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FULL COMMITTEE HEARING ON

LEGISLATION TO REAUTHORIZE

THE SMALL BUSINESS INNOVATION

RESEARCH (SBIR) PROGRAM

COMMITTEE ON SMALL BUSINESS 

UNITED STATES HOUSE OF 

REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MARCH 13, 2008

Serial Number 110-79

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 

DAVID DAVIS, Tennessee 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida

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 

VERN BUCHANAN, Florida, Ranking 

BILL SHUSTER, Pennsylvania 

STEVE KING, Iowa

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

Subcommittee on Urban and Rural 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 

DAVID DAVIS, Tennessee

Subcommittee on Investigations and Oversight

JASON ALTMIRE, PENNSYLVANIA, Chairman 

CHARLIE GONZA ́ LEZ, Texas 

RAUL GRIJALVA, Arizona 

MARY FALLIN, Oklahoma, 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

PANEL I: 

Preston, Honorable Steven, Administrator, U.S. Small Business Administration ........................................................................................................................ 4

PANEL II: 

Greenwood, Honorable James, President and CEO, Biotechnology Industry 

Organization ......................................................................................................... 13

Heesen, Mr. Mark, President, National Venture Capital Association ................ 14

Leahey, Mr. Mark, Executive Director, Medical Device Manufacturers Association .................................................................................................................... 17

Skinner, Mr. Mark, Vice President, State Science & Technology Institute 

(SSTI) .................................................................................................................... 19

Matthews, Mr. Charles, Professor and Executive Director, Center for Entrepreneurship, Education & Research College of Business, University of Cincinnati ................................................................................................................... 21

APPENDIX 

Prepared Statements: 

Vela ́zquez, Hon. Nydia M. ....................................................................................... 33

Chabot, Hon. Steve .................................................................................................. 35

Altmire, Hon. Jason ................................................................................................. 36

Preston, Honorable Steven, Administrator, U.S. Small Business Administration ........................................................................................................................ 37

Greenwood, Honorable James, President and CEO, Biotechnology Industry 

Organization ......................................................................................................... 41

Heesen, Mr. Mark, President, National Venture Capital Association ................ 46

Leahey, Mr. Mark, Executive Director, Medical Device Manufacturers Association .................................................................................................................... 54

Skinner, Mr. Mark, Vice President, State Science & Technology Institute 

(SSTI) .................................................................................................................... 59

Matthews, Mr. Charles, Professor and Executive Director, Center for Entrepreneurship, Education & Research College of Business, University of Cincinnati ................................................................................................................... 73

(V) 

(1)

FULL COMMITTEE HEARING ON LEGISLATION 

TO REAUTHORIZE THE SMALL BUSINESS 

INNOVATION RESEARCH (SBIR) PROGRAM 

Thursday, March 13, 2008

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON SMALL BUSINESS, 

Washington, DC. 

The Committee met, pursuant to call, at 10:00 a.m., in Room 

1539 of the Longworth House Office Building, Hon. Nydia 

Vela ́zquez [chairwoman of the Committee] presiding. 

Present: Representatives Vela ́zquez, Cuellar, Chabot, Graves and 

Buchanan. 

OPENING STATEMENT OF CHAIRWOMAN VELA ́ ZQUEZ 

Chairwoman VELA ́ ZQUEZ. Good morning. I am kind of disoriented 

because this is not our Committee room, and I am accustomed to 

the fact that Mr. Chabot is always on my right. Today he is on my 

left, and I do not know if there is a subliminal message here. 

[Laughter.] 

Chairwoman VELA ́ ZQUEZ. I call this hearing to order. 

Today we will examine legislation modernizing and extending the 

Small Business Innovation Research Program. SBIR is one of the 

government’s largest sources of funding for innovation. It awards 

more than $2 billion in research grants every year, which enables 

the work of thousands of America’s most innovative small firms. 

As science and technology evolve, however, so must this initiative. The authors of the program had great foresight. Twenty-five 

years ago they recognized early stage firms could make important 

contributions regarding technological development. SBIR made it 

practical for these small and innovative companies to conduct research on behalf of the federal government. 

This has yielded ground breaking advances, including unmanned 

aviation, needleless insulin patches, and a promising malaria vaccine. 

SBIR awards have supported R&D that has strengthened our 

country’s national security and public health infrastructure. In the 

process, it has helped launch leading technology companies, such 

as Amgen, Qualcomm, and Symantec, employing thousands of 

Americans. 

From the Committee’s perspective, continuing this success is dependent on three primary issues. First, the number of small firms 

that apply for SBIR awards must increase. 

2

Second, awardees must have access to financing of all types, including venture capital. 

Third, the commercialization of SBIR funded research projects 

must be more of a priority. 

The draft legislation we will consider this morning seeks to address each of these elements. In order for more firms to apply for 

SBIR, it doubles award sizes, providing more capital for important 

research projects. 

It also establishes a 90-day period for a decision on applications. 

This provision will enable small firms to get more capital more 

quickly and reduce the time it takes for research to go from the lab 

to the marketplace. 

Emerging economic sectors, including women, veterans, and minorities, are also brought into SBIR. This is achieved through the 

reauthorization and expansion of the Federal and State Technology 

Partnership Program. FAST will increase competition for federal 

research dollars giving the taxpayers a better value. 

While SBIR has been a successful program, one of the critiques 

we have heard is that it is difficult to take the next step. The legislation addresses this by establishing a new Primers Initiative 

which will provide the technical know-how and a system many 

small firms need. 

The draft bill also assures companies can choose from a wide 

array of external financing sources, and that the SBA does not 

make this decision for them. 

We have included a provision that is identical to the amendment 

offered by Ranking Member Chabot on the House floor last fall. 

This gives certainty that businesses can make their own financing 

choices. It also frees them from worrying about being second 

guessed by the government. 

SBIR funded research needs must reach the consumer, whether 

it is the government or the private sector, and this legislation 

places a greater emphasis on commercialization. 

The changes consolidate the existing fragmented effort and expanded government-wide wage benefits of research sectors, including health care, energy, and agriculture. This improvement will entice, enable, and permit more small companies to advance the innovations that have made our economy so diverse and vibrant. It will 

help insure that SBIR awards remain competitive, fund topnotch 

research, and produce cutting edge breakthroughs. 

As a result, the SBIR program will keep pace with the very innovation that it seeks to promote and will continue to foster next generation technologies and therapies. That also means it will solidify 

our efforts to increase U.S. competitiveness worldwide. 

I look forward to today’s hearing, and I want to thank all of the 

witnesses in advance for their testimony. I now recognize Ranking 

Member Chabot for his opening statement. 

OPENING STATEMENT OF MR. CHABOT 

Mr. CHABOT. Thank you. 

Good morning, and, Madam Chairwoman, I want to thank you 

for holding this hearing to review a Committee print of legislation 

reauthorizing and modernization the Small Business Innovation 

Research Program. 

3

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, and especially Dr. Charles H. Matthews, who has a Doctor 

of Philosophy in management from the University of Cincinnati. 

Dr. Matthews is a professor of entrepreneurship and strategic management at the University of Cincinnati’s College of Business, and 

he is also the founder and Executive Director of the University 

Center for Entrepreneurship, Education and Research, and the Director of the university’s College of Business Small Business Institute. 

We want to welcome you this morning, Dr. Matthews, and coincidentally Dr. Matthews and I happened to go to the same grade 

school, same class, St. Catherine’s in Cincinnati, and the same high 

school, class of 1971. So we have known each other from a long, 

long time. He is here despite that, not because of that. 

And we also want to thank Mr. Preston for being here today. I 

know he has an extremely busy schedule. So I think it is very commendable that he is with us here today, and we really do appreciate that. 

Today’s hearing is the third in a series designed to collect information and data to help this Committee draft legislation reauthorizing the SBIR Program. On January 29th, we held a hearing that 

reviewed how well the SBIR Program is performing. 

On February 13th, this Committee’s Oversight and Investigation 

Subcommittee held a hearing to review the SBIR Program’s role in 

the development and commercialization of innovative health care 

technologies. 

At each of these hearings, the Committee received valuable information from academics, small businesses, and trade associations on 

the performance of the program. Based on this input, the Committee developed draft legislation for the SBIR Program’s reauthorization. 

We are working toward developing legislation that modernizes 

and strengthens the SBIR Program. The draft we have before us 

goes a long way toward achieving these goals. As the National 

Academies of Sciences noted in its report on the SBIR Program, 

there are not adequate measures of performance in the SBIR Program. 

The draft legislation before us addresses that issue by requiring 

agencies with an annual SBIR Program at $50 million or more a 

year to create an SBIR advisory board to review the program quarterly and recommend improvements in that agency’s operation of 

the program. The creation of these advisory boards and the annual 

report to Congress will allow far greater oversight and better management of the program. 

The draft bill also mandates that agencies required to have an 

SBIR advisory board must complete evaluation of competitive SBIR 

proposals within specific time frames. 

Additionally, the legislation doubles the authorized SBIR Phase 

1 and 2 award amount and makes numerous other technical but 

important positive changes to the program. 

That said, I do have some concerns with a few of the provisions 

in the draft before us. I am certain that the Chairwoman and her 

staff, as she and her staff have done since the beginning of this 

4

Congress, will work with me and with our staff in a bipartisan 

manner in an attempt to hammer out any differences that may 

come up as we continue with this process. 

To the Chairwoman’s credit, as I have said many times, she has 

worked very cooperatively with the minority, and we expect nothing less in the future. 

Today we have excellent witnesses as I mentioned before here to 

provide us with discussion and comment on the draft legislation. 

We want to, again, thank you, Chairwoman, and thank you, Mr. 

Preston, for being here. We look forward to working with you on 

the improvement and reauthorization of the SBIR Program. 

And I yield back the balance of my time. 

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Chabot. 

And now I have the great pleasure of welcoming the Honorable 

Steven C. Preston, Administrator of the United States Small Business Administration. He has served in this capacity since July of 

2006 and has testified several times before this Committee. 

Welcome, sir. 

