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39–789 PDF 2008

FULL COMMITTEE HEARING ON

SBIR: AMERICA’S NATIONAL

TECHNOLOGY DEVELOPMENT

INCUBATOR

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

JANUARY 29, 2008

Serial Number 110-68

Printed for the use of the Committee on Small Business

(

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

HOUSE COMMITTEE ON SMALL BUSINESS 

NYDIA M. VELA ́ ZQUEZ, New York, Chairwoman 

HEATH SHULER, North Carolina 

CHARLIE GONZA ́ LEZ, Texas 

RICK LARSEN, Washington 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois 

HENRY CUELLAR, Texas 

DAN LIPINSKI, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

BRUCE BRALEY, Iowa 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

BRIAN HIGGINS, New York 

MAZIE HIRONO, Hawaii 

STEVE CHABOT, Ohio, Ranking Member 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

STEVE KING, Iowa 

JEFF FORTENBERRY, Nebraska 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

MICHAEL DAY, Majority Staff Director 

ADAM MINEHARDT, Deputy Staff Director 

TIM SLATTERY, Chief Counsel 

KEVIN FITZPATRICK, Minority Staff Director

STANDING SUBCOMMITTEES 

Subcommittee on Finance and Tax

MELISSA BEAN, Illinois, Chairwoman 

RAUL GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JOE SESTAK, Pennsylvania 

DEAN HELLER, Nevada, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Contracting and Technology

BRUCE BRALEY, IOWA, Chairman 

HENRY CUELLAR, Texas 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

JOE SESTAK, Pennsylvania 

DAVID DAVIS, Tennessee, Ranking 

ROSCOE BARTLETT, Maryland 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

MARY FALLIN, Oklahoma

(II) 

Subcommittee on Regulations, Health Care, and Trade

CHARLES GONZA ́ LEZ, Texas, Chairman 

RICK LARSEN, Washington 

DAN LIPINSKI, Illinois 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

JASON ALTMIRE, Pennsylvania 

JOE SESTAK, Pennsylvania 

LYNN WESTMORELAND, Georgia, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa 

MARILYN MUSGRAVE, Colorado 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JIM JORDAN, Ohio

Subcommittee on Rural and Urban Entrepreneurship

HEATH SHULER, North Carolina, Chairman 

RICK LARSEN, Washington 

MICHAEL MICHAUD, Maine 

GWEN MOORE, Wisconsin 

YVETTE CLARKE, New York 

BRAD ELLSWORTH, Indiana 

HANK JOHNSON, Georgia 

JEFF FORTENBERRY, Nebraska, Ranking 

ROSCOE BARTLETT, Maryland 

MARILYN MUSGRAVE, Colorado 

DEAN HELLER, Nevada 

DAVID DAVIS, Tennessee

Subcommittee on Investigations and Oversight

JASON ALTMIRE, PENNSYLVANIA, Chairman 

CHARLIE GONZA ́ LEZ, Texas 

RAUL GRIJALVA, Arizona 

, Ranking 

LYNN WESTMORELAND, Georgia

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page

Vela ́zquez, Hon. Nydia M. ....................................................................................... 1

Chabot, Hon. Steve .................................................................................................. 2

WITNESSES

Doerfler, Douglas, MaxCyte, Inc. ........................................................................... 3

Beall, Robert, Cystic Fibrosis Foundation ............................................................. 5

Borrus, Michael, X/Seed Capital Management ..................................................... 7

Farrell, Lt. General Lawrence Doerfler, USAF (Ret.), National Defense Industrial Association ................................................................................................... 9

Bean, William, The College of William and Mary ................................................ 11

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 27

Chabot, Hon. Steve .................................................................................................. 29

Altmire, Hon. Jason ................................................................................................. 30

Doerfler, Douglas, MaxCyte, Inc. ........................................................................... 31

Beall, Robert, Cystic Fibrosis Foundation ............................................................. 39

Borrus, Michael, X/Seed Capital Management ..................................................... 46

Farrell, Lt. General Lawrence Doerfler, USAF (Ret.), National Defense Industrial Association ................................................................................................... 52

Bean, William, The College of William and Mary ................................................ 64

Attachments to testimony of Lt. General Lawrence Doerfler, USAF (Ret.), 

National Defense Industrial Association ............................................................ 78

Letter to Chairwoman from Mr. William Bean, The College of William and 

Mary ...................................................................................................................... 210

(V) 

(1)

FULL COMMITTEE HEARING ON SBIR: 

AMERICA’S NATIONAL TECHNOLOGY 

DEVELOPMENT INCUBATOR 

Tuesday, January 29, 2008

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 10:06 a.m., in Room 

2360, Rayburn House Office Building, Hon. Nydia M. Vela ́zquez 

[chair of the Committee] Presiding. 

Present: Representatives Vela ́zquez, Cuellar, Braley, Clarke, 

Ellsworth, Johnson, and Chabot. 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

Chairwoman VELA ́ ZQUEZ. I call this hearing to order. This morning the Committee begins the process of reauthorizing the Small 

Business Innovation Research Program. This public/private partnership is key to the United States remaining a global leader in 

innovation and creating new jobs through all parts of the Nation. 

In fact, just last year, 5,000 small research firms, companies located in every State in the Nation received awards that total more 

than $2 billion. 

As recent data demonstrate, the current economy is showing 

signs of a potential recession. During the last slow down, it was the 

technology sector, led by small firms, that provided a foundation for 

stronger growth. SBIR, with its emphasis on next-generation products, can help us emerge from this weak economic time stronger 

than before. In order to play this role however, the initiative must 

stay in sync with the very technology it seeks to promote. 

When the Committee last authorized a program in 1999, the 

term Google was an obscure mathematical concept. Today, Google 

is one of the most well-known and largest companies in the United 

States. As technology changes, this program has to keep face. During this modernization effort, the Committee will make certain that 

the SBIR program is providing the resources for economically valuable technologies and not wasting its effort on second-rate science 

fair projects. 

In order to ensure the full development of promising new product, the program should be given the capability to provide larger 

amounts of capital. For businesses facing difficulties going to market, the necessary assistance should be made available. New efforts 

must also be taken to reach the next generation of small companies, whether they are located in Silicon Valley or rural America. 

2

Reducing the regulatory burden associated with the program and 

streamlining the application process is essential to increasing the 

competition for these important awards. 

Finally, Federal agencies need more flexibility to implement the 

program both in terms of being creative but also in using what 

they have learned. These improvements will ultimately benefit the 

taxpayers in terms of greater competition for awards and higher 

levels of innovation. Together these changes will create an SBIR 

program that is responsive to today’s economic environment. This 

includes creating more high-paying jobs; reducing our trade deficit; 

and emphasizing the importance of math and science education to 

American students. If we are able to promote these very goals in 

the program, then we will be successful in our reauthorization efforts. 

Our Nation now more than ever needs a vibrant small business 

foundation to secure our economic future, and it is programs like 

SBIR that support this vision. With the prospect of a recession before us, entrepreneurial activity can provide a pathway to growth. 

It has done so before, and it will do so again. I want to thank all 

the witnesses for traveling here, and I look forward to your testimony. I now recognize Ranking Member Chabot for his opening 

statement. 

OPENING STATEMENT OF MR. CHABOT 

Mr. CHABOT. Thank you very much, Madam Chairwoman. 

Good morning, and I want to welcome all of you to this hearing 

on the small business innovation research or SBIR program. I 

would like to extend a special thanks to each of our witnesses who 

have taken the time to provide the Committee with their testimony 

here this morning. We are anxiously waiting to hear from them. 

And a special welcome to Bill Bean, a professor and the director 

of Technology and Development Center at my alma mater, the College of William & Mary in Williamsburg, Virginia. 

So we especially welcome you, Mr. Bean. 

Today’s hearing represents the beginning of the Committee’s 

work to reauthorize the SBIR program which was last fully examined by this Committee back in 1999 and reauthorized in 2000. 

Created in 1982, the SBIR program offers competition-based 

awards to stimulate technological innovation among small privatesector businesses while providing government agencies new cost-effective technical and scientific technologies to meet their diverse 

mission needs. 

The development of this program is not only critical to the 

unique needs of each of the participating Federal agencies but also 

to our national economy. Small businesses renew the U.S. economy 

by introducing new products and lower-cost ways of doing business, 

sometimes with substantial economic benefits. They play a key role 

in introducing technologies to the market, often responding quickly 

to new market opportunities. Some of the great technological innovations in this country came about from small business owners tinkering in their workshops, including two very famous people from 

Ohio, my State, the Wright brothers. 

