SBIR is an intensively competitive program. Less than 1 out of 10 NIH SBIR

Phase I applications are funded. Increased participation by large venture capital

firms will dramatically reduce this to 1 in 20 or fewer.

Question 2. You make much of the GAO Report issued in April of this year. Yet,

in that report the GAO admitted that it could not distinguish between companies

that were majority and minority backed by venture capital funding. Further, the

GAO report only looked at SBIR grants made between 2001 and 2004, yet majoritybacked companies were allowed to receive SBIR funds until the ruling in 2003. So

the figures you cite about the increase in venture funding and the SBIR program

actually includes the majority-venture backed companies that are now ineligible.

Given these facts, to you agree or disagree with the following Small Business Administration quote about the April GAO report: ‘‘The data presented in the report

has no bearing on program eligibility. For this reason, SBA finds the general discussion of SBIR eligibility to be unclear and potentially misleading.’’ [See letter from

SBA Associate Administrator for Government Contracting, Karen Hontz, dated

April 2006]

Answer. First, the statement has been made by advocates of S. 1263 that venture

capital backed firms can no longer compete in NIH SBIR. I cited the GAO report

because it clearly refutes this statement. The fact is that venture capital companies

are participating at higher levels than ever before and that participation is increasing rapidly.

Second, firms that were majority owned by venture capital firms were never legally allowed to participate in SBIR.

Third, I believe that eligibility, as it applies to affiliation, is very clear and should

apply equally to all participants.

Question 3. How capital intensive is your business? Do you have revenue from

products you are selling? Does your product have to go through anything like the

3-stage Food and Drug Administration approval process that drug development

firms face?

Would you say that the economics of your product development are fundamentally

different from the economics of drug and medical device development, which can

cost hundreds of millions of dollars and take a decade or more? Viewed in this light,

isn’t a reliance on venture funds understandable in the drug development world, if

not in your line of business?

Answer. I spoke at the hearing representing the Small Business Technology Council of the NSBA. Obviously this organization does not have products. The company

I work for does sell products and, yes, some are medical products that require FDA

approval. Thus, I do understand why venture capital funding is used to support

pharmaceutical development. I also believe that this work is important and necessary and I know that the studies are long and expensive.

The studies, however, are not ‘‘innovation research’’ and, as such, do not properly

belong in the SBIR program. SBIR is supposed to fund innovations before they have

reached the state of development where they can attract venture capital funding.

This is not a problem faced only by venture capital funded firms. I have had several NIH SBIR applications rejected because the NIH reviewers felt that the technology was too advanced and no longer innovative. Just last year I submitted a proposal that was not funded. The reviewers found that ‘‘The PI (Principal Investigator)

is one of the leaders in the field’’ and ‘‘This is important research and the work

could have a positive impact.’’ However, they also noted: ‘‘These studies are not very

innovative’’ and ‘‘nothing revolutionary has been proposed.’’ Obviously, this hurts,

but it is the key criterion for funding SBIR research.

I definitely believe that the NIH should have a program that supports clinical

studies for drug development. This should not come out of the small 2.5% SBIR program. When SBIR is reauthorized, it would be a wonderful idea to have an additional allotment of funding, possibly 1% of the NIH extramural budget, to fund clinVerDate 11-MAY-2000 16:54 Sep 14, 2007 Jkt 036593 PO 00000 Frm 00158 Fmt 6601 Sfmt 6621 C:\SBA\36593.TXT CELINA PsN: CELINA
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ical studies related to technologies developed under SBIR. I would gladly work with

you and the committee to develop a concept like this.

RESPONSES BY DR. MICHAEL SQUILLANTE TO QUESTIONS FROM

SENATOR CONRAD BURNS

Question 1. The assumption is often that the presence of venture capital—and the

private confidence that it signified—is a good measuring stick for the viability of an

idea. Good ideas tend to attract private funding. On the other hand, SBIR was designed to support good ideas that might not be attractive in the marketplace. How

do we go about making SBIR as effective at choosing good ideas as possible while

maintaining its ability to fund good projects that might not otherwise be developed?

Answer. I believe that venture capital funding does indeed give credence that an

idea has huge commercial potential. It does not, however, mean that an idea has

merit and can solve important medical problems. (This is obvious by the enormous

resources that go into clinical studies for cosmetics.) If this were the only criterion

for performing SBIR research, many diseases would not be investigated and many

problems would never be solved.

A very specific example is the research we carried out under an NIH SBIR program that led to an order of magnitude decrease in the incidence of stroke during

open-heart surgery and has changed the way open-heart surgery is performed in

hospitals throughout the United States. If commercial potential and venture capital

involvement were important criteria, this would not have been funded and the incidence of stroke following open-heart surgery would be 10 times higher than it is

today.

In addition, the development of new technologies for medical research would come

nearly to a standstill. SBIR is the primary mechanism today for technology development in medical research in the United States. For the most part, investigations

into new tools for medical researchers would not get done. Large companies are not

doing it, and venture capital firms obviously would not fund it.