STATEMENT OF THE HONORABLE STEVEN C. PRESTON, 

ADMINISTRATOR, U.S. SMALL BUSINESS ADMINISTRATION 

Mr. PRESTON. Thank you very much, Chairwoman Vela ́zquez, 

Ranking Member Chabot. 

SBA is very supportive of the Small Business Innovation Research Program. We look forward to working with the Committee 

as legislation moves forward to the sunset date on September 30th. 

I also appreciate, Madam Chairwoman, the three points that you 

raised, increasing the number of firms in the program, making sure 

that these firms have access to financing, and your folks on commercialization. I think those are all very important priorities, and 

I appreciate your finding that as such. 

Since this program has been in place, as you commented, it has 

helped many firms get access to federal research and development 

funding. Today it is over $2 billion annually going to these firms 

to fund research and foster innovation and commercialization of 

products. 

Every federal department with an extramural R&D budget in excess of $100 million participates in SBIR. There are currently 11 

federal departments that meet this criterion and participate in the 

program and we are at the SBA responsible for promulgating regulation and policy directives to govern the program while other federal agencies utilize the program to foster innovation. 

The purpose of SBA’s regulations is to insure the benefits of 

SBIR reach small business entrepreneurs and that the R&D advances resulting from SBIR Program benefit our country. 

For a business to be eligible for participation in the program, 

they have to be organized for profit. They have to be at least 51 

percent owned and controlled by one or more individuals who are 

citizens or permanent residents to the United States, or be at least 

15 percent owned and controlled by another for profit business 

which may be a venture capital firm that is at least 51 percent 

owned and controlled by individuals and have including its affiliates not more than 500 employees. 

5

In 2001 and in 2003, our Office of Hearings and Appeals did confirm the interpretation that an individual is a natural person, not 

a corporate entity. These decisions constituted neither a new eligibility rule nor a new restriction on the program. However, we do 

understand that the clarification provides some consternation in 

the industry. 

Concurrent, however, with these rulings, SBA decided to update 

its regulations to account for some of the more complex investment 

structures that have emerged in order to facilitate the funding required to launch new technologies. In 2004, SBA issued a rule providing the opportunity for future venture capital involvement 

under the SBIR program, and under that rule, a venture capital 

company may invest in 51 percent or more of the small business, 

and that small business can, in turn, receive SBIR awards provided 

that the venture capital firm is, in fact, 51 percent owned by individuals and meets the 500 employee small business size standard. 

In other words, in these circumstances a venture capital firm can 

even wholly own an SBIR recipient. The issue is not for us the 

value of venture capital investing in innovation. Venture capital 

has been the financial fuel behind many of our most ground breaking advances in technology and health care and defense. As such, 

venture capital has enabled innovation and growth that has helped 

our economy keep strong and dynamic. 

We all understand the value of venture capital. It has great 

value to our SBIR firms. Many of them receive it today, and we encourage their getting funding from venture capital sources. 

From our perspective with the proposed legislation, the issue is 

much more limited. Two, point, five percent of extramural research 

dollars are set aside for a program that focuses on early stage 

small innovators. Ninety-seven and a half percent, or 82 billion in 

research dollars, is available for firms that are not considered 

small. 

So the issue is: should firms owned and controlled by large venture capitalists and universities be able to compete for 2.5 percent 

or should this funding come from the 97 and a half percent? Effectively, where do we draw the line and what should that definition 

be? 

SBA’s goal is to insure that the integrity of the program is maintained and that it remains program for small business. 

Beyond SBIR, and this is something I think we just need to clarify, we are concerned that changing the affiliation rules with regard to venture capital participation raises some other issues in the 

other programs, our procurement programs namely. Any changes to 

SBA’s size standards could potentially affect our other programs, 

and federal programs targeted for small business could be open to 

a business concern that is controlled by what would be considered 

a large business. 

So we ask the Committee to proceed with caution on those. We 

just want to make sure that understand what your intention is and 

make sure that we clarify that. 

The administration is concerned with the proposed legislative 

change to the definition for purposes of venture capital, and while 

recognizing that a venture capital investment is crucial to small 

business growth, the administration is nonetheless concerned that 

6

the Committee print offers too broad of a definition to the affiliation standards. 

And once again, we also are concerned about other conflicts within the legislation. 

We are committed to continued improvement, to expanded monitoring of the SBIR Program. We hope to work with the Committee 

as well as other agencies in the administration to insure that small 

business is defined in a manner that effectively minimizes ineligibility of actual small businesses, while minimizing inadvertent eligibility of large businesses. 

So I appreciate the opportunity to share our views on it, and I 

look forward to clarifying these views and answering any questions 

you have. 

[The prepared statement of Mr. Preston may be found in the Appendix on page 37.]

Chairwoman VELA ́ ZQUEZ. Thank you very much, Administrator. 

I would like to ask you about the draft legislation that we have 

before us, it includes provisions that reauthorize, modernize, and 

extend the Federal and State Technology Partnership Program. 

FAST, of course, is a program to encourage SBIR application from 

small firms located in areas that are under represented in the 

SBIR Program. 

My question is: will the SBA support reauthorization of FAST? 

Mr. PRESTON. We think FAST has a lot of value, and at this 

point I believe we will, but I am still clarifying that with some of 

my colleagues. 

Chairwoman VELA ́ ZQUEZ. Okay. In your written statement, you 

outline the legal basis for SBA support of current SBIR eligibility 

rules. Your statement does not, however, address the fact that 

leaders in both the public and private sector believe the SBA’s eligibility rules are having a negative impact on the overall objectives 

of the SBIR Program. 

Keep in mind that the firms that are rendered ineligible for 

SBIR because of their ownership structure often have fewer than 

25 employees. How would you respond to those, including people 

from your own administration like the Director of the NIH, argue 

that the current rules undermine the statutory purposes of the 

SBIR program? 

Mr. PRESTON. Well, I think there are a lot of issues inherent in 

that question, and the question I have in that is there are a few 

issues. 

First of all, the language as it is drafted right now defines a venture capital firm as being small if it has fewer than 500 employees. 

I think that will cover virtually every independent venture capital 

firm in the world. So really, you know, major multimillion dollar 

venture capital firms who do early stage investing may have 20 or 

25 partners. So I think the important thing from my perspective 

is to understand what truly is a large firm. 

Now, I understand the other issue is I think this program focuses 

on two and a half percent of the dollars, and the question I have 

is why do we need to open up a program that has two and a half 

percent of the research dollars to firms that are supported by very 

7

large venture capitalists when 97 and a half percent or $82 billion 

is also available? 

I think it is important for us to keep the integrity of the small 

business nature of this program. Now, let me make one other comment, ma’am. I do believe that there may be a better way to look 

at size within the venture capital world, and I would love to roll 

up my sleeves and work with this Committee and with the industry and with other people in the executive branch to figure out if 

there is a better way, to make sure that good small businesses are 

not being excluded. 

But I do think the language as it is written right now would 

allow some very large venture capitalists in the program. 

Chairwoman VELA ́ ZQUEZ. So, we will work with you on the eligibility rules because what we are discussing here is the SBIR program and the objective of the program. 

Mr. PRESTON. The objective of the program as I understand it is 

to work with small businesses to seed early stage innovation that 

has a viable commercialization possibility, and so the question is: 

what is a small business, which I think is what you are asking? 

If it is a different question, I apologize if I did not answer it. 

Chairwoman VELA ́ ZQUEZ. Under current law, the Department of 

Defense is permitted to use available SBIR forms for expenses incurred through the administration of commercialization programs. 

In your written statement, you caution Congress to avoid refocusing the program in a manner that involves direct support for 

commercialization activities more appropriately performed by the 

private sector. 

Could you elaborate on what that means? 

Mr. PRESTON. Well, right now our program provides grants for 

Stage 1 and Stage 2 research. As a firm moves toward commercialization, they are available for other federal funding, but under 

the program as it is structured as I understand it, that Stage 1 and 

Stage 2 funding is SBIR. Once they get to Stage 3, they can seek 

other federal grant funding. Obviously they can seek venture capital funding. 

The other thing is once a firm gets its stage 2 grant, the ownership restrictions effectively recede and they are free to, you know, 

continue to raise money from wherever. 

Chairwoman VELA ́ ZQUEZ. Let me ask you, does the SBA oppose 

the Department of Defense commercialization pilot program? 

Mr. PRESTON. I am not familiar with their program in detail. I 

would be happy to answer that for the record though. 

Chairwoman VELA ́ ZQUEZ. Well, I am asking that question because in the draft bill we extend the commercialization pilot program to all the agencies, and this is important for me to know and 

for the Committee whether or not you support the Department of 

Defense’s pilot program. 

Mr. PRESTON. So you are saying that the two and a half percent 

specifically in SBIR would now be able to be used for Stage 3. Is 

that what you are proposing? 

Chairwoman VELA ́ ZQUEZ. No. 

Mr. PRESTON. Okay. 

Chairwoman VELA ́ ZQUEZ. No. Let me go to the next question. The 

Defense Department’s commercialization program allows the agenVerDate 0ct 09 2002 09:54 Apr 16, 2008 Jkt 033615 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\40853.TXT LEANN
8

cy to use one percent of the SBIR set-aside for payment of administrative costs. This provision has the effect of—

Mr. PRESTON. Oh, I see. Yes, I understand. 

Chairwoman VELA ́ ZQUEZ. So if the agency supports the pilot 

project, that is my question. 

Mr. PRESTON. Yes. We do not have an issue with your taking a 

portion of the money, and I know you have some funding. We do 

not have an issue providing funding to help support firms during 

that transition. I am more concerned with, you know, the essence 

of the grant program being shifted toward commercialization when 

we are trying to use it primarily to seed early stage innovation. 

Chairwoman VELA ́ ZQUEZ. My question is: do you support the use 

of money for agencies’ expenses or will you oppose it, or it should 

be solely used for R&D? 

Because if we allow the Department of Defense to use money to 

cover administrative expenses, then we are taking money away 

from money that is supposed to go to R&D. We are just supporting 

the agency’s bottom line. 