Several congressionally mandated and independently conducted 

research projects have closely examined the program to determine 

3

how well it is performing in relation to congressional dictates. A 

study by the National Research Council found that the SBIR program is performing well in the Federal agencies required to operate 

the program. According to the National Research Council Study, 

the SBIR program provides entrepreneurs with funding to investigate and commercialize new technologies without diluting ownership through equity investment or taking on additional costly debt. 

Since one of the purposes of the SBIR program is to serve the mission needs of Federal agencies, the process can also lead to greater 

Federal procurement opportunities for participants. In turn, it will 

accelerate growth of these small businesses. 

The SBIR program, as the National Research Council demonstrates, also provides significant benefits to Federal agencies by 

providing additional opportunities to solve operational needs. A 

program officer can post a solicitation that describes a particular 

problem and invites small businesses to propose research that will 

solve it. This contrasts with other Federal research awards where 

a researcher provides a proposal of personal interest. The nationwide scope of the program also ensures that the agency will investigate various research avenues. 

Finally, the program, by leading to commercialization of the research, diversifies the Federal Government’s industrial base. Competition among suppliers will lower prices to the government and 

save tax dollars. That said, this study does point to some weaknesses within the program and makes several recommendations for 

the Committee’s jurisdiction to consider as we reauthorize the program this year. As we continue this process, we must consider topics such as examining cycle times from solicitation through phase 

three; understanding and managing firms; winning multiple 

awards; and increasing and improving oversight and program evaluations by the agencies involved. We will also need to scrutinize 

the current award size and administrative costs of the program as 

we move forward with the reauthorization. 

Madam Chair, I look forward to working with you on this important issue. And again, I thank each of the witnesses for being here 

today, and I yield back the balance of my time. 

Chairwoman VELA ́ ZQUEZ. Thank you, Ranking Member Chabot. 

Chairwoman VELA ́ ZQUEZ. Our first witness is Mr. Douglas 

Doerfler. Mr. Doerfler is the President and CEO of MaxCyte, Inc., 

based in Gaithersburg, Maryland. Mr. Doerfler is testifying today 

on behalf of the Biotechnology Industry Organization. It represents 

more than 1,100 companies and organizations in the research and 

development of innovative health care, agricultural, industrial and 

environmental biotechnologies. 

Mr. Doerfler, welcome. There is a timer, and you will have 5 

minutes. When it is green, you can start. And then when it is red, 

your time is up. Welcome, sir. 

STATEMENT OF DOUGLAS A. DOERFLER, PRESIDENT AND 

CEO, MAXCYTE, INC., GAITHERSBURG, MD, ON BEHALF OF 

THE BIOTECHNOLOGY INDUSTRY ORGANIZATION 

Mr. DOERFLER. Thank you, Chairwoman Vela ́zquez, Ranking 

Member Chabot, and Mr. Johnson. Thank you for your time this 

morning. I am the president and CEO, as mentioned, of MaxCyte. 

4

I formed the company in 1999. I have about a 25-year career in developing biotech companies and biotech products around the world. 

My company is a small company. We are 20 employees. And what 

we do is we create drugs out of human cells, and we are involved 

in treating diseases like leukemia. 

We have a clinical trial going on right now at Baylor College of 

Medicine. We also have a clinical trial treating pulmonary arterial 

hypertension in treating humans. This is high blood pressure of the 

lungs, a very serious disease. We also have a number of pre-clinical 

programs for treating such diseases as cancer, cardiovascular disease and infectious disease. We also collaborate with major universities around the world, including Baylor, the University of Pennsylvania, Duke, Stanford, among others. And we were a proud recipient of a 2003 SBIR-1 grant, and we are still eligible for the 

SBIR program in its current state. 

As you mentioned, I am testifying on behalf of the Biotechnology 

Industry Organization. I am on the board of BIO and involved in 

a number of their other programs. My oral comments are a summary of the written testimony that I presented to the Committee. 

Like my company, the majority of biotech companies are small 

companies. They are less than—there are 50 employees. And what 

is typical is we have a lead product, one single lead product that 

we are developing. And behind that, there are two or three other, 

maybe five other products that are in pre-clinical testing, being 

tested in animals or maybe still on the lab bench prior to going into 

human testing. In my company, we raised about $5 or $6 million through friends 

and family until we were able to find large-scale venture funding. 

During that period, we also became eligible for SBIR. We put in an 

application with a very rigorous study section through NIH to get 

our program approved. And the program was a very risky project, 

and it is around using our technology to develop potential rapid deployment vaccines for biodefense applications. None of the venture 

capitalists would touch that. 

But when we went to the VC community, and we talked to them 

about what we were doing, they were really taken by the rigor of 

our science being able to get an SBIR award. That was issued in 

2003. We received funding in 2004. 

The way the funding work, just a few minutes on this. We went 

out and went to a number of investors. They liked what we were 

doing. And we put together a group of investors that eventually 

owned, in total, slightly more than 50 percent. This was my doing. 

I went out and formed this group of investors. They want to have 

multiple investors in the deal because of the risk in our kind of a 

company. And I want additional investors in on my deal because 

I need to raise a lot more money to develop a product. These products take anywhere from 8 to 15-plus years to develop. It is commonly held that it can cost anywhere from a half a billion dollars 

to a billion dollars to get a product to market. And what is amazing 

about this business—and I have to wonder why I am in it sometimes—is that 95 percent of the projects fail; 95 percent of the 

projects fail, so it is a very, very high risk endeavor. The SBIR program has been essential to companies like mine and quite frankly 

essential to the biotechnology community. This is the one—one of 

5

the industries that we really do excel in around the world. When 

the best and newest treatments for cardiovascular disease, cancer, 

HIV—they are invented and developed by companies in this country. And of the couple hundred products that were developed and 

approved by the FDA in the last 20 years, the companies who were 

involved in that, about a third of those companies received SBIR 

or STTR funding. So this is a vital piece of the foundation of this 

industry. 

And what has happened since I think 2003 or 2004, when there 

was a change in the regulations or the interpretation, a number of 

our companies are no longer eligible to participate. And what that 

does is it really eliminates a number of the companies who are best 

served to solve some of the Nation’s problems that are directed by 

NIH to participate in this program. So we are very, very focused 

on regaining eligibility. We are not here asking for more money 

which might be something that is different from a lot of committees. We want to be eligible. We want to make this more competitive because more competition brings stronger companies to develop better therapies that will eventually help this Nation move 

forward. 

So thank you for your time. 

[The statement of Mr. Doerfler may be found in the Appendix on 

page 31.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Doerfler. 

Our next witness is Mr. Robert Beall. Mr. Beall is the president 

and CEO of the Cystic Fibrosis Foundation. The foundation is a 

nonprofit organization dedicated to the cure and control of the disease and to improve the quality of life for those with the disease. 

Research developed through the SBIR program could prove invaluable to this effort. 

Welcome, sir. 

STATEMENT OF ROBERT J. BEALL, PH.D., PRESIDENT AND 

CEO, CYSTIC FIBROSIS FOUNDATION 

Mr. BEALL. Thank you, Congresswoman Vela ́zquez. And thank 

you other members of the Committee. 

It is very important for me to have this opportunity to speak to 

you not only on behalf of the Cystic Fibrosis Foundation but on behalf of other patient advocates. In your introduction, you spoke 

about the important contributions that the SBIR programs are 

making to innovation and to jobs and technology. But the other 

thing that it does is it saves lives. And I think we can prove that 

great innovations in the SBIR and support of the SBIR program 

has served to save lives. The Cystic Fibrosis Foundation is a multifaceted research program. It has a multifaceted research program 

that strategically invests in basic research and in companies that 

are developing new therapies to treat cystic fibrosis. 

Our research model is described as venture philanthropy. This 

means that the foundation invests as much as venture capitalists 

would in very early stages of drug development. We have invested 

over $600 million in research and drug development. And this year 

alone, we will invest $28 million in biotechnology companies to 

bring new developments to cystic fibrosis. Other foundations are 

clearly moving in the arena of venture philanthropy, but they do 

6

not have the resources that are necessary to fill the gap that is so 

critical for us if we are going to be able to develop new therapies 

to treat the various diseases. The SBIR program reflects a fundamental philosophy of creating viable and creative partnerships to 

accelerate the development of new therapies, not just for cystic fibrosis but for many other diseases as well. SBIR grants are particularly important for companies that are pursuing early discovery 

phase of drug development, the most difficult kind, as Mr. Doerfler 

has just described, to secure funding. 

Let me give you an example of our experience. PTC Therapeutics 

is a New Jersey company and is one of our great partners in our 

efforts to develop new treatments for cystic fibrosis. The company 

has a promising new therapy. It is called PTC 124. And it is an 

innovative oral drug that treats the basic defect in cystic fibrosis. 