Question 2. Should the presence of venture capital factor into the likelihood of receiving an SBIR award?

Answer. All SBIR proposals should be judged on their technical merit and the potential impact of the research.

The issue of venture capital should be a factor relative to the size of the company

and the total number of all of its affiliates.

RESPONSES BY THOMAS J. BIGGER TO QUESTIONS FROM

SENATOR CHRISTOPHER S. BOND

Question 1. [The text for question 1 was not available at press time.]

Answer. Biotechnology and medical device companies are disproportionately impacted by the new SBIR eligibility rules because these industries rely upon venture

capital investments to fund research and development over long time horizons. By

some accounts, it can take 10-15 years and $800 million to develop a new biotech

product. During this time, a small biotech firm will likely have no revenue from

product sales. Hence, biotech companies are heavily dependent on venture capital

backing, even at very early stages of product development.

Question 2. [The text for question 2 was not available at press time.]

Answer. Paratek has 66 employees. We are typical of the numerous biotechnology

companies with fewer than 100 employees who find themselves majority venture

capital backed due to the very capital intensive nature of biotech research and development. Like the vast majority of the biotech industry today, we are a small company.

Question 3. [The text for question 3 was not available at press time.]

Answer. We maintain day to day management of the company. Our firm is run

by our management team, not by our venture capital investors. In general, venture

capitalists are looking to invest in technologies that are promising. They are not

looking to run their portfolio companies. In the case of Paratek, no single venture

firm owns more than 5 percent of the company’s stock.

Question 4. [The text for question 4 was not available at press time.]

Answer. We hear anecdotal evidence that promising research is being turned

away by NIH due to the new eligibility interpretation. NIH has stated that the rules

prohibit funding of research with the potential to improve human health, research

that NIH would like to fund but cannot. According to a survey by the Biotechnology

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Industry Organization, roughly half of biotech companies with majority venture capital backing had cancelled or delayed a project due to the new SBIR rules.

Question 5. [The text for question 5 was not available at press time.]

Answer. The simple answer is that venture capital funding often goes to product

development that is further along while SBIR dollars help to fund the earliest stage

research. The SBIR eligibility rules, however, are not product specific, but instead

look at the capital structure of the company. So a company that has become majority VC-backed by virtue of funding for one product is no longer eligible for SBIR

funds for different products at earlier stages of development.

Question 6. [The text for question 6 was not available at press time.]

Answer. In our case, we had to actually lay off employees due to the funding restriction. Under the new eligibility interpretation, not only is the public losing out

on the benefits of research that could provide new therapies, but in some cases there

is a direct negative economic impact to the community as well.

RESPONSES BY THOMAS J. BIGGER TO QUESTIONS FROM SENATOR CONRAD BURNS

Question 1. [The text for question 1 was not available at press time.]

Answer. My view would be to allow the agencies, NIH for example, to make the

decisions as to what research gets funded. The eligibility rules should not screen out

companies based upon whether or not they have raised private capital. The eligibility rules should be as neutral as possible so as to allow all small companies to

compete. We should have confidence in the peer review process implemented by the

agencies that participate in the SBIR program. Put simply, Congress should do

what it can to ensure that SBIR funding decisions are made, to the extent possible,

based upon the merit of the scientific research at issue.

Question 2. [The text for question 2 was not available at press time.]

Answer. The legislative history and statutory language of the bill creating the

SBIR program indicates that Congress viewed the presence of private investment

as a positive factor in the decision making process regarding Phase II SBIR awards.

This represents a recognition by Congress that ideas that attract private funding

are more likely to succeed. Viewed from this perspective, SBIR funds are more likely

to result in commercialization of a new product where the ability of the firm to attract private capital is taken into account.

Having said that, however, there are many worthwhile projects that could benefit

from SBIR funds that have not attracted private investment. In our industry, in

particular, a company may raise private funding for a specific product and may then

apply for SBIR funding for different products that are too early stage to raise private funding. Whether the SBIR program should contemplate the fact that a company, or a specific product, has raised venture capital or other private investment

funds is a policy decision that Congress will ultimately have to make.

RESPONSES BY THOMAS J. BIGGER TO QUESTIONS FROM SENATOR MICHAEL B. ENZI

Question 1. [The text for question 1 was not available at press time.]

Answer. This is a problem specific to companies that have long product development cycles in heavily capital-intensive fields of research. Biotech companies are a

prime example of this situation, as are medical device companies.

Question 2. [The text for question 2 was not available at press time.]

Answer. NIH has been the agency most impacted by the new SBIR eligibility

rules. However, other government SBIR participants, such as the Department of Defense, may want the ability to fund promising research and development by companies that are venture backed. Rather than making the solution NIH-specific, a preferable alternative would be to grant participating agencies the discretion to make

awards to majority-backed firms where doing so would advance the mission of the

agency’s SBIR program.

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