So what is your position regarding that issue? Should the money 

go just for research or should we allow for agencies to use the 

money to cover operating expenses, and administrative expenses? 

Mr. PRESTON. Okay. I am not familiar with the DoD program. I 

apologize. I would be happy to look into it and give you questions 

for the record. 

I do know you have some provisions in your language to support 

firms going through that process, and that is what I thought you 

were getting at, but I would just have to look into that further. 

Chairwoman VELA ́ ZQUEZ. Let me ask this last question, and then 

I will recognize Mr. Chabot. 

Congress has received testimony alleging that the SBA is not 

adequately meeting its responsibility under the current SBIR statute. One example is SBA’s inability to collect and distribute meaningful data about the SBIR Program. 

Would you provide the SBA’s Office of Technology with additional resources so that it can carry out its responsibility? 

Mr. PRESTON. Well, I think what I need to do is understand specifically what responsibilities you are talking about in detail, and 

then assess whether or not they are, in fact, not meeting those. So 

I would rather not make a—

Chairwoman VELA ́ ZQUEZ. Well, the Office of Technology is 

charged with the collection of data, and they have not done that, 

and it went from 13 people, staff, to only four. So, do you think 

that the fact that they are not fulfilling their responsibility is because of manpower? 

I mean, would you assign more resources? 

Mr. PRESTON. Ma’am, I am not willing to accept that they are not 

fulfilling their responsibilities based on your statement. I am willing to work with you to understand what the concerns are and address them in a very hands-on way. 

Now, I will also tell you that we do expect to expand the technical system right now to provide much of the data that has been 

lacking in the program, and I believe that launch is going to be in 

the next six to eight weeks, but I would be happy to work closely 

with the Committee to keep you abreast of the advances we are 

9

making there and also understand any specific shortfalls so that 

we can address them. 

Chairwoman VELA ́ ZQUEZ. I welcome that. 

And I recognize Mr. Chabot. 

Mr. CHABOT. Thank you, Madam Chair. 

Mr. Preston, you have already touched on this to some degree, 

but let me ask. What is the impact of the size standards as set 

forth in the previous legislation? 

And if there is a problem, would you be willing to work with the 

Committee to come up with a reasonable size standard in order to 

preserve this as a small business program and allow for venture 

capital investment in small firms? 

Mr. PRESTON. Oh, absolutely. And you know, a number of our 

SBIR recipients already receive venture funding. I think venture 

funding is an essential part of this program. I think what we are 

interested in is preserving the small business character of the program, and I fully accept that there may be a more enlightened way 

to define small business given the complexity of, you know, venture 

cap. ownership and venture cap. funding. 

I think it is a very different animal than a typical procurement 

program, and we should be looking at it in a way that specifically 

meets the needs of the program. 

Mr. CHABOT. Thank you. 

With all of the rule changes that have taken place over the 

years, would you agree that the eligibility rules for venture capital 

companies have become too complex? 

Mr. PRESTON. I think they are complex, and I think there are 

ways that, you know, firms can go forward with a significant percentage of venture cap. ownership if they need certain subsidiary 

structure requirements, and I think it would be helpful for all of 

us to have a more simplified process in place, more simplified 

structure in place. 

Mr. CHABOT. And where is the administration willing to work 

with the Committee to permit venture capital investment in small 

firms? 

Mr. PRESTON. Well, as I said before, Mr. Chabot, I think venture 

capital ownership is really essential to the success of this program. 

It’s essential for these people to be able to commercialize their 

product. In many cases it’s essential for them to be able to continue 

well before commercialization. 

And let me just say, you know, in my career before coming to 

this role, I have structured joint ventures with venture capitalists. 

I have been on advisory boards from private equity firms. I have 

taken biotech companies public. You know, I appreciate the value 

of venture cap in the world of innovation, and I do not think our 

country would be where it is today if we did not have that capital 

fueling innovation. 

And I think there is a very important role for venture capital in 

this program. 

Mr. CHABOT. Thank you very much. 

Madam Chair, I will yield back the balance of my time. 

Chairwoman VELA ́ ZQUEZ. Mr. Graves. 

Mr. GRAVES. Thank you, Madam Chair. 

10

My questions have actually been addressed, but I do want to say 

for the record I want to thank you and Ranking Member Chabot 

for having this hearing. As you know, this issue is very important 

to me, and I have worked on it for some time, and I think it is very 

important to small business. I appreciate what the Committee is 

doing. I am looking forward to this. 

I think that we do need to change the eligibility requirements. 

Small businesses are the backbone of the economy in this country, 

and I think this program is just one of them that would go a long 

way, and I think we do need to fix this. 

But thank you both for doing this. 

Chairwoman VELA ́ ZQUEZ. Mr. Preston, I have some other questions now. In your testimony you indicate that SBA would like to 

develop quality metrics that can assist agencies in developing 

standards to limit the perceived effect of so-called SBIR mills. 

What is your view of the reporting requirements of the draft bill 

which require the SBA to report on our deeds that have won more 

than 15 Phase 1 grants and no Phase 2 grants over a five-year period? 

Mr. PRESTON. Well, I think your whole intention of providing 

greater transparency, greater metrics, greater reporting in the program is great. And I would really look forward to working with you 

and your staff and the industry to figure out what that should look 

like and specifically to make sure that that process goes forward 

effectively. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

In January, a leading law firm issued an advisory indicating that 

participation in the SBIR Program creates significant risk for venture backed companies under the False Claims Act. Is the SBA 

concerned that its confusing affiliation rules are causing all venture backed companies, not just companies that are majority owned 

by venture firms, to forego participation in the SBIR Program? 

Mr. PRESTON. Well, I do not know the text of that advisory, but 

certainly if firms are going for these funds inappropriately they 

should be concerned, and I think we all should be concerned if 

firms are in any aspect of federal contracting not qualified as a 

small business and they are going for a small business program. 

That having been said, I am not familiar with the text of that 

discussion, and I think our affiliation rules are fairly straightforward. It is 500 employees in the affiliated group and 51 percent 

ownership by individuals. 

I do think that there are other structures that some people can 

use to avail themselves of the program that begin to get more complex, and that is what I think we should think about simplifying. 

But, you know, as I hear your statement, I think any firm that 

avails themselves inappropriately of a program should be concerned with—

Chairwoman VELA ́ ZQUEZ. Well, I am not talking about firms that 

are illegally applying like those firms that have gotten contracts 

with the federal government claiming that they were small firms. 

I am not talking about that. 

I am talking about small firms that consider the affiliation rules 

so confusing that they are so concerned about getting venture capital money. 

11

Mr. PRESTON. Well, I have not heard that firms that qualify 

under the affiliation rules are walking away from the program because of confusion. You know, I would assume that that is focusing 

on firms that do not qualify. 

Chairwoman VELA ́ ZQUEZ. Well, that is a matter, I think, of concern, and maybe we should revisit this issue because for those companies that should go, especially those who finish Phase 1 and are 

willing and able to move to Phase 2, and in order to move to Phase 

2 and to get into commercialization, they have to show that they 

can secure money from the private market, and these confusing 

rules will inhibit them from doing so. 

I hope that you are going to leave your staff here for the second 

panel, these are issues that we are going to discussed during the 

second panel. 

So it is not enough to say that those who are applying for this 

type of money are ineligible for SBIR. We are talking about people 

who are playing by the rules, companies that are playing by the 

rules. 

Mr. PRESTON. Well, I think that advisory you mentioned implies 

that companies are not playing by the rules, and if the text of that 

is different and there is any detail in there that would give us a 

better understanding of how to clarify those rules, we would love 

to look at that. 

Chairwoman VELA ́ ZQUEZ. Well, I guess what the statement implies is that the rules are so confusing that people are, companies 

are, concerned by the unintended consequences of violating the affiliation rules even when they are playing by the rules. 

Section 9 of the Small Business Act specifies that for an SBIR 

company to be eligible for Phase 2 awards, it should be able to 

demonstrate that it can secure private funding from non-SBIR 

sources. The SBA’s current view, however, runs counter to this. 

How can you reconcile the program’s statutory basis with your 

agency’s current stand against venture capital investments? 

Mr. PRESTON. We do not have any stance against venture capital 

investment. Many of these firms get venture capital investment. 

The only stance we have is majority ownership by large venture 

capital firms. 

So I think it is important that we draw the line appropriately 

here. These firm get venture cap. They should get venture cap., 

and they are going to need it to grow. 

The other thing I would tell you is today in the program only ten 

to 12 percent of these firms have any venture cap. funding. So 

when you look at that ten to 12 percent and then we are talking 

about going to majority venture cap. funding before they even get 

these grants, I think we are talking about a relatively small subset 

of the firms. 

And then when you take it further to say we think they should 

be able to be majority owned by large venture cap. firms, I think 

you are getting into an even smaller subset. 

Chairwoman VELA ́ ZQUEZ. I believe that the way you structure 

the affiliation rules, you limit venture capital participation, and I 

guess that if you listen to the testimony and the discussion that we 

are going to have in the second panel, this is a real concern that 

cripples the ability of companies to move from Phase 1, Phase 2 to 

12

commercialization, and I guess that we have work to do on this 

issue. 

It is an issue. It is a problem, and it is just not enough to say 

that small firms that play by the rules can apply for grant money 

and there will be no unintended consequences. 

The draft bill grants federal agencies the express authority to increase the size of the SBIR awards they issue. It also includes provisions clarifying that agencies have the authority to issue more 

than one Phase 2 award for promising projects. 

What are the SBA’s views on these provisions? 

Mr. PRESTON. We agree that it is time for the size of the grants 

to increase, and in fact, we have been working in house on a rule 

to address that. So I think, yes, it is time, and so we are supportive 

of an increase. 

Chairwoman VELA ́ ZQUEZ. Very good. Well, any other questions, 

Mr. Chabot. 

Mr. CHABOT. Thank you. Just one final question, Madam Chair. 

In regard to the affiliation rules, would it make sense or more 

sense to apply an asset limit on venture capital participation as opposed to an employee numbers limit? 