The company has other drugs that are in the pipeline, very important drugs that could treat disorders like Duchenne Muscular Dystrophy and Parkinson’s disease. The company, like several of our 

partners, received early SBIR support for the discovery stages of 

the drug. The development of this groundbreaking therapy is dependent upon the SBIR program. In its earlier stages, the technology that they are using today was too risky to get venture capital. The SBIR program has certainly catapulted this into the mainstream and allowed it to become a potentially effective therapy in 

cystic fibrosis. 

SBIR grants, much like our own venture philanthropy efforts, 

provide the critical support companies need to approve their research concept. And it is with initial support of the SBIR program, 

the proof of concept that these companies are more willing and 

more likely to get capital funding necessary to move their products 

forward to development. For people with cystic fibrosis, this model 

allows us to continually add new drugs to our pipeline. We now 

have nearly 30 products that are in our pipeline. 

We urge that the SBIR program be reauthorized with minor but 

important modifications so that it can continue to foster the involvement of small businesses in research and development. There 

are substantial risks in any kind of research and development. We 

just talked about 95 percent of the programs fail. But for orphan 

diseases, the barriers are even greater because orphan diseases, by 

the way, are for those 200,000 patients and less. The obstacles are 

greater because the rewards for the developer are certainly less because it is determined by patient size. 

This combination of factors in terms of small patient numbers, 

the cost of developing new drugs, presents a barrier, and we lose 

incentives for the creation for these small companies. The venture 

philanthropy efforts of the foundation and the SBIR programs are 

very important in attracting companies to CF research and other 

kinds of diseases. However, from our point of view, our support 

alone cannot make all this happen. And we have to continue to sustain the involvement of other individuals and other companies in 

cystic fibrosis research as well as other orphan diseases. I really 

want to emphasize that I spoke about the fact that we are going 

to be spending $25 to $30 million this year alone to put drug development in the biotechnology companies. But not all diseases have 

those kinds of resources to make those kinds of investment. We are 

7

very fortunate, and I really speak here from the orphan diseases 

community because there are so many orphan diseases that we 

know so much about at this point that will never be able to cross 

the finish line unless we continue to have the SBIR support. 

So the CF Foundation urges the Committee to set aside a portion 

of the SBIR funds at the National Institutes of Health for support 

of biotechnology companies that are focused on these orphan diseases and for the development of new drugs to be able to attack 

these important orphan diseases. We would recommend a set aside 

of 10 percent of SBIR grants for NIH for orphan diseases. This approach, we feel, is fully consistent with the fundamental goals of 

the SBIR program to increase the commercial application of federally supported research and to stimulate technology innovation in 

the private sector and at the same time attacking the diseases that 

have a very profound impact on our society. We also believe that 

the modest targeting of these funds to rare diseases might have the 

added benefit of encouraging applications for small business entities that have specific interest in rare diseases but have never applied for SBIR support. 

I want to return briefly to the PTC Therapeutics, the company 

I spoke about earlier. As its innovative PTC 124 drug moved 

through the development pipeline, the company applied for and received SBIR support, as I mentioned. However, they have subsequently applied for another grant, but they were not allowed to 

continue it because of the reinterpretation of the 51 percent owner 

rules. As a result, the efforts in cystic fibrosis were curtailed for a 

short period of time until they were able to receive other sources 

of support, including those from the Cystic Fibrosis Foundation. We 

urge the Congress to rethink the current ownership rules to ensure 

that companies with the right capabilities, the right capacity and 

the right talent and a proven track record can pursue innovative 

projects with SBIR support grants. 

In conclusion, the CF foundation lends its strong support for the 

reauthorization of the SBIR program. This program clearly facilitates partnerships that are critical to the development of new 

therapies and new treatments for all Americans. In an age of limited Federal resources, we applaud the SBIR program for facilitating collaboration between the public and the private sectors. 

Thank you very much. 

[The statement of Mr. Beall may be found in the Appendix on 

page 39.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Dr. Beall. 

Our next witness is Mr. Michael Borrus. Mr. Borrus is the founding general partner of X/Seed Capital, an early stage venture fund 

based in California’s Silicon Valley. Mr. Borrus is also the author 

of three books and more than 70 articles on topics including management of technology, high technology competition and financial 

strategy for tech companies. 

Welcome. 

STATEMENT OF MICHAEL BORRUS, GENERAL PARTNER, X/

SEED CAPITAL MANAGEMENT 

Mr. BORRUS. Thank you, Madam Chairwoman, distinguished 

members of Congress. 

8

In addition to founding X/Seed Capital, I currently serve on the 

National Academies’ Steering Committee on SBIR which, after 

nearly 5 years of work and 9 of these rather weighty tomes, has 

produced the first comprehensive assessment of SBIR in the program’s near two and a half decade existence. 

In the interest of full disclosure, you should also note that at 

least two of X/ Seed’s portfolio companies have received phase one 

SBIR awards, and several other applications are in process. In a 

sense, then, I wear multiple hats today. Except where I explicitly 

call out findings and recommendations of the Academies’ SBIR 

studies, the views I express here and in my written testimony are 

my own. 

I have four points to make. First, as the Chairwoman’s opening 

remarks and as both of the prior witnesses suggested, the SBIR 

program plays a specific role in promoting innovation by small 

businesses for which other sources of capital are usually unavailable, inappropriate or inadequate. It fills several major gaps in 

funding. Even in my own backyard, Silicon Valley, arguably the 50 

or so most overcapitalized square miles on earth, even there SBIR 

dollars matter. They help seed new businesses. They help seed or 

advance innovative new ideas or approaches within established 

small companies. They help, very often, to sustain the very survival 

of innovative small businesses until they can find that, as I think 

almost all entrepreneurs would affirm, that often tortuous path toward commercial success. 

Let me don my National Academies’ Steering Committee hat for 

my second point. Mr. Chabot did a very good job of summarizing 

many of the findings. The Academies’ study of SBIR has concluded 

on the whole that the program is meeting its congressionally mandated objectives. There is a laudable inventiveness and diversity 

across the program within and between individual agencies, a laudable diversity that includes many best practices that ought to be 

emulated more widely across the program. The study also suggests 

program improvements which are necessary if the program’s performance to congressional objectives is to be optimized. Some of 

those recommendations are spelled out in my testimony, like the 

need to eliminate the overly long processing delays between phases 

in the program, like the need for increased commercialization support. Many more are spelled out in these studies. 

If the Committee permits, I would like to incorporate, by reference here, as in my written testimony, the Academies’ findings 

and recommendations, particularly of the summary study. 

Third point, among the most significant issues flagged by the 

Academies’ studies is this: The SBIR program is insufficiently datadriven in the committee’s view. It generates little hard data that 

would permit Congress to quantify and measure the program’s performance to the various congressional objectives it serves. Because 

of this fact, it is really difficult to answer questions you may have, 

questions like to what extent the program ought to have a preferential claim on scarce Federal technology R&D resources. In my 

personal opinion, the program needs to be better quantified and 

measured. Improvements to that end are essential if Congress is to 

have a more objective basis on which future decisions about allocations of funds to SBIR can be made. 

9

Finally, taking off my Academies’ hat and donning that of a venture investor, let me address one last issue. It is this: Should the 

SBIR program exclude small businesses that are majority-owned by 

venture capital investors? My answer, for reasons spelled out in my 

written testimony is this: If one of the most significant of 

Congress’s goals for the SBIR program is to stimulate increased innovation by small business, innovation that can achieve commercial success and help to meet agency missions, then small businesses that otherwise meet all of the program’s criteria should not 

be denied SBIR simply because they are majority owned by venture 

investors. I am happy to elaborate on all of these points and any 

other issues as the Committee members desire. 

Madam Chairwoman, thank you for your time and attention. 

[The statement of Mr. Borrus may be found in the Appendix on 

page 46.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Borrus. 

Our next witness is Lieutenant General Lawrence Farrell. Mr. 

Farrell is the president and CEO of the National Defense Industrial Association. NDIA represents nearly 1,400 corporate members, almost 50,000 individuals from the entire spectrum of the defense and national industrial base. 

Welcome. 

STATEMENT OF LIEUTENANT GENERAL LAWRENCE P. 

FARRELL, USAF (RET.), PRESIDENT AND CEO, NATIONAL DEFENSE INDUSTRIAL ASSOCIATION 

General FARRELL. Thank you, Ms. Vela ́zquez and Mr. Chabot. It 

is an honor to be here. NDIA, first of all, is passionate about the 

SBIR program because of its impact on our industry and the Department of Defense. We exist to advocate the best possible systems to be placed in the hands of our soldiers, sailors, airmen, Marines, coast guardsmen, and the SBIR program is integral to that 

mission. 