Mr. PRESTON. You know, I think that is a possibility, sir. I would 

really on this size issue much prefer spending time with my colleagues at other agencies and people in the industry to come up 

with, you know, what we think is a fair standard. 

And so I don’t know that I feel comfortable saying that an asset 

size or an equity under management or some other standard is 

going to be the right thing. It is possible, and we have batted 

around some of those concepts with other people. But at this point 

I am not ready to come out on one side or another on that issue. 

Mr. CHABOT. All right. Thank you. 

I yield back the balance of my time, Madam Chair. 

Chairwoman VELA ́ ZQUEZ. Thank you, Administrator. 

Mr. PRESTON. Thank you. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Preston, if I may, who from the staff will be staying here? 

Mr. PRESTON. We have got two gentlemen from our SBIR Program, Edsel Brown and Ron Cooper, and are you staying as well? 

And one person from—

Chairwoman VELA ́ ZQUEZ. Will you please identify yourselves for 

the record? Your names? 

Mr. COOPER. Ron Cooper. 

Mr. PRESTON. Ron Cooper and Edsel Brown. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

I would ask the witnesses from the second panel to please take 

your seats. 

Sorry for the inconvenience of the room. 

Good morning, gentlemen, and it is always a pleasure to have 

the opportunity to welcome our former colleague, the Honorable 

James C. Greenwood, to our Committee. He is the President and 

CEO of the Biotechnology Industry Organization in Washington, 

D.C. 

Prior to his appointment as President of BIO in January 2005, 

he represented Pennsylvania’s Eighth District in the U.S. House of 

Representatives. BIO represents more than 1,150 biotechnology 

13

companies, academic institutions, state biotechnology centers, and 

related organizations across the United States and in more than 30 

other nations. 

Welcome, and each witness will have five minutes. 

STATEMENT OF THE HONORABLE JAMES C. GREENWOOD, 

PRESIDENT AND CEO, BIOTECHNOLOGY INDUSTRY ORGANIZATION 

Mr. GREENWOOD. Well, good morning, Chairwoman Vela ́zquez, 

Ranking Member Chabot, members of the Committee, ladies and 

gentlemen. As the Chairwoman said, I am Jim Greenwood, President and CEO of the Biotechnology Industry Organization, otherwise known as BIO. 

I am privileged to be here this morning on behalf of BIO’s more 

than 1,000 member companies, academic institutions, state biotechnology centers, and related organizations in all 50 states. 

The role the SBIR Program has had in bringing breakthrough 

therapies to the American people is a matter of public record. 

There are 252 FDA approved biologics that have been developed by 

163 companies, and 32 percent of those companies have received at 

least one SBIR/STTR award. 

Despite its noble past, however, the ability of the SBIR Program 

to provide critical funding for medical research projects will remain 

hampered unless SBIR reauthorization updates the program to address the current realities facing small, innovative American companies. 

Congress created the SBIR Program in the early 1980s in order 

to utilize the capabilities of small, innovative, domestic companies 

to fulfill federal research and development needs. Congress recognized that some promising scientific research failed to be funded by 

private sector capital because it was viewed as too high risk. For 

20 years the program worked well for U.S. life science companies 

engaged in high risk, cutting edge, medical research. 

However, in 2003, the Small Business Administration’s Officer of 

Hearings and Appeals ruled that a biotechnology firm, Cognetix, 

did not meet the SBIR size standard because multiple venture capital investors in the aggregate owned more than 50 percent of the 

company’s stock. 

The ruling, which is not based on statute nor based, in my opinion, on congressional intent at all ignores the realities of the marketplace where small biotechnology firms must raise tens of millions of dollars to conduct incredibly capital intensive research. The 

implementation of the SBA’s decision has caused many small 

American companies that had participated in the program for 20 

years and who were a fundamental part of the program’s success 

to be suddenly deemed ineligible. 

Additionally, applications for the SBIR Program at NIH have decreased dramatically, and the number of new businesses applying 

is at the lowest level it has been in a decade. 

I commend Chairwoman Vela ́zquez, Ranking Member Chabot, 

and the members of the Committee for their insight in including 

a remedy to the eligibility issues affecting many small life sciences 

companies in the reauthorization legislation soon to be introduced. 

It is the right thing to do, and this is the right time to do it. 

14

On behalf of America’s biotechnology companies, I look forward 

to working closely with you to see this much needed change enacted into law this year. 

BIO also supports provisions in the bill that will allow agencies 

to maintain flexibility. Each agency should be able to administer 

SBIR grants based on scientific merit and each agency’s unique 

needs. 

The provisions in the reauthorization providing agencies with the 

flexibility and authority to determine the amount and number of 

awards the project can receive will help accelerate the development 

of those projects with the most promising potential to improve 

human health. 

I would also like to commend the Committee for drafting legislation that reaffirms and fosters the original goals of the SBIR program, namely, the commercialization of new technologies by small, 

innovative, American companies. Specifically, BIO supports the 

modernization and reauthorization of the Federal and State Technology, or FAST, Program and the authorization of funds for agencies to develop and expand their commercialization programs. 

Finally, I would like to discuss the provisions in the bill aimed 

at addressing the concern that some companies are receiving multiple awards without progress towards commercialization. These 

provisions would require the SBA to release the names of firms 

that have received multiple Phase 1 grants and zero Phase 2 

grants and promulgate rules for the agency to address these 

awardees. 

We fully support this effort and would encourage the Committee 

to be even more vigilant in assuring that companies are not gaming 

the system. 

We look forward to working with the Committee to ensure the 

intent of these provisions is fully realized. 

Again, I thank you for the opportunity to testify today. I would 

be happy to answer any questions members of the Committee 

might have. 

[The prepared statement of Mr. Greenwood may be found in the 

Appendix on page 41.]

Chairwoman VELA ́ ZQUEZ. Thank you, Jim. 

Our next witness is Mr. Mark G. Heesen. Mr. Heesen is President of the National Venture Capital Association. Before joining 

the National Venture Capital Association, Mark was an aide to a 

former governor of Pennsylvania and was the Deputy Director for 

Federal Funds reporting to the Texas legislature. 

NVCA’s mission is to foster greater understanding of the importance of venture capital to the U.S. economy and support entrepreneurial activity and innovation. 

Welcome. 

STATEMENT OF MARK G. HEESEN, PRESIDENT, NATIONAL 

VENTURE CAPITAL ASSOCIATION 

Mr. HEESEN. Thank you. 

Venture capitalists invest in small, high risk, emerging growth 

companies in areas such as life sciences and information technology, homeland security, and clean technology. Our goal is simVerDate 0ct 09 2002 09:54 Apr 16, 2008 Jkt 033615 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\40853.TXT LEANN
15

ple: to bring the best and most innovative new products and services to market in the most efficient manner. 

I must note NVCA’s utmost frustration with SBA’s campaign to 

exclude our industry from the SBIR Program. Doing so is a disservice to our country and denies government access to cutting 

edge technologies. We urge Congress to reauthorize the program 

with provisions that ensure venture backed companies have a fair 

chance to thrive alongside their non-venture backed counterparts. 

Doing so will only strengthen the future success of the program 

and correct a significant injustice that has gone on for far too long. 

NVCA strongly supports the draft Committee print which includes 

a provision allowing for venture backed firms to again participate 

in the SBIR Program. If the provisions which guarantee a level 

playing field for venture backed companies are removed or compromised in any way, NVCA will not support reauthorization of 

this program. 

For years SBA’s policies regarding SBIR eligibility have been inconsistent, discriminatory, and based on serious misconceptions 

which they appear to have absolutely no interest in reexamining. 

I would like to debunk a number of myths employed by the SBA. 

First, venture backed companies do not need SBIR Program 

money because they are strong, fully funded entities. Make no mistake: these companies are small, fragile businesses, typically employing less than 25 people. The only distinction for a venture 

backed company is that it has demonstrated enough promise to attract an investor whose business it is to find and fund opportunities ready for commercialization. 

Second, venture backed companies have access to a bottomless 

pit of funds. In fact, financial controls at a venture backed company 

are likely to be much more stringent than their non-venture backed 

counterparts. Venture backed companies must focus on exclusive 

projects with narrow trajectories while consistently meeting or 

beating agreed upon milestones to continue to receive funding. 

Third, venture firms have unlimited cash. That, too, is a fallacy. 

Venture firms raise money in a closed end process. They have a 

contractually finite pool of resources that must stretch across multiple companies for many years. 

Fourth, venture backed companies are able to compete and win 

broader government R&D dollars. In reality venture backed companies turn to the SBIR Program for funding critical, early stage 

projects. If there were other avenues to obtain, these much needed 

funds after all these years of being discriminated against by the 

SBA, we would have found it by now. 

Fifth, the SBA assumes that venture capital firms are the equivalent to large corporations, and therefore, the companies they fund 

should be excluded from SBIR grants. We agree large corporate 

owned businesses should not be allowed to participate in the small 

business program, but venture firms are not large corporations. 

They’re partnerships with typically less than a dozen professionals. 

SBA knows this, which is why they have gone to great lengths 

to manipulate the system and concoct a nonsensical formula to justify their position. Last September we testified before you regarding a portfolio company that was denied a small business waiver 

from SBA for a $900,000 FDA application fee. While the company 

16

employed seven people, the SBA affiliated every employee not only 

from the venture capital firm (which only had ten people), but also 

every company in that venture capital firm’s portfolio to exceed the 

500 people employee threshold. 

Aside from this maneuver being absolutely irrational and unjustified, SBA hurt a very small business and delayed a very promising drug discovery. 

Sixth, the SBA also wrongly assumes that venture backed companies are controlled by venture capitalists. While venture capitalists do participate on the board, they do not exert day-to-day control of a company. Venture capitalists divide their time among all 

investment of a venture capital fund. It’s impossible and impractical to spend that limited time on the day-to-day business decisions of one particular portfolio company. 

If control is equated to 51 percent ownership interest, SBA logic 

falls again. The 51 percent or more ownership of a company is typically met only when several venture capital firms have invested in 

the company. Ironically, SBA’s policies particularly hurt the very 

regions that SBA programs are designed to support, like middle 

America. The scarce venture capital dollars in this region cause 

venture firms to join together to form a promising start-up. As each 

firm takes an equity stake in the company, the total venture ownership percentage can quickly rise to 51 percent. 

Venture backed businesses have been fighting this battle for far 

too long. If Congress intends the SBIR Program to generate significant commercial impact, it makes no sense to exclude the companies that empirically are among the most likely to have significant 

commercial success from the program. 

Current SBA practices impede the ability of agencies like DoD, 

NIH, and the Energy Department to solve serious issues in the 

homeland security, energy dependence, and quality health care 

areas. 

In closing, the venture capital industry is known for its patience 

when it comes to our investing, but our patience with SBA’s campaign to penalize venture capital companies because of their success is at an end. 

We support this bill and reauthorization wholeheartedly, but 

only if we have an opportunity to contribute to its success. 

Thank you very much. 

[The prepared statement of Mr. Heesen may be found in the Appendix on page 46.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Heesen. 

Our next witness, Mr. Mark Leahey. He is the Executive Director 

for the Medical Device Manufacturers Association. MDMA is a national trade association that represents independent manufacturers 

of medical devices, diagnostic products, and health care information 

systems. 

MDMA was created in 1992, and their mission is to promote public health and improved patient care through the advocacy of innovative research driven medical device technology. 

Welcome, sir. 

17

STATEMENT OF MARK LEAHEY, ESQ., EXECUTIVE DIRECTOR, 

MEDICAL DEVICE MANUFACTURERS ASSOCIATION 

Mr. LEAHEY. Thank you, Chairwoman Vela ́zquez and members of 

the Committee. 

On behalf of the more than 160 medical technology companies 

that MDMA represents across the country, I would like to thank 

you for your efforts to improve and reauthorize the SBIR Program. 

The Committee’s draft legislation will help insure that small, innovative companies have access to the necessary resources to develop 

life sustaining and life enhancing products of tomorrow. 

Given the advancements in science, increasing regulatory requirements and market access challenges, significant investments 

from the government and the private sector are often needed to develop these technologies. In return, Americans live longer, 

healthier, and more productive lives. 

One of the cornerstones of the government investment in small 

medical technology companies has been the SBIR Program. Resources from the program, in addition to private investment, have 

greatly improved the quality of life for more than 20 years. 

However, as you are aware, the Small Business Administration’s 

reinterpretation of the definition of ‘‘individual’’ significantly worsened the landscape for the private-public partnership envisioned by 

the SBIR Program. 

As a result, many promising technologies from smaller companies have not received SBIR support and patients are suffering as 

a result. Fortunately, this Committee has taken the necessary 

steps to correct the actions of the SBA and insure that the SBIR 

Program is restored to its critical role of providing promising entrepreneurial medical technology companies with the resources needed 

to develop the clinical solutions of tomorrow. 

With small companies responsible for the majority of medical 

technology advancements over the past 20 years, the SBIR Program has played an important role in assisting some companies. 

Unfortunately, since the SBA’s reinterpretation, a barrier has been 

created for many small companies to receive SBIR assistance. 

The development of a medical device often involves collaboration 

of public and private investments, including resources financed by 

various venture capital investors. Since SBA’s reinterpretation of 

ownership requirements under the SBIR, the number of medical 

technology companies applying for grants has significantly declined. 

For example, applications for SBIR grants at the National Institutes of Health, the most prolific grant of SBIR grants for medical 

technology companies, has declined by nearly 12 percent in 2005 

and by nearly 15 percent in 2006. 

In addition to reducing the number of companies receiving 

grants, one may conclude that the new interpretation has prevented SBIR from supporting those very projects that have the 

greatest potential for clinical benefit. 

The SBIR Program should support small companies with promising clinical technologies regardless of whether venture capitalists 

have partnered with the company. As the committee moves forward 

with the reauthorization of the SBIR Program, MDMA would like 

to reiterate our support for the SBIR Program and the support of 

18

the following improvements that will help reestablish the program’s success. 

First, the reauthorization should include language to restore the 

participation of venture backed companies, especially redefining 

the ownership requirements for more business concerns. It is critical that this language be included so that small venture backed, 

medical technology companies are not excluded from this program. 

This will serve to provide SBIR grants to the most promising 

technologies which are likely to provide the greatest public and patient benefit. 

Second, MDMA believes that increasing the dollar amount of the 

Phase 1 and Phase 2 grants to 200,000 and 1.5 million, respectively, is critical to address the increasing developmental costs. In 

addition, it will help provide the necessary incentive to encourage 

more companies to apply for the grants. 

Given that the award levels have not been modified since 1992, 

change is long overdue. 

Third, MDMA supports providing agencies with more flexibility 

to administer the SBIR Program. Specifically MDMA supports allocating a small percentage of the SBIR set-aside to be used for administering the program. These SBIR funds could be used to pay 

for activities including conferences that would assist small businesses in commercializing and competing in the marketplace. 

The funds could also be used to improve systems for assessing 

the program’s effectiveness. These resources would help to administer the SBIR Program and assist agencies in making improvements without diverting funds from other programs or priorities. 

Finally, it would be beneficial to remove the requirement that a 

company must have applied for a Phase 1 grant in order to apply 

for a Phase 2 grant. If this rule would change, MDMA believes that 

small business participation in the SBIR Program would increase. 

Adopting the changes outlined above is consistent with the mission of the SBIR Program to insure that the nation’s small, high 

tech, innovative businesses are a significant part of the federal government’s research and development efforts. They are also consistent with the SBA’s mission to strengthen the nation’s economy 

by enabling the establishment and validity of small businesses. 

Thank you again for y our effort to improve and reauthorize this 

important program. MDMA appreciates the Committee’s efforts 

and supports the reauthorization of the SBIR Program incorporating the important changes outlined above and included in the 

Committee’s draft legislation. 

Thank you very much. 

[The prepared statement of Mr. Leahey may be found in the Appendix on page 54.]

Chairwoman VELA ́ ZQUEZ. Thank you. 

And now I welcome Mr. Mark Skinner. He is the Vice President 

of the State Science and Technology Institute. Since 1996, SSTI 

has assisted states and community as they build tech based economies and encourage cooperation among and between state and federal programs. 

Welcome. 

19

STATEMENT OF MARK SKINNER, VICE PRESIDENT, STATE 

SCIENCE & TECHNOLOGY INSTITUTE 

Mr. SKINNER. Thank you very much for the opportunity. 

It seems much of my original testimony needs to be summarized 

only briefly because it appears that it is in much of the draft legislation, and we appreciate that. 

We also appreciate the support for FAST that has been shown 

by some of the other panelists. 

The Committee recognizes, it appears, the role and value that 

states and local governments play in outreach and assistance for 

SBIR firms. In fact, since the mid-’80s, the states have viewed 

SBIR as a tremendous opportunity for economic development 

through the growth of their high tech firms, and I can attest to 

that from my own personal experience. 

My first real job was to look at how SBIR was affecting the small 

businesses in Ohio through the Ohio Department of Development, 

and that was only in the first year of SBIR making awards back 

in 1983-84. 

An appendix to my testimony illustrates nearly every state has 

already established at least one program dedicated to supporting 

SBIR proposal development awareness and in many cases direct 

matching funds for SBIR awards. And additionally, there are probably 1,100 to 1,200 programs at the state and local level that are 

supporting technology growth through either university commercialization, Phase 3 Angel funds. I believe Mr. Matthews in his testimony, that I saw briefly, may provide a good example of some of 

the excellent work being done in the Cincinnati area. 

While the agency’s perspective is that SBIR results need to be 

commercialized, most states recognize it needs to be commercialized within their boundaries, and many of the concerns that 

states brought to SSTI’s attention regarding FAST, the original introduction of FAST, have also been addressed in the draft. 

So I’ll direct the rest of my time on comments and initial reactions to the draft legislation which I saw this morning. 

This seems to be an awful lot of work for only a two-year authorization. Eight years was definitely too long, given the changes that 

have occurred in many industries in how R&D is conducted and 

how innovation occurs, but I believe two years will not give you 

enough time to identify that the changes you are making having 

the desired or potentially deleterious effects. 

So possibly something along the lines of five years in between 

would be useful. It also gets you off of the election cycle. 

As the National Academy of Sciences mentioned, state assistance, even the small FAST grants, seems to make a difference, and 

it does. The carrot that the federal government can provide helps 

direct limited resources toward particular audiences that may not 

get the attention otherwise based on the limited resources that 

states already have that they are investing in tech-based economic 

development. 

There are elements of the bill, however, that could be tweaked 

that would make FAST authorization much more meaningful for 

the small businesses that you are hoping to help. I noticed that the award size is set at $250,000. You do recognize 

the need for multi-year awards of three years or more to provide 

20

continuation or continuity in the programs and staffing level and 

staffing commitments. 

However, the authorization program is only for two years. So 

you’re setting some programs up for failure or potential problems 

or challenges by making three-year awards for a two-year program. 

So something that we can work out, I believe. Also, if the Committee means $250,000 for the full three years, 

then you’re inadvertently crippling the programs. So I recommend 

that I think you mean $250,000 per year for the three years, which 

would be matched dollar for dollar by the state and local governments, and I think that is a much more meaningful value. 

As a result of that though, I recommend that you increase the authorization level to $20 million rather than the $10 million so 

that you have enough money available to make more awards in 

more states, spreading the geographic reach of the program. 

I noticed the exclusion of commercialization activities from the 

list of potential uses of FAST funds, and I believe that is a mistake 

primarily because, based on the awards and the way the SBIR Program is set up, most companies will not win SBIR awards that receive assistance. So if we can provide a structure to help those communities or those companies get into the infrastructure that already exists through venture capital, Angel capital, then it is a 

much more meaningful program. 

And I have run out of time, but my other point is just that FAST 

did not work well under SBA in its first go-round. The states have 

recommended that it be moved to or transferred to NSF, which provides an environment that is much more conducive to the flexibility 

needed. NSF has the understanding already in place of supporting 

innovation companies. 