I have submitted comments for the record, and I have also given 

my notes to your counsel, but just briefly I would like to emphasize 

a couple of points. Number one, the SBIR program is highly leveraged. If you look at the statistics, over 45 percent of the SBIRs in 

phase one transition into phase three, which is some sort of a commercialization. And that process only takes 2.5 years. It is a very 

small amount up front, $100,000 for phase one and $750,000 for 

phase two, but it enables these companies to leverage their private 

funds, and in many cases, it multiplies that manyfold. It really 

pays for itself. It is also important to the country. We know that 

small business is the most efficient at job creation, the most innovative and the most agile and the most efficient at value creation. 

We and the Department of Defense are most interested in the innovation part of that and the agility part. It is important to the Department of Defense because the Department of Defense basic research budget is about $1 billion. The SBIR portion of another $1 

billion for the Department of Defense essentially doubles the basic 

research budget of the Department of Defense. Very important. We 

see lots of phase three successes. 

I have in this book before me Army, Navy, Air Force and Department of Defense success stories. And when you see this very imVerDate 0ct 09 2002 09:10 Mar 07, 2008 Jkt 033615 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 G:\CLERK SB\HEARINGS\TRANSCRIPTS\39789.TXT LEANN
10

pressive tome that the National Research Council has produced, 

and if you go through that, you stand back and you say, wow, this 

is a really, really important program. The R&D of the Department 

of Defense is increasingly squeezed. We have seen consolidation of 

the large primes, and where do the enabling technologies from supplier base come from? Increasingly they are coming from small 

business. The DOD share of SBIR, as you know, is over 50 percent, 

and it is about $1.3 billion. That is very important. 

Now, why is it important to small business? If you look at small 

business, 42 percent of the phase one awards are to firms with less 

than 9 employees. And 25 percent of those receiving phase ones are 

startup companies. In other words, these are new companies entering the space. So it is leveraging their R&D capital, and it is making them attractive as suppliers to large primes and takeover candidates. And indeed it is life for small businesses. There are lots 

of successes. And if you go through all of the documentation, you 

stand back and you really are amazed at the high tech nature of 

what comes in. 

Just a few examples. Cybernet Systems, a woman-owned business, is providing an automated tactical ammunition sorting and 

classification system in Iraq today. The Army is really excited 

about this program. They think it is one of the best things they 

have ever seen. It takes the manual sorting of ammunition out of 

the soldiers’ hands and puts it into something automated. The 

Small Arms Protective Inserts, the SAPI plates that you see our 

soldiers wearing, that comes from an SBIR project out of Armor 

Works, Inc. 

The Phraselators, these automatic translation devices that you 

see in Iraq and Afghanistan today, come out of a veteran-owned 

company from an SBIR project, Marine Acoustics, Inc. There are 

over 5,000 of those in use today in Iraq and Afghanistan. This happened to be in phase two. When the Army saw a need for it, they 

asked them to accelerate it. In just a few weeks, they accelerated 

it from phase two into a commercial product and put it in the 

hands of the soldiers. 

The last example, Microphase Coatings, Inc., a small company, 

only seven employees, they make specialty coatings for all of the 

Department of Defense. But one of the specialty coatings is for the 

B-2 stealth bomber. As you know, that requires a lot of maintenance to maintain the stealth on the B-2. That product is coming 

from a product with seven employees, SBIR. 

So if you look at the examples—there are many more. There are 

thousands. If you look at the United States Navy, a lot of their 

SBIRs result in advanced acoustics for sonar, advanced communications technologies, and you just can’t say enough about the 

technologies that are coming out of this. 

We in NDIA are asking for four things: Number one, the reauthorization of the program; number two, we would like to see an 

admin fee above 1 percent, because we don’t think 1 percent is 

enough; number three, we would like to see that you don’t change 

the set aside fee without talking to the Department of Defense, because that is a sensitive issue, not only in industry but with the 

department; And number four, we would like to see some flexibility 

in the award amounts. Right now they are $100,000 and $750,000. 

11

In some cases you need more than $100,000 and more than 

$750,000. We would like to see legislation give some flexibility to 

the program managers in using that. Thank you very much for 

your time, ma’am. 

[The statement of General Farrell may be found in the Appendix 

on page 52.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Lieutenant General 

Farrell. 

And now I recognize Mr. Chabot for the purpose of introducing 

our next witness. 

Mr. CHABOT. Thank you, Madam Chairwoman. I am pleased to 

introduce William E. Bean, who graduated from Oregon State University with a degree in electrical engineering. For over 30 years 

he has been associated in various roles with technology-based organizations ranging from startups to Fortune 1,000 companies. His 

responsibilities have included those of engineering, sales and marketing management, general manager and president for domestic 

and international divisions of large international corporations, 

among other things. He later formed his own consulting company, 

R.B. Associates, which specialized in serving small technology companies. 

Mr. Bean has served on several boards of directors. He is currently the director of the Technology & Business Center at the College of William & Mary in Williamsburg, Virginia. He is on the executive Committee of the Hampton Roads Technology Council, and 

he chairs the HRTC Censor Science and Technology Forum and the 

Hampton’s Roads research partnership’s Censor Cluster Program. 

And we welcome you here, Mr. Bean. 

STATEMENT OF WILLIAM E. BEAN, DIRECTOR, TECHNOLOGY & 

BUSINESS CENTER, DEPARTMENT OF ECONOMIC DEVELOPMENT, THE COLLEGE OF WILLIAM & MARY 

Mr. BEAN. Thank you so very much. It is a pleasure to be here. 

Chairwoman Vela ́zquez, Representative Chabot and members of 

the small business Committee, it is a pleasure to be here and have 

the opportunity to speak to you today. An exciting opportunity I 

must say. 

The Technology & Business Center at the College of William & 

Mary is part of the Department of Economic Development. And as 

such, we are the college’s primary outreach with the community. 

We spend a lot of time working with area technology companies 

trying to help them grow, provide jobs for graduating students, link 

the faculty into these companies to help with projects, vice versa. 

So we spend a lot of time working with SBIR oriented type companies. 

And having worked with those companies, it is clear to us that 

the SBIR program has had a major influence on the growth of technology in Hampton Roads. And so that leads to several recommendations that we would make with regard to this program 

given its local success and major success within the State of Virginia. I think Virginia is number three in awards received over the 

life of the program. Over $1.2 billion has gone into the community 

of Virginia. I think the number is somewhere around 40,000 people 

12

in this State are employed by companies that have won SBIR rewards. So it has been extremely important here. 

One issue is the program itself. It seems kind of odd that something that has been as successful as this still has to go up for renewal. Therefore it seems to me that making this a permanent program would be a smart thing to do. It certainly has proved itself 

time and time again. 

The next two things are intertwined. It was just mentioned that 

the caps are $100,000 and $750,000, for phases one and two. Those 

caps were assessed in 1992. So certainly the ravages of inflation 

have driven down the amount of value that you are going to get 

from that amount of money. It has been recommended by the Senate Committee to increase that to $150,000 for phase one and to 

$1.25 million for phase two; we strongly recommend that this be 

done. 

Another issue is the ratio. With the phase one, not phase two but 

phase one, SBIR, the current ratio is two-thirds/one-third. That 

means that the contractor that gets the award must keep twothirds. They can if they want subcontract one-third. Again, given 

the current caps, one-third of $100,000 is $33,000, which is not 

much to do some kind of sophisticated feasibility study. Remember 

phase one is looking at really advanced state of the art. So you 

need enough money to be able to do that. And $33,000 is not much. 

Furthermore, if you are going to do that with a college, the college 

has to take out overhead, leaving only about $21,000 for professors. 

That is true at every college in the United States, essentially. William & Mary is not unique there. That does not leave very much 

money for the professors to work on. So we would recommend taking a look at that split. I am not quite sure where those numbers 

came from; change it to 55 percent/45 percent. 

If you then combine that with increasing the cap, now you have 

a reasonable amount of money to do some very serious research. In 

particular that comes into play when you have to use more than 

one collaborator. Sometimes there may be two collaborators with 

the prime contractor on a project. So that would be a very useful 

thing. 

In addition, it has been recommended by several bodies that the 

overall funding of the program be increased to 5 percent. It would 

seem reasonable to increase funding from its current 2.5 percent of 

extramural funds to 5.5 percent in half percent increments over a 

period of years to get it up to a higher funding level. However, if 

you increase the current cap, the funding has to come out of somewhere. If you don’t increase program size, ultimately you will reduce the number of awards. So increasing the total amount of 

money in the program would help offset that. And the next one is 

a recommendation that is a little exterior to the program but I 

think really important. There is a lot going on right now through 

a program called Commercialization Pilot Program. That is a program that is instructing the agencies to implement commercialization projects to help get from phase two into the commercialization 

phase. And some of those are very, very good projects, especially 

the one that is being done by NIH. John Williams, who runs the 

Navy program, has done an excellent job on that. 