Thank you. 

[The prepared statement of Mr. Skinner may be found in the Appendix on page 59.]

Chairwoman VELA ́ ZQUEZ. Thank you, Mr. Skinner. 

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

our next witness. 

Mr. CHABOT. Thank you, Madam Chair. 

And I am very pleased to introduce our next witness, and I already did that to some degree in my opening statement. I should 

probably mention that Dr. Matthews and I have literally known 

each other since the fourth grade. So it has been a long time, and 

he has been very successful obviously. 

Dr. Charles Matthews is a professor and Executive Director at 

the University of Cincinnati Center for Entrepreneurship, Education and Research. An award winning teacher, Dr. Matthews has 

taught over 5,000 students ranging from freshmen to doctoral students to executives, from individual instruction to classes of up to 

540 students. 

He has facilitated over 500 faculty guided, student based field 

case studies, and has served as a consultant to numerous organizations, including many family businesses. 

In addition to his consulting practice, Dr. Matthews has entrepreneurial and family business experience in the automotive, photographic, and real estate industries. 

21

And we welcome you here, Charlie. 

STATEMENT OR DR. CHARLES MATTHEWS, Ph.D., PROFESSOR 

AND EXECUTIVE DIRECTOR, CENTER FOR ENTREPRENEURSHIP, EDUCATION AND RESEARCH COLLEGE OF BUSINESS, 

UNIVERSITY OF CINCINNATI 

Mr. MATTHEWS. Thank you very much, Congressman. 

It is a pleasure to be here, and I appreciate the comments. Our 

history does go way back to the fourth grade, but I must for the 

record say that your football career was much more distinguished 

than my football career. 

[Laughter.] 

Mr. MATTHEWS. And you taught me well to avoid the hits. 

Madam Chairwoman, Congressman Chabot, members of the 

Committee, distinguished guests, it is with great enthusiasm that 

I present this testimony in regard to the reauthorization of the 

Small Business Innovation Research Grant Program. It is not often 

one has the opportunity to speak about a government program that 

meets and in many cases exceeds its expectations, but in this case 

I believe the SBIR Program does do that. 

The SBIR Program creates a climate for scientific and commercial innovation. It leverages existing resources in the community, 

and consistently provides critical support that is often unavailable 

in the private sector. In short, it works. 

Quite simply, in order to create the future and to reach the many 

and considerable goals of enhancing and improving commerce, 

science and society, we must take the first steps of that journey 

today. It is not enough to say that we want a better and brighter 

future, a more robust economy, a cure for cancer, or an improved 

quality of life for future generations. We must take positive and 

proactive steps to reach those goals. We must continue to create an 

environment that supports the pursuit of not only the foundational 

science needed, but the translation and application of that science 

to productive uses in business and society. 

The Small Business Innovation Research Program was conceived 

for just such a purpose. It creates and supports an environment 

that encourages scientific and commercial pursuits that are needed 

and necessary to advance the applied technologies fundamental to 

the attainment of goals that benefit the United States and, indeed, 

the world. It creates an environment that supports and encourages 

innovation. 

Based on data from both the private and public sectors and research education, I can testify first hand to the strong, positive impact that the SBIR Program has had in southwestern Ohio. In the 

four-county Region V area of Ohio, Butler, Clermont, Hamilton and 

Warren Counties, in 2004 and 2005 there were a total of 105 Phase 

1 and 2 SBIR grants for 92 different ventures totaling nearly $27 

million. These SBIR grants cut across a broad range of scientific 

and commercial applications, including, but not limited to, biology, 

chemistry, engineering, health care, nanotechnology, and physics, 

to name but a few. 

The Hamilton County Business Center is an integral part of the 

Hamilton County Development Center, and is one of the most successful public incubators in the U.S. Over a dozen current and 

22

graduate HCBC companies have been able to advance both scientific and commercial goals, as well as grow their business with 

an assist from funding connections and processes associated with 

the SBIR Program. 

A brief sample of these ventures include the Maverick Corporation, which provides cutting edge materials, technologies, setting 

industry standards for service, and developing advanced materials 

and technologies of the chemical, industrial, missile, and space industries, the Modal Shop providing structural vibration and acoustic sensing systems to engineers worldwide, Sheet Dynamics whose 

expertise lies in the field of mechatronics, which is the synergistic 

combination of mechanical and electrical engineering, and the Advance Biological Technologies, which is developing a proprietary 

advanced technology process in diabetes analysis. 

The Hamilton County Business Center not only sees the SBIR 

Program as a strong component of the overall capital strategy for 

the early stage research companies, but also recognizes the value 

to the stability and vitality of many early stage small business ventures. The competitive processes of the SBIR Program provide companies with a difficult to secure but increasingly needed funding to 

enhance the innovation and commercialization processes of these 

early stage ventures. 

To quote Mr. Pat Longo, Director of the HCBC, without SBIR 

dollars, the number of HCBC best success stories would not have 

made it to being successful product driven, market focused companies they are today. 

In addition to the Hamilton County Business Center, Southwest 

Ohio is fortunate to have a state of the art life science incubator 

located on the University of Cincinnati campus, BIOSTART. Under 

the leadership and direction of BIOSTART President, Carol Frankenstein, the past ten years bear witness to the leveraged success 

of the creation of an that fosters creativity and innovation at the 

nexus of science and commerce. 

The SBIR Program enables these life science companies to conduct initial proof of concept and preclinical and clinical field studies 

to move their products to market. To quote Ms. Frankenstein, 

′′This is a niche that even early stage funds are reluctant to fill because of the high risk and long time to market.′′

Clearly, the SBIR Program is making a strong and sustained difference in advancing these scientific and commercial opportunities. 

Finally, I would like to comment on a program which I had a 

hand in helping to start, Cincinnati Creates Companies. Together 

with the University of Cincinnati, the College of Business, Engineering and Medicine, and the UC Center for Entrepreneurship, 

Children’s Hospital Medical Center, BIOSTART, CincyTech USA, 

and the Hamilton County Business Center, put together a handson, outcome oriented program that supports innovation through the 

development of people, tools, and the infrastructure needed to connect new scientific discoveries to practical and commercial applications. 

Overall, the program has worked with over 150 applicants, accepting 47 nascent technology ventures into the program involving 

100 participants. I would like to comment that the process here has 

resulted in a number of companies that have received SBIR fundVerDate 0ct 09 2002 09:54 Apr 16, 2008 Jkt 033615 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 G:\CLERK SB-LD\HEARINGS\TRANSCRIPTS\40853.TXT LEANN
23

ing, and that four of the companies are now at BIOSTART. I will 

not go into the details on those companies, but those four companies have done quite well. 

It takes a dedicated effort to create and sustain an environment 

that encourages and facilitates the ideation, conceptualization, formulation, and implementation of technology ventures. The mission 

mantra for the Center for Entrepreneurship is quite simply to remove barriers and create gateways for the next generation of entrepreneurs. 

I encourage you to fully consider the vital role that the SBIR Program plays in removing barriers and creating gateways for future 

entrepreneurial activity. The SBIR Program encourages today’s entrepreneurs to aim high and dare to create a vibrant future built 

on foundations of science and commerce. 

Thank you for the opportunity to provide these comments. 

[The prepared statement of Dr. Matthews may be found in the 

Appendix on page 73.]

Chairwoman VELA ́ ZQUEZ. Thank you, Dr. Matthews. 

I would like for any of the witnesses to comment on my first 

question. Mr. Preston made the point that small companies that 

are majority owned by venture capital firms can apply for 97.5 percent of all federal government’s R&D dollars. For this reason, according to Mr. Preston, these small companies should be barred 

from SBIR participation. 

How would you respond to Mr. Preston’s comment? Mr. Greenwood? 

Mr. GREENWOOD. I would respond that while that statement may 

be technically accurate, the fact of the matter is that, yes, 97.5 percent of the NIH’s budget, and I will speak specifically of the NIH, 

is available to universities and businesses, exactly .4 percent of 

that goes to businesses. 

So the Administrator said 97.5 percent is available; 97.1 percent 

continues to go to the universities, and only .4 percent to businesses. So our companies do not have success. The universities are 

well entrenched, and of course, as we know in the case of the NIH, 

even though we doubled the budget, it has been flat since then, and 

so universities are scrambling to try to maintain their existing 

R&D programs. 

So I do not see, even if Congress continues to increase slightly 

the budget, I do not see a lot, if any, being left for small businesses. 

Chairwoman VELA ́ ZQUEZ. ?Thank you. 

Mr. HEESEN. I totally agree with Mr. Greenwood, but I will take 

it from the other side, let’s say, the DoD or the Department of Energy perspective. You know, if we have a venture backed company, 

once again, it may be 15 employees. Realistically, are they able to 

go up against Lockheed? Are they able to go up against Exxon? 

It is totally impractical. These are 15 people companies, you 

know, in the wind, in the solar area. They are not going to be able 

to compete. First of all, they do not have resources to even start 

that process, and then are they really going to have a realistic ability to go up against these multinational corporations? It is unrealistic. 

24

Mr. LEAHEY. In addition to the two previous comments, I can 

only speak to practically what our member companies are saying 

to us, and time and time again, they are coming back and saying, 

‘‘Do you know what? Because of this new interpretation we do not 

have access to these funds.’’

And I think it is also important, with all due respect to Mr. 

Heesen and his members and some of which are members of ours, 

venture capitalists are looking for, you know, an ROI, and there 

may be certain applications of a technology that may not be as 

profitable, but may serve the greater public good, and these are the 

ones simply because of this investment mechanism that will be left 

on the shelf, and really that is the great tragedy here. 

Chairwoman VELA ́ ZQUEZ. Any other member want to? 

Thank you. 

We should recess now. We have two votes. We will go to vote and 

right after we will come back. So the Committee stands in recess. 

[Recess.] 

Chairwoman VELA ́ ZQUEZ. The Committee is called back to order. 