13

But to my mind, that is not quite the issue, and of course we look 

at this from a college perspective. What we have found with the 

companies that we work with is that the issue is at the front end. 

It is really the phase one end. These are entrepreneurs. These are 

the high tech people, technologists, scientists. When they start 

their company, their real education in the process of business is 

minimal. And so many of them struggle mightily to try to get to 

a phase two. And when they ultimately get a phase two, they again 

struggle mightily to perform it. A very major reason for this is just 

a flat lack of real business education. We implemented at William 

& Mary what we call a modular education program. We ran it for 

eight companies last year. Six of them were SBIR winners. It went 

through five basic areas of business with them, and gave them access to professors following the program. We found it to be enormously successful. It gives them basic education so at least they 

know what they need to know. And when they get to the point 

where they are ready to start implementing more complex things, 

not only are they better able to do that but they now have a little 

bit of background on the right questions to ask and they have also 

built a link into the university so they can ask the professors to 

help them. 

That program can be funded through the FAST program which 

is the Federal and State Technology Partnership Program. I do not 

believe it is funded at the moment. That program, by the way, was 

instrumental in helping the Center for Innovative Technology (CIT) 

for the State of Virginia, which is our technology secretariat to implement their SBIR program and indeed allowed them to hire a fellow named Robert Brook, who is here today, who now runs that 

program very successfully for us. So we have seen the FAST program work. That is part of what helped drive this program that we 

implemented through CIT last year. I think that something could 

be implemented fairly simply and quickly through just about every 

college in the United States. 

So, again, thank you very much. There are other comments in 

the testimony that I have submitted to you, and I appreciate the 

opportunity to be here today. Thank you. 

[The statement of Mr. Bean may be found in the Appendix on 

page 64.] 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Bean. 

Mr. Borrus, I would like to address my first question to you. A 

recent study concluded that more than 20 percent of companies 

that receive a phase two were funded entirely or in part due to the 

prospect of an SBIR award. This suggests that the SBIR awards 

have a strong effect on business formation. To what extent does 

this business formation translate to job creation? 

Mr. BORRUS. Well, small businesses typically are a source—a 

large source of new job creation. It is pretty clear that the program 

fills an important funding gap that permits small businesses to 

exist and then eventually to expand, and after that, if they are successful, to prosper. That progression leads to new job-creation. 

Chairwoman VELA ́ ZQUEZ. Mr. Doerfler, one challenge associated 

with the program is the need to increase the number of small businesses that are applying for SBIR awards. The NIH reports that 

the SBIR applications has been decreasing since 2005. Agencies 

14

will need to grow their applicant pools in order to keep the awards 

as competitive as they have been in previous years. What steps can 

be taken to encourage more individuals and firms to apply for 

SBIR awards? 

Mr. DOERFLER. Thank you. A couple of things, I believe. One is 

that—I think that the agencies can get the word out and tell more 

about what their goals are. Secondly, this rolling around majority 

ownership over 51 percent is eliminating a number of companies 

from even trying to participate. Thirdly, there is another—there is 

called the affiliation role where there is more than 500 employees 

in an affiliation. We have venture capital investors. Many of these 

investors invest in literally tens of companies at one time. And 

right now if—the way the rule is written is, if a venture capitalist—if they invest in another company, the number of employees 

in that company would count against our 500 employees. In the 

biotech space, we have—I have 20 employees. That same venture 

capitalist could have invested in 5 or 6 or even 10 different 

startups, and maybe one is a retail company where they have several hundred employees. It is virtually impossible for me to understand what our investors, who they are invested in and how many 

employees they have. So another critical part of this would be to 

fine tune that affiliation role so that it is easier for us to know 

when we can participate, because it does take time for us to focus 

in on this program, and we need more certainty around the application process. 

Chairwoman VELA ́ ZQUEZ. Mr. Bean, do you have any more recommendations as to how we can get more individuals to apply? 

Mr. BEAN. To encourage companies to apply for the SBIR program? Again, I think a lot of that can be done through local programs. The Center For Innovative Technology does multiple training programs throughout the State. They have an annual conference that is available to companies and that has been quite successful. What we have been able to do is to educate throughout the 

communities in Virginia, through the local technology councils and 

other organizations like the Hampton Roads Research Partnership. 

I don’t know how other States may be organized, but certainly 

through programs where you push it out through area technology 

councils and other economic development agencies, even town economic development agencies would help. I think you would find 

that they would be more than happy to support seminars and 

training programs to let companies know that these SBIR programs are available. 

Chairwoman VELA ́ ZQUEZ. Dr. Beall, I know that you mentioned 

you have a $600 million foundation. 

Mr. BEALL. We have invested $600 million in medical research. 

Chairwoman VELA ́ ZQUEZ. From your testimony, it is apparent 

that the SBIR program is playing a critical role in developing potential cures for cystic fibrosis. Without this funding, where will 

the progress stand in the fight against the disease? 

Mr. BEALL. Well, clearly it would not be where we are today. I 

say we have 30 products that are currently in clinical trials or late 

stage development for cystic fibrosis. I just reviewed—we have 

about 10 of these products that have received SBIR support in various stages over the years. I mention PTC directly. This is an oral 

15

drug that would not be where we are today that is treating the 

basic defect in cystic fibrosis. This is incredible. We wouldn’t have 

an opportunity to have an effort in the area of gene therapy with 

a company in Ohio called Copernicus. We have another product 

that is in clinical trials that is also treating the basic defect with 

support to Parion pharmaceutical company. So all of these things 

are really important in our effort. We try to pick up as much of 

these things as possible. Many of the things that support—that 

SBIR supports in the early stage, we then come along and then 

hopefully it is leveraged to other companies. Again, the important 

thing to recognize—and I want to emphasize to you—is that we are 

fortunate, we can make these kind of investments and create this 

pipeline. But we have an incredible opportunity in biomedical research today. We know the genes—so much about the genes, the 

basic defect of so many things. And unless we take this opportunity 

and use the SBIR programs to translate the information that we 

know at the basic research level to finding new therapies and move 

forward, this is what the SBIR does. It is really following with 

what the Congress has asked Dr. Zerhouni to do, and it is a perfect 

example of how we can take basic research and leverage it to new 

therapies. That is what the SBIR program does. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Doerfler, for life science firms undertaking such research, 

SBIR is often only one component of their funding. Given the high 

cost of developing and testing a health related product or technology, how important is it that life science firms have access to 

as many sources of funding as possible? 

Mr. DOERFLER. It is very important. As I mentioned in my testimony, it is a very risky endeavor. It is a very expensive endeavor, 

and we need to be accessible to all forms of funding. We also want 

to ensure that the agencies have a certain amount of flexibility, for 

instance, NIH. We are not looking for any dollar hard caps. We 

think that, again, these programs need to be judged upon their 

merits. There have been some programs that actually got higher 

levels of funding because they were so profoundly important to 

moving some of these cures against some diseases. So, again, I 

think it is important that we have SBIR both one and two. In most 

cases if you get through a phase two SBIR, you can find and leverage that with private capital, which is a great thing for companies 

and great things for developing new medicines. 

Chairwoman VELA ́ ZQUEZ. Thank you. General Farrell, NASA and 

DOD have developed initiatives within their agencies, SBIR programs, to help facilitate partnerships, and in some cases mentoring 

between prime contractors and small firms that have received 

SBIR awards. How can we encourage more partnerships between 

prime contractors and firms that have been awarded SBIR contracts? 

General FARRELL. Number one, everybody in the Department of 

Defense, in the industry and for NASA as well recognizes the 

power of the SBIR and the small firms that are part of that. So 

what you need is a lot more bringing together the large and the 

small firms and giving them the opportunity to have a conversation 

about what is going on inside the industry. In my association, as 

an example, we have a national small business conference once a 

16

year where we bring large and small firms together in a kind of 

match making. We also this last year for the first time got together 

with the Department of Defense and put on an SBIR conference 

where the subject of the conference was the SBIR program, and a 

lot of small companies with SBIR capabilities came, and they exhibited and we also had the large companies there. And in addition, the Department of Defense was there. We don’t do—my association doesn’t do that much with NASA, but those are the kinds 

of things that we need to do to get the word out. Also, one of our 

recommendations has to do with the admin fee. To the extent that 

somebody is managing an SBIR project, 1 percent admin fee 

doesn’t allow you to do very much. But if you had a higher admin 

fee, it gives you a capability as a project manager to reach out 

more. And so that is one of the things that we think needs to be 

done. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Now I recognize Mr. Chabot. 

Mr. CHABOT. Thank you, Madam Chair. 

Mr. Doerfler, I will begin with you. If bringing a biotechnology drug to market can cost, I understand, upwards of $1.2 billion 

sometimes, how does the $750,000 maximum phase two award in 

the SBIR program provide the needed capital for small biotech 

firms? 

Mr. DOERFLER. It is a spark that allows this to happen. In many 

cases, if you have a lead program that is funded by a company, by 

a group of investors, it is very typical that that money is allocated 

solely for that one drug. If I wanted to work on another application 

of my technology for—in the case of orphan diseases, which aren’t 

that well fundable because of the patient populations, I have to 

find financing for that. NIH has a list of diseases that they want 

companies like mine to try to get a spark, to try a new discovery. 

So it is critically important because it allows us to do the initial 

bench work. It allows us to do the initial proof of concept. It allows 

us to do the experiment and create the data that we can then convince investors to invest in the next stage of development. I believe 

frankly that without that initial money for sparking these innovations, that many of these diseases will not get the attention that 

they deserve. 

Mr. CHABOT. Thank you very much. 

Dr. Beall, I will turn to you next if I can. I might just note that 

we—and I am sure the Chairwoman finds this as well—we are inundated over time by many groups who come to our offices talking 

to us about various diseases, advocating funding for NIH and others for funding, and I know the cystic fibrosis folks have been in 

my office many times. And I happened to read a book many, many 

years ago by Frank Deford. I think it was called, ′′Alexandra: Life 

of a Child,′′ which was a very moving book that I have never really 

forgotten. And so I always kind of look with a special kind of open 

mind when they come in to advocate on behalf of the folks that 

they try to help. So thank you for your work in that field. 

My question would be, did—some firms would argue that small 

businesses owned by venture firms don’t need the capital infusion 

because to continue their research, they can rely on the venture 

firms for their capital. What would be your viewpoint on that? 

17

Mr. BEALL. My reaction goes back to the concept, they need the 

spark. One thing that has happened in the last 10 years is that the 

window for venture capital has dramatically changed; 10 years ago, 

if you had an idea, you could get venture capital support. Now, 

with the disappointments in biotech and the return on the investments and the fact that 95 percent fail, that window has moved up. 

It needs a product—or a product needs to be almost in phase two 

clinical development or phase three before venture capital is—is 

willing to make its investment. So you have what is frequently 

called the valley of death. It is that very idea of a proof of concept, 

phase one, very early stage issues. And that is where the SBIR program, that is where our venture philanthropy, we are filling in that 

particular gap. I will tell you that one of our programs that is in 

phase three, not the PTC—excuse me. It is in phase two. We had 

to put in $2 million the first year, but we got enough data that was 

leveraged eventually by venture capital support that originally 

went to $120 million and then the product was just purchased by 

another major pharmaceutical company for $350 million. But it all 

started out with that spark, that one investment for us of a couple 

million dollars just to have the proof of concept. And that is what 

is so critical. That is what SBIR does. And that is what venture 

philanthropy is doing. 

Mr. CHABOT. Thank you very much. 

Mr. Borrus, do you think that a venture fund owned by, say, 

Paul Allen, who is one of the co-founders of Microsoft, should they 

be allowed to own SBIR awardees? And if not, what would you consider to be the appropriate cap for allowing venture firms to own 

SBIR awardees. 

Mr. BORRUS. I don’t think it makes sense to exclude any class of 

venture-owned or financial investor-owned small businesses so long 

as they otherwise meet the program’s criteria. Most of Mr. Allen’s 

money—I don’t want to speak for him—but let’s imagine that most 

of his money is going to be deployed well past the phase where an 

SBIR would help to initiate something new—that spark that these 

gentlemen are talking about—and that much of his money will be 

directed to a particular outcome. If the entrepreneur, in a firm that 

he is backing, chooses to spend that money in, say, searching for 

something new that is not on the critical path for which his fund 

provided money, he is not going to be happy about it, the board is 

not going to be happy about it. The team is probably not going to 

be allowed to spend the money in search of that something new. 

SBIRs fund not just the new spark that initiates the new business, 

but in fact, very frequently, the critical spark that takes a company 

down a path that was unexpected, that was not in the original 

plan, and for which there is no existing available capital. Although 

there might be a lot of capital in the company, it just can’t be spent 

pursuing this new direction. And it is often that new direction that 

actually leads to the breakthrough which leads to commercial success. 

Mr. CHABOT. Thank you very much. 

General Farrell, you recommend that up to 3 percent of the SBIR 

funds should be set aside for managing the program. Would that 

not reduce the availability of funds for distribution of small businesses to perform research? How would you comment on that? 

18

General FARRELL. Yes, sir, you are exactly right. It does reduce 

the amount of funds which it provided. However, we think at 1 percent—there are a lot of inefficiencies on how the program is being 

managed, outreach and things like that. We think we could be 

much more efficient in the way we manage the program with a little bit higher admin fee. I don’t think it is unreasonable to go from 

1 percent to 3 percent. That is an amount of money that would be 

subtracted, but it is not a large amount of money. But it is essential to the management of the program. So we think that overhead 

is needed. Thank you. 

Mr. CHABOT. Thank you very much, General. 

And finally, Mr. Bean, some would argue that the Government 

should fund the best research proposals without regard to the size 

of the entity submitting the proposal. What would your argument 

be to support setting aside research money to specifically small 

businesses? 

Mr. BEAN. Now, when you say ′′small businesses,′′ are you referring to that definition of small business which is 500 or less, or the 

really small businesses which are the 25-to-30-type size or less, 

which is by far the bulk? 

Mr. CHABOT. I would say either, whichever way you feel most 

comfortable answering the questions. 

Mr. BEAN. Again, if you look at the greater Hampton Roads area, 

which is where we are, there is absolutely no question that this research money which is set aside for investment into the SBIR program has been enormously successful. There are many cases of 

companies that have been started up by scientists and researchers 

coming out of NASA or local colleges, our own Old Dominion University, Norfolk State, so forth, that have started up companies either by themselves or maybe with one partner, and through the 

SBIR program have been able to start, as you said, that spark, and 

using that spark to be able to create the path of both technology 

and their business process for their companies. We have seen them 

grow, you know, from 1, 2 people up to 25, 30, 40. And as the SBIR 

program continues to invest in them, what it allows them to do is 

create an initial platform, expand that platform, expand that platform, and to continue to expand that platform. 

To give an example, there is one local company that has developed a virtual reality engine primarily on an Army SBIR program. 

They have been able to take that development and move it into the 

community college sector for job-training programs, workforce development-type projects that are becoming extremely successful. 

There are multiple examples like that. 

I think that in my mind there is certainly no doubt that taking 

that amount of money, that very small amount of money, it is 4.3 

percent of total Federal investment, or 2.5 percent in Federal research investment, that produces something like, what, 40 percent 

of all of the patents that come out of the U.S. Therefore, just about 

any way that you look at that, there is a huge benefit to the SBIR 

program. 

Mr. CHABOT. Thank you very much, and I thank all the witnesses for their response to my questions. 

Yield back. 

Chairwoman VELA ́ ZQUEZ. Mr. Johnson. 

19

Mr. JOHNSON. Thank you, Madam Chair, for holding this hearing, and thank you, panel members, for preparing and your testimony and coming to present it today. 

To go back to the question Mr. Chabot asked of Mr. Bean, I 

would ask you to comment on whether you think that the smaller 

businesses, 25 to 30 people, those businesses have been underserved by the SBIR program. Would that be your opinion? 

Mr. BEAN. No. You know, I don’t think so. It certainly allows the 

awards to go to larger programs. But if anything, on the front end, 

and we were talking earlier about how to help companies and get 

them involved, it is often difficult for small companies to find help 

on how do you actually write an SBIR that would be acceptable to 

an agency. So the number of small companies that would be winning these various awards would go up if there were more such 

help like that available. 

I think the other issue is early stage education to help them go 

forward. 

Mr. JOHNSON. A mentoring program? 

Mr. BEAN. Kind of a mentoring program. It could be involved 

even in the modular program that I discussed earlier where you 

could include as a portion of that perhaps sessions on how do you 

prepare SBIR-type responses. 

The other issue that comes to mind with that is a little bit tricky. 

There are a lot of topics published. I don’t know the total number 

of topics that are issued by all of the agencies, but it is huge. The 

Department of Defense comes out with three listings a year. There 

is one STTR release; in fact, it came out this week. And there are 

hundreds upon hundreds of topics. So one of the issues is trying to 

find enough reviewers that are actually qualified enough to review 

what the submissions are. And when you are looking at phase 1, 

what this is for is really high-risk-type ventures. In fact, that is 

why DARPA is there. So if you are submitting something to 

DARPA, you can assume that it is some technology that is way out 

there, and trying to find reviewers that are really capable to understand what the submittal is is difficult. 

So part of the strengthening of the program would be to tighten 

up a little bit on how these ultimate proposals are reviewed. And 

I believe if that was done, you would increase the number of really 

small businesses that are successful in this program. 