Mr. Skinner, one of the objectives of the SBIR Program is to foster and encourage participation by minorities and women in the 

SBIR Program. Despite this fact, a National Academies of Science 

report recently concluded that agencies do not have a uniformly 

positive record funding research by women and minority owned 

firms. 

How will the Federal and State Technology Partnership Program, as it is reauthorized in the draft bill, help federal agencies 

address this concern? 

Mr. SKINNER. I believe it is very smart of the Committee to include in the legislation a requirement that the FAST awards specifically address how they are going to identify two particular 

groups: those geographic areas that are not served well, and populations that do not win awards. It is going to require the state programs and the local programs involved to demonstrate what they 

are already doing in those target audiences, but increase or set 

aside additional funding to address particular ways to reach 

women scientists and engineers that they may not be doing currently. 

But I think that is one of the advantages of FAST, is it takes advantage of the 1,100 to 1,200 organizations already in existence 

around the country to help the agencies reach into places that they 

cannot reach from their installations or their centers. 

Chairwoman VELA ́ ZQUEZ. Thanks. 

Dr. Matthews, the guidance for Phase 1 and Phase 2 grant sizes 

has not increased since 1992. The Committee print doubles the 

grant size guidelines to $200,000 for Phase 1 and $1.5 million for 

Phase 2. Given what you do with small, innovative companies, how 

do you expect larger average awards will impact increases in the 

commerce solicitation rates of SBIR funded research? 

Mr. MATTHEWS. That is an excellent question because obviously 

things have changed over a period of time, and costs have gone up 

across a number of sectors and in a variety of areas. 

Specifically with regard to the amount of money that is needed 

especially in early, early stages, which is, I think, one of the hallmarks of the strengths of SBIR, has escalated over time. Especially 

25

a lot of them have long lead times. There is a need for more capital 

expenditure at the front end of that period. So I would support 

those increases. 

Again, I think this is a leverage program. I do not think it ever 

can stand all by itself. It has to be used in combination with other 

sources of capital, and the source of capital is a broad continuum 

from friends, families, and founders all the way up to venture capital, and SBIR falls within that continuum. So I would definitely 

support that increase. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Heesen, an important component of small firms’ efforts to 

commercialize the research can be the receipt of an investment 

from firms such as those that you represent. Why do initiatives 

that help small firms develop the research to a greater degree of 

commercial readiness before they graduate from SBIR encourage 

more VC firms to invest in SBIR graduates? 

Mr. HEESEN. As Mr. Leahey said, we are not in this totally for 

altruistic purposes. We are in this to make money at the end of the 

day, and so the more certain you are of a company’s trajectory, the 

more likely you are to invest in it. 

And so if you see the commercial viability of an entity being 

much greater because you have basically grown that company to 

the point where it is just better to see what the future is, you are 

going to be more apt to invest in that company, just as you will 

be more apt to know if it has good patent protection, if it has a 

good management team, if it has an ability to grow a business long 

term because it understands global competition. 

All of these things are part and parcel of growing a company. So 

if you are able to make these companies more professional, frankly, 

and more apt to understand the nuances of working in a fast 

changing environment, we are more likely to invest at the end of 

the day. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. Greenwood, my understanding is that venture capital investments are often tied to the development of companies’ lead therapies or technologies. In your industry, this means that companies 

cannot use the investment to fund research and development of 

secondary applications of the lead therapy. 

If the SBIR eligibility provisions included in this bill became law, 

how would small firms with venture capital backing be better able 

to explore secondary applications of their firm’s lead research? 

Mr. GREENWOOD. Thank you. 

That is an important question. What frequently will happen is if 

you can imagine a small company that might have spun out of the 

university from NIH granted research and develop a molecule that 

it thinks is a very good candidate to, let’s say, cure prostate cancer, 

and they make enough progress with the help of, among other 

things, SBIR grants, and then the venture capital companies see 

them and say, ‘‘This company really shows some progress with this 

molecule. Let’s invest in it.’’

And so they invest, and they invest in that particular molecule 

to cure that particular kind of cancer. Meanwhile, back in the laboratory, there may be a scientist who says, ‘‘Do you know, I think 

from my research that same molecule might be able to cure brain 

26

cancer?‘‘ or, ‘‘we have another molecule or another protein here 

that we think can do something else.’’

The venture capitalist may say, ‘‘That is very nice, but that is 

not why we invested. We watched the progress on that first compound or molecule, and we want you to keep our money there.’’

Under the current system, since the Administrative Law Judge 

ruling, that company cannot go back to the SBIR and say, ‘‘How 

about you fund this new idea?’’ Under your proposed draft they will 

be able to, and that is critical because having that opportunity to 

then get some data with that new molecule, to get some advancement in their research. Then they can achieve the kind of milestone or proof of concept that then will attract the venture capitalists or other venture capitalists to come and say, ‘‘Okay. Now, that 

one is worth investing in as well.’’

And at the end of the day, this is about whether we do or do not 

cure brain cancer, and that is why in my view the bottom line of 

this entire program is we put all of that money in the NIH because 

we want to cure disease, and we ought to construct a system for 

small businesses, whether they are backed by venture capital or 

not backed by venture capital, that gets us to the goal: cure disease. We need to keep our eye on that ball. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

Mr. GREENWOOD. Thank you. 

Chairwoman VELA ́ ZQUEZ. I now recognize Mr. Chabot. 

Mr. CHABOT. Thank you, Madam Chair. 

Mr. Greenwood, I will begin with you if I can, and as the chair 

mentioned before, we want to welcome you back here. 

Mr. GREENWOOD. It is a pleasure. 

Mr. CHABOT. You have testified before, and in your years here 

as a member of Congress, you were one of the more respected 

members on both sides of aisle because of your integrity and working across party lines. 

Mr. GREENWOOD. That is very kind to have you say that. 

Mr. CHABOT. So it is good to have you here. It is very true. 

Mr. GREENWOOD. Thank you. 

Mr. CHABOT. Now I will ask you the tough questions. 

[Laughter.] 

Mr. CHABOT. No. 

Mr. GREENWOOD. And I will try to make a good answer. 

Mr. CHABOT. Although it does come up in several other industries, the venture capital issue seems to come up and I think it is 

most prevalent in the biomedical field, and could you explain why 

that is the case? 

Mr. GREENWOOD. Yes. This is a highly, highly risky business. I 

was at Amgen’s facility. Amgen is one of the biggest, if not the biggest, biotech companies in the world. I was at their facility in Boulder, Colorado last week, and they went through a presentation. 

They will take 150 different compounds or molecules and begin to 

try to bring each and every one of them to a place where it can 

cure a disease. The attrition of the process of success and failure 

is such that one of those 150 ultimately makes it to the FDA. 

This is hard science, and it is risky science. And what happens 

is, typically as I said, an academician will develop something. They 

spin off a little company, and they find themselves squarely in the 

27

valley of death because they know they have a good idea. The brilliant scientists really believe in this product, this compound, this 

molecule, but Mr. Heesen’s people are going to be skeptical. They 

have lots of opportunities, and they are risk takers, but they are 

not extraordinarily foolish risk takers. 

So the public-private partnerships, be it SBIR grants, be it state 

programs that nurture these little companies, are all there for the 

purpose of helping these entrepreneurial scientists get through the 

valley of death, prove or not prove that they have something here, 

and then that is the point that the venture capitalists will come in. 

And I can tell you and Mr. Heesen can tell you when you talk 

to investors today, they are not rushing into the biotech space. 

They know all kinds of policies that the state and federal governments can adopt. They can contribute to our success or failure. 

We cannot do this without the venture capital contributions, and 

as I have said before, you know, it is clear from the congressional 

record that congress said years ago when a company attracts venture capital, it is a very good sign that some very smart and skeptical people think they are onto something, and we want to reward 

companies that can achieve that level of credibility, not punish 

them. 

Mr. CHABOT. Thank you very much. 

Mr. Heesen, I will go to you next if I can. Would you expound 

upon why you consider the SBA, or Small Business Administration’s position on independent ownership and control unacceptable 

as it applies to venture capital firms? 

Mr. HEESEN. Sure. As stated in my testimony, when you look at 

a venture capital firm, it is normally about a dozen individuals that 

are employed by that firm, sometimes literally only two or three. 

You know, you look at the ones in your hometown. Blue Chip is the 

largest, and if they have ten people I would be surprised, and yet 

they have a major impact on the Cincinnati economy. 

So these are very small entities. Now, over the process of having 

a fund, they may invest in 20 companies. That is high. Maybe 15 

companies. Now, when you invest in those companies early on, they 

may have five, six, ten employees. What you want to do as you are 

investing in these companies is to grow those companies, of course. 

So hopefully you will have companies at the end that have several hundred employees because you have grown those small companies just like you want to. So if you start to aggregate a venture 

capital firm and all of the other venture capital firms that you are 

going to co-invest with because you do not invest in a biotechnology 

company on your own; you do not have that much money, particularly in the Midwest. You are going to get four or five venture capital firms who are going to put their resource together and invest 

in that biotechnology company. 

So you have four or five who have ten employees. So that is 50, 

but then they all have different portfolio companies out there. I 

might have 15. Another person might have ten. Another firm might 

have eight, and they all have, you know, seven to ten employees, 

but you also have some of those growing companies. 

It is very easy to get to that 500 person, and of course, that is 

what you want. You want to be growing these companies. So the 

idea that you are aggregating all of these companies and they could 

28

be biotechnology companies; they could be clean tech companies; 

they can be IT companies because a venture capitalist invests in 

lots of different areas. They might have absolutely no correlation, 

but under what the SBA is doing is literally aggregating all of 

those employees and saying, ‘‘You now are a large entity and, 

therefore, that one particular company that is in the portfolio cannot get an SBIR grant.’’

It just does not make sense at the end of the day. 

Mr. CHABOT. Okay. Thank you very much. 

Mr. Leahey, I hope I am pronouncing that correctly. 

Mr. LEAHEY. Yes, you are. 

Mr. CHABOT. Okay. Could you explain further why you believe it 

is important that the award amounts be increased? 