Mr. JOHNSON. Yes, Mr. Farrell. 

General FARRELL. Yes. Just to add to that, I said previously that 

about 42 percent of the phase 1 awards go to companies with less 

than 9 people. If you take it out to companies with less than 24 

people at DOD, 70 percent of phase 1 awards go to companies with 

less than 24. 

Mr. JOHNSON. Thank you. 

Mr. Borrus, in your written testimony, you make the point that 

inclusion of small businesses that receive venture capital investments doesn’t come at the expense of those that don’t. Can you explain how the Academy conducted this evaluation? 

Mr. BORRUS. I mentioned also that the program doesn’t generate 

in and of itself a lot of data that would permit one to reach these 

conclusions. One of the reasons it took the Steering Committee approximately 5 years to generate this amount of work was that we 

20

had to conduct original research. The Committee staff and the consultants to the Committee painstakingly assembled a wide range of 

data sets examining all of the issues that comprise these and the 

other five studies that the Academy has produced on this subject. 

Somewhere in all that data gathering is data that suggests, number one, that—

Mr. JOHNSON. I won’t ask you to pull it right now. 

Mr. BORRUS. Please don’t, because I am not exactly sure where 

I would find it. I would refer, though, refer the Congressman to it. 

First, throughout the program’s almost 24-, 25-year history, majority venture-owned small businesses have participated in the program. In fact, really, if you look at the life cycle of a venturebacked startup, over its life at some point in time while it still 

qualifies as a small business, it is likely to be majority-owned by 

its financial investors. And that is especially true for extraordinarily risky research like that financed by the National Institutes, by Dr. Beall’s foundation, by members of BIO, that often literally require hundreds of millions of dollars to get to a product—

or more these days—and 12 to 15 years to get a product eventually 

to market through FDA approval. Equally true these days in energy, where hundreds of millions of dollars are required if you are 

actually going to go into the production of a biofuel or if you are 

going to build a solar process production facility. 

So, you know, it is not at all surprising that eventually as they 

go down new pathways searching for new products, that venturebacked start-ups will be majority-owned by financial investors. 

Such companies have participated in the program historically, 

number one. 

Number two, throughout this extraordinary amount of evidence 

gathering, over 5 years, no evidence whatsoever was turned up 

that there was any crowding out of any other small businesses. 

Mr. JOHNSON. I got you. 

Let me ask a question, Dr. Beall or Mr. Doerfler. Actually, Mr. 

Doerfler, you are the one who spoke of the orphan diseases. 

Mr. DOERFLER. We both did. 

Mr. JOHNSON. Dr. Beall, what are some of these orphan diseases, 

these rare diseases with 200,000 or less cases, and is that throughout the world? 

Mr. BEALL. No. That is throughout the United States. It is cystic 

fibrosis is one of those. There are a number of blood disorders that 

exist, or rare disorders. Some of them don’t even have names, quite 

frankly. They are syndromes and just—you know, I think they estimate that there is about over 2,000 rare disorders that exist. 

And again, the most important thing is that a few years ago, in 

1999, when the human genome, the great accomplishment of 

Francis Collins and others, when we identified the genes, we really 

got clues on how to attack some of those other kind of orphan diseases that exist out there. And the important thing is that, you 

know, unless we start to get an infusion of dollars to those diseases, they are not going to ever be able to cross the finish line to 

find therapies. And I think the SBIR program is a great way to leverage our Federal investment in basic research in finding the 

gene, I think it is a great opportunity for us, take it and start to 

translate it to new therapies for these diseases, because many of 

21

those diseases just don’t have the resources, like fortunately we do 

and so you have, to make that happen. 

And so I really do feel that it is very important that the SBIR 

program really be looked at, and Mr. Doerfler can probably add to 

that. 

Mr. DOERFLER. There are a number of genetic diseases that are 

very, very rare that would never get the attention of any financial 

investor because it may only affect 100 people. Of course, there is 

a real passion in what we do. Many of us start these companies 

surely to make a living, but we are really passionate about developing new medicines to treat diseases that can’t be treated any 

other way. And Biotech is uniquely in a position to do things like 

HIV/AIDS is a chronic disease now; 20 years ago it wasn’t. Arthritis, now people with severe arthritis can be treated with these biologics. I am one of those patients, frankly. I wouldn’t be here without those kind of drugs. Cardiology drugs. A number of cancers, 

now it is a chronic disease; it is not a death sentence anymore. And 

these are the kind of diseases that are being attacked and driven 

by the biotechnology industry, and, again, that spark is critically 

important. 

Chairwoman VELA ́ ZQUEZ. The time is expired. 

Ms. Clarke. 

Ms. CLARKE. Thank you, Madam Chairwoman and Ranking 

Member Chabot, for holding this important hearing this morning, 

and I want to thank all the witnesses for testifying today. After 

hearing all of your testimony, I have a much better understanding 

of the overview and priorities of this program. I would like to highlight, however, a recommendation by the National Academy of 

Sciences, which is that I would like to see improvements in outreach efforts to women- and minority-owned firms. 

My question is to Mr. Bean, and I think that there are a number 

of you here who can answer them. I am going to put all of them 

out there because time is of the essence here. 

Mr. Bean, according to a recent EPA press release, there are approximately 22 million small businesses in the United States that 

have more than 50 percent of their employees in the private workforce, and they develop the Nation’s new technologies. The expectation is that many of these new technologies being developed will 

improve our environment and quality of life. 

Can you tell me what types of innovative, environmentally 

friendly technologies are being developed today and that may create jobs and economic growth in the low-income, working-class, 

urban communities similar to my district? I come from Brooklyn, 

New York. And as a follow-up, how can we encourage the SBIR 

program to develop partnerships between biotech companies and 

State university medical schools and hospitals such as the incubator campus that has been created in my district, which is the 

SUNY downstate medical center? I heard discussion from Mr. Bean 

about Norfolk State. And how does this promote more economic development? 

Mr. BEAN. Let us see. Do we have about an hour for this answer? 

That is a very big question with a lot of moving parts to it. 

One of the more interesting companies that are in the State of 

Virginia is a company recalled Luna Innovations. They have been 

22

able to build multiple platforms. They have come up with some 

very clever nanotechnology using carbon tubes that can be used to 

help with medical analysis, because these tubes, as I understand, 

don’t stay in the body following X-ray, or radiographs, which is a 

dramatic improvement. They have developed some other technology 

that has to do with helping clean up Chesapeake Bay, a way of 

treating algae blooms and things like that. 

There are any number of companies out there doing technologies 

like that. At Virginia Institute of Marine Science, which is a campus of William and Mary, there is some technology being developed 

to measure really foul toxins that unfortunately are found around 

here because of the shipbuilding industries. It helps assess what 

the toxic levels are and can clean them up. They are in the process 

of commercializing that product. So there is any number of programs that are going on like that. 

With regard to programs of Norfolk State, for example, there is 

an effort going on right now to stand up a center that is going to 

specialize in transportation and other technology issues. We anticipate that that center will be a place where small companies can 

come to get support with the research that they need done, which, 

again, ultimately leads to commercialization, hopefully hiring of 

graduate students, providing them opportunities for employment 

once they leave the university. 

So there is any number of things that are going on locally that 

help support technology development. That was a fairly long question. Did I address all the parts, or is there something additional 

you would like to know? 

Ms. CLARKE. I think Dr. Beall and other—

Mr. BEALL. One of the great things about Biotech is they are 

really experts at identifying things that develop academics and try 

to commercialize it. That is really one of the great resources that 

Biotech really has in terms of moving forward ideas that come out 

of academics. 

I am just looking at our pipeline. I refer to Copernicus, which is 

in Cleveland, that came out of Case Western Reserve University, 

the technology, they have licensed it to Copernicus. Obviously if it 

is marketed, funds will go back to the university, and this will be 

leveraged into a continuing investment into the infrastructure of 

the university. That is only going to leverage itself to more employees and continue to grow. And I think this happens all across our 

spectrum. 

Just looking here, of the seven or eight products that have got 

SBIR support, they originally were in academic institutions, identified by the biotech companies, and then commercialized through 

that process. So I think that is one of the real benefits of the SBIR 

program. 

Mr. DOERFLER. Biotechnology Industry Organization represents 

companies outside of health care. We are actively involved in safe 

foods, bioremediation, biofoods, and all these companies are actively involved in developing these new technologies to solve some 

of the very problems you brought up. And again, these companies 

are small, they are 40, 50, 70 people, and because of the capital 

structure, we can’t participate in this program. 

Chairwoman VELA ́ ZQUEZ. Mr. Braley. 

23

Mr. BRALEY. Thank you, Madam Chairwoman, and thank you to 

all the members who came to our panel today. 

I chair the Contracting and Technology Subcommittee, which has 

specific jurisdiction over the issues we are talking about here 

today, and it has been very illuminating to hear you put a human 

face and voice on some of these important issues we are talking 

about. 

Lieutenant General Farrell, I want to start with you. One of the 

things we talk about frequently in this Committee is the disproportionate geographic allocation of Federal dollars to small businesses 

through a variety of different programs that the Small Business 

Administration offers. I am fortunate that the Rock Island arsenal 

is not technically in my district, but it is right in the middle of the 

Mississippi River between my district and Representative Hare’s 

district, and it served as a great economic incubator for small business development. But when we look at the rest of the country, we 

see large pockets where Federal contracting dollars don’t go, and 

specifically in DOD programs. 

So as someone who is very interested in thinking outside the box 

on what we can do to stimulate small business development 

through the SBIR program in areas of the country that don’t have 

a major DOD installation near them, what types of creative things 

have you seen from members of your association given the fact that 

the technology that exists today should allow small businesses to 

provide services and goods and compete for these Federal contracts 

with the assistance of an SBIR program? 

General FARRELL. That is an excellent question. When you see 

the lay down of DOD dollars, it tends by and large to follow large 

programs, like the B-2 program or the F-22; or shipbuilding programs tend to be scattered, too, but not as scattered as airplane 

programs or vehicle programs so that the dollars tend to follow the 

large programs, and large companies, large primes that do this. 

They make an overt attempt to spread the money around the country to make sure they got support for that program. 

So I think that is working pretty good. However, the problem 

with that is that the R&D dollars that go into those large programs 

are not the SBIR kinds of things, which is what you are interested 

in. Those R&D dollars go to develop that particular program. They 

don’t go to the creative ideas that come out of phase 1s. But I think 

if we just look at large programs, we are missing the boat, because 

there is lots of manufacturing around this country, you know, basic 

manufacturing processes that we are kind of overlooking. So if we 

could kind of focus some of the SBIR into the manufacturing processes, I think you will do a lot. 

And if you look around the country, there is a thing up in Pittsburgh called the National Center for Defense Machining and Manufacturing. It is a not-for-profit, started with a little bit of money 

from Congress, but now they are getting money from industry to 

develop advanced manufacturing processes. And so I think you 

need to kind of stimulate and look at certain things like that. You 

got CTC up in Pennsylvania as well. 

There are certain parts of country that are kind of hotbeds for 

manufacturing right now, some places in Ohio, some places in 

Pennsylvania, Massachusetts, and we need to stimulate that more. 

24

But the kind of money that does that is really not recognized, like 

the manufacturing technology money coming out of the Department 

of Defense budget is very small right now. I think you need—personally I think you need kind of a national investment program 

that would address some of these. If you had a national program, 

then you could spread it across the country. 

Mr. BRALEY. Thank you. 

Mr. Borrus, I want to follow up on that, because part of the materials we received is the analysis of the State-by-State distribution 

of Federal program dollars, and I was very, very disturbed to see 

my State of Iowa ranked 43rd on this list despite the fact that we 

have a major research institution at the University of Iowa, we 

have lots of Department of Agriculture programs in our State. And 

as part of the ongoing work that the academies did, did you focus 

at all on this geographic disproportionality, and how we can try to 

look at ways of improving the program and make sure that it is 

actually having a positive impact throughout the country? 

Mr. BORRUS. There was great variety across the various agencies, 

and some of them did a much better job of geographic outreach 

than others. One of the academies’ conclusions is that it is really 

critically important to take approaches that work to solve problems, such as geographic outreach at one agency, and generalize 

them across the agencies to the extent possible, while maintaining 

the laudable flexibility in the program itself. 

The second recommendation was to experiment. Sometimes you 

don’t know what works until you try it. And so another recommendation was a series of pilot programs that on a small scale 

could test new approaches that could address, for example, Representative Clarke’s question about community outreach to her district. If those pilot programs work, generalize them and spread 

them more widely across the program as a whole. I am a fan of experimenting, trying by doing, learning by doing. Then, as long as 

you are generating the data that suggests you are performing, generalizing that and spreading the successful practices. That would, 

I think, benefit the program as a whole, including the geographic 

outreach. 

Mr. BRALEY. Did you become aware of any particular agencies 

that were, for example, pushing the envelope in that area and trying to do a better job of geographic outreach that may have fallen 

outside of their traditional areas of emphasis? 

Mr. BORRUS. You know, the studies generate so much data, I 

can’t, without possibly mis-quoting, point to specific agencies. It is 

somewhere in these reports, I promise you. I might recognize my 

fellow committee member, Ty Taylor here, who may have some 

input on that issue. 

Mr. BRALEY. I will have my legislative assistant contact you after 

the hearing, and maybe we could get some information. 

I want to talk to our two health care innovators that are here 

and talk a little bit about the importance of this program. In this 

same vein that I have been talking about, there is a lot of health 

care facilities around the country doing research. What more do we 

need to be doing to make sure that there are opportunities available to people under this program in parts of the country that have 

the ability to participate in research and development but maybe 

25

are not getting the same piece of the Federal pie right now? Do you 

have any thoughts that you can share on that? 

Mr. DOERFLER. I think the first up, again, is clarity around some 

of these rules that have been preventing companies from getting 

involved in the program. Again, it takes a lot of preparation work 

to do so, and if your capital structure changes, you are no longer 

eligible, and that is a problem. So I think that is a great degree. 

I think a lot has to do with the agencies themselves. NIH is very 

aggressive across the country. Our organization represents biotechnology companies in all 50 States. So this science is, and in 

particular biotechnology, it is a very attractive industry. And so 

economic development groups across the States in almost every city 

is looking to bring our kind of companies into their geographic 

areas. It is a very attractive industry. 

Chairwoman VELA ́ ZQUEZ. Time has expired. Thank you. 

Mr. Chabot, do you have any questions? 

Mr. Ellsworth? 

I do have two other questions. 

Dr. Beall, your testimony suggests that small firms can make important contributions to advances in medical research because the 

firms are willing to explore new approaches. Given the SBIR programs’ emphasis on commercialization, are you concerned that participating Federal agencies may not have an adequate incentive to 

fund high-risk research projects? 

Mr. BEALL. You know, if you had asked me that question 20 

years ago, I would say I would have grave concern about that, because I think fortunately the NIH has done a terrific job in making 

sure that they have developed review processes that are set out to 

identify opportunities and new technologies and move forward. Initially when they had their review processes, it was mixed up with 

the regular peer-review process of regular research grants, and I 

think it provided some confusion to the reviewers. Now they have 

specialized panels that are looking at looking for innovation and 

new technology. 

So the fact that we have PTC 124 suggests to me the system is 

working. Nano particles, to look at gene therapy, suggests to me 

that the SBIR system is working at the NIH. 

So, again, we always have a concern at the NIH whether we are 

looking for innovation and so forth, but I really believe—and I really commend Dr. Zerhouni and the staff for making sure they put 

mechanisms for being able to look for innovation and new opportunities. 

Chairwoman VELA ́ ZQUEZ. Mr. Doerfler, can we talk about the application process? Your company has applied for SBIR and won 

SBIR awards. Do you have any recommendations about how this 

process can be improved? 

Mr. DOERFLER. Yes. I have been saying it several times. The key 

one is consistency and clarity in terms of who is eligible. And it is 

not around the change in your capital structure, which I think is 

an artificial way of judging a company’s size. When we raised our 

money, we still are about 20 people, so we didn’t change. 

I think the process is quite good, as Dr. Beall said. The peer review at NIH is superb. The people who are reviewing in those 

study sections really understand the area. They understand the 

26

mandate that NIH has to improve public health. So we are very 

comfortable. The only thing I would also add is that perhaps more 

flexibility at the agency level for them to provide different amounts 

if they feel that the science, again, and the opportunity warrants 

a larger amount. 

Chairwoman VELA ́ ZQUEZ. Do any of the other witnesses have any 

recommendations regarding the application process? 

Yes, Mr. Borrus. 

Mr. BORRUS. Again, I would refer you to the Academy’s findings. 

There were a number of programs at some of the agencies that involved electronic submission, electronic evaluation, which seemed 

to speed up the process significantly, and could be more widely 

adopted. 

Chairwoman VELA ́ ZQUEZ. Let me take this opportunity again to 

thank all the witnesses, and I know how important this program 

is for small businesses, for innovation and technology in our country and our economy, and for small businesses in particular. We 

will continue to give serious consideration to the reauthorization 

process. 

With that, I ask unanimous consent that Members would have 

5 days to submit statements and supporting materials for the 

record. Without objection, so ordered. 

Chairwoman VELA ́ ZQUEZ. This hearing is now adjourned. 

[Whereupon, at 11:35 a.m., the Committee was adjourned.]

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