Mr. LEAHEY. Certainly. Well, I think as Dr. Matthews had stated 

as well, you know, since 1992 obviously the landscape has changed 

significantly, and although the SBIR funding is not the only source 

of funding, obviously, it is part of that public-private relationship. 

I do not think you will find anyone who will argue about the increasing regulatory requirements that are needed at the FDA as it 

relates to user fees, things of that nature. 

The clinical data that is required to satisfy the payer community, 

both the private insurers and the CMS; so throughout the research 

and development and life cycle of an early stage company, before 

they get to commercialization, they are looking ahead and saying, 

‘‘Okay. I have got to meet all of these endpoints here to satisfy the 

FDA, to satisfy CMS or the private payers, to satisfy the markets,’’ 

and not having that move at all since 1992, I do not think sensitizes or appreciate the changing landscape. 

That being said, there is a lot of promise ahead, but I do not 

think anyone can argue that some of the hurdles have been increased. And so increasing that threshold, I think, coupled with increasing or allowing small companies regardless of their venture 

capital investment structure to have access to these funds, I think, 

will really, as Mr. Heesen said, achieve the objective insuring that 

the government and the private sector work together to develop the 

best technologies to really deliver the care that is needed in the future. 

So I commend the committee for the draft for increasing those 

limits. 

Mr. CHABOT. Thank you. 

Mr. Skinner, would you comment on the geographic disparity of 

awardees and why in your opinion some areas of the country are 

getting more SBIR grants than some others? 

Mr. SKINNER. Yes, thank you. 

Some of it is inherent to the population centers. More demographically large states are going to receive more awards than 

some of the other states. There is also, at least in my experience, 

as one moves away from Washington and certain research centers 

around the country, one does not think of the federal government 

as a source of funding for this type of work, or they do not think 

of it as a friend actually for the most part. 

And this is particularly the case and is reported to me by folks 

in New Mexico, even though they have the large federal labs. They 

will say companies just do not even think of applying for it. 

29

In the other situations there is not the infrastructure necessarily 

there to support an environment that encourages entrepreneurship, 

and that is why states are making an investment to try to encourage that kind of thinking, that kind of risk taking, and that is 

where SBIR and outreach and assistance efforts can be helpful. 

Mr. CHABOT. Thank you very much. 

And finally, Dr. Matthews, what role does the SBIR program 

have in Cincinnati that creates companies, that project and any 

other programs or projects that you would like to mention? 

Mr. MATTHEWS. Thank you. 

First of all, I am very impressed by the testimony and the wide 

range of issues that have been brought up here because I am more 

at the early, early, early, early, early, early—did I get six in 

there?—early stage. 

[Laughter.] 

Mr. MATTHEWS. I live in the ideation/conceptualization world 

more than a lot, but I completely support what Mr. Heesen is saying in terms of venture capital backed ventures, and that is where 

Cincinnati Creates Companies came into play. We identified this 

gap that exists at that early stage, very early stage, where we have 

individuals who are extremely interested in moving forward science 

and technology, but just do not know how to do it, do not know 

what to do or how to go about it. 

We conceived Cincinnati Creates Companies around that very 

notion, and it is a three-part program. The first part is a very rigorous ten-week educational program. We put them through their 

paces. It is kind of an advanced boot camp, if you will, over ten 

weeks; a 15-week structured mentor relationship. So we actually 

have a mentor come in and work with them oftentimes from the 

Angel or VC community on a volunteer basis. 

Then we have a competition because nothing motivates people 

like getting together and trying to compete against each other in 

these situations because that is what they are going to be doing 

from that point forward. 

And so they compete and they get some funding from that what 

I call trouble money because it is not enough to really do anything 

with but get them in trouble, but that is a good thing because that 

really propels them forward. 

SBIR becomes a critical component of that as they move through 

that process, as they become aware of it, especially as I mentioned 

for some of our BIO life ]science companies that are at the 

BIOSTART incubator. This has been particularly critical for them, 

and some have been very successful at moving from the bench forward, which again I apologize. I think it was Mr. Heesen or Mr. 

Greenwood said that people are not rushing to fund a lot of these 

things at that early, early stage. So SBIR is critical at that point 

to make that happen, and I certainly saw that with Cincinnati Creates Companies. 

Now, we had NSF funding for that program over three years, 

and we had a one-year extension. We put four cohorts through that 

program. We are trying to keep it going at CincyTech. CincyTech 

now is trying to use some of their Third Frontier money in Ohio 

to keep that program alive and moving forward. 

30

So I would very much like to see SBIR play a key role in that, 

and I keep in touch with the 47 graduates of the program very extensively and just was in conversation with one, Dr. George Weber, 

who is working on a molecule for cancer, a very good example, and 

I see him as prime, prime to get an SBIR to move his process forward. 

He just competed very successfully at the Purdue Life Sciences 

Business Plan competition. So, yes, critical, just very critical. 

Chairwoman VELA ́ ZQUEZ. Would the gentleman yield? 

Mr. CHABOT. I would be happy to yield. 

Chairwoman VELA ́ ZQUEZ. Dr. Matthews, we created a program 

for Phase 1 and 2 primer that will provide technical assistance for 

Phase 1 and then on Phase 2, for those, you know, Ph.D. researchers that have something really good, but they do not have the skill 

in terms of how to run a company. So you will be supportive of 

that? 

Mr. MATTHEWS. Absolutely. Again, in the academic world you 

have professors who are very adroit and adept at the science side, 

and you have those that are very adroit and adept at the business 

side, but they rarely exist in the same space So getting those folks 

together or getting one trained on the other side is critical. 

A great case in point, in my graduate MBA class I often have engineering students. Four or five years ago I had an engineering 

student show up in my spring quarter class. He is an engineer 

through and through. You know, business was not in his vocabulary, but he was a co-patent holder on some type of MEMS-based 

technology that was very promising in the liquid cooling side of the 

house for electronic applications. He went through my regular 

MBA program. He graduated and actually applied to and was part 

of our Cincinnati Creates Companies Program, and he has moved 

that program forward tremendously at this point. 

Now, he is being incubated out at the Siemens Business and 

Technology Park in San Francisco. He will probably be applying for 

an SBIR in the not too distant future. I would be a little concerned 

that now he has gotten a little bit of backing that he would be excluded from that, but you know, without that training, he would 

not be in the position that he is in now. 

Mr. CHABOT. Yes, Mr. Greenwood. 

Mr. GREENWOOD. There is a point that I failed to make in response to Mr. Chabot’s question, which is why our industry is so 

particularly reliant upon venture capital. If you are a small business and you make widgets, it is not a very long period of time 

until you can start selling your widgets, and then you derive revenues from those sales, and you can become completely self-sufficient. 

In the biotechnology world, once you get a patent for your molecule, let’s say, you have a ten to 12 to 15-year long period for you 

to develop that to the point where you can test it in animals and 

then do Phase 1 clinical trials in humans and Phase 2 and Phase 

3 and take it to the FDA. 

And throughout all of that period, throughout all of that time, 

and by the time you get to the FDA you have spent hundreds of 

millions of dollars, you have to raise all of that money usually 

without a penny of revenue from sales, and you cannot get there 

31

without at some point becoming more than 50 percent owned by 

venture capital. There is just no other way to do it. 

And that is why this rule is so nonsensical. 

Mr. CHABOT. Thank you. 

Madam Chair, I want to commend you for putting together such 

a fine panel here, and it was extremely informative, and we appreciate the testimony of all the witnesses, and I will yield back the 

balance of my time. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

I have two more questions or maybe three. Mr. Greenwood, the 

draft bill includes provisions that require federal agencies to establish an SBIR advisory board that includes private sector representatives. The bill also requires agencies to release regular research 

solicitations and to issue a final decision on an SBIR application 

within 90 days after the agency received the application. 

How will these provisions impact the small research firms that 

are members of your organizations? 

Mr. GREENWOOD. Well, I think it would be useful. I think the one 

sensitivity I would raise is that in some of these agencies already 

have peer review panels, and so what you want to do is be careful 

to avoid redundancy there, but I like the idea that you would have 

two representatives from small business there to make sure that 

the review gets that perspective, and I certainly think anything 

that gives you certainty with regard to the turnaround time of your 

application would be very helpful. 

Chairwoman VELA ́ ZQUEZ. Thank you. 

I want to ask the question that I engaged the Administrator regarding the use of one percent of funds set aside for SBIR research 

to pay for administrative costs associated with commercialization 

programs, and current law authorizes the Department of Defense 

to use it. 

The draft legislation takes a different approach, and I would like 

either Mr. Leahey or Mr. Greenwood to comment on this. 

Instead of re-purposing scarce research dollars, it authorizes an 

appropriation to the SBA equal to approximately one percent of the 

set-aside for a fund that federal agencies can draw on to support 

new commercialization initiatives. Do you support this approach to 

funding federal agency efforts to help small firms commercialize 

SBIR funded research? 

Mr. LEAHEY. Madam Chairman, yes, we do. I think it is an important mechanism. Again, it supports the overall objective of the 

SBIR Program. So to the extent that these funds could be used to 

administer or provide additional commercialization or training activities to help educate these entrepreneurs, I think, is consistent 

with the overall objective of the program, and certainly something 

we could support. 

Mr. GREENWOOD. I think very straightforwardly, if the Congress 

is able to authorize the appropriations of these funds to cover the 

administrative costs, it is more money left for R&D, and that is 

what the program is all about. 

Chairwoman VELA ́ ZQUEZ. Yes. Well, I want to thank all of the 

witnesses. It has been quite an insightful hearing today, and we 

will continue to work on this reauthorization and expect to mark 

32

up the bill soon and in consultation with, of course, the minority, 

Mr. Chabot. 

And I ask at this point consent that members will have five days 

to submit a statement and supporting materials for the record. 

Without objection, so ordered. 

This hearing is now adjourned. Thank you. 

[At 12:21 p.m., the Committee hearing was adjourned.]

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53


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54


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56


40853.023
57


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61


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63


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65


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66


40853.033
67


40853.034
68


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69


40853.036
70


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72


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40853.041
75


40853.042
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40853.043
77

Æ


40853.044