3.1. INTRODUCTION

This chapter reviews SBIR awards made by DoD, based on data provided by the department. All awards at DoD are made in the form of contracts, and as such require a deliverable. At a minimum, this means a final report; in some cases, a prototype or working model is also delivered.

The chapter provides a comprehensive overview of the distribution of awards, giving a context into which questions regarding outcomes and program management can best be placed.

This is especially important because of the very decentralized character of the DoD SBIR program. Each agency or service in effect operates its own program within the guidelines sets by the Small Business Administration (SBA) and Defense Research & Engineering (DDR&E). Program objectives, mechanisms, and assessment are all developed and implemented primarily at the service and agency level.

Overall, the number of awards made at DoD has grown sharply in recent years, reflecting increases in the department’s R&D budget.

3.2. NUMBER OF PHASE I AWARDS

While SBIR funding for DoD has substantially increased in recent years (see Figure 3-1), the number of Phase I awards awarded has not. The number of Phase I awards remained relatively constant from 1993 to 2001 before increasing substantially in 2002. Since then the number of Phase I awards has again stayed relatively flat. (See Table 3-1.) The substantial (65 percent) increase in the number of Phase I awards made by DoD in 2002 resulted from a number of factors.

FIGURE 3-1

SBIR funding at DoD, FY1998–2006. SOURCE: Michael Caccuitto, DoD SBIR/STTR Program Administrator, and Carol Van Wyk, DoD CPP Coordinator, Presentation to SBTC SBIR in Rapid Transition Conference, (more...)

TABLE 3-1

SBIR Awards at DoD, 1992–2005.

After several years of relatively constant funding, the DoD R&D set-aside increased by 15 percent in FY2001. Cautiously, DoD awarded less than 8 percent more Phase I contracts. In 2002, DoD received a further increase of 22 percent in R&D funding and it became clear that the FY2003 and FY2004 DoD R&D budgets were likely to grow even further.

DoD responded by increasing the number of SBIR topics by about 10 percent in FY2002, but received about 75 percent more proposals as the private, venture-funding technology bubble burst and small technology companies sought new sources of funding. The confluence of increased funding available, more topics, and more demand led to a significantly higher number of Phase I awards.

Agency-specific factors also played a part. In 2001, the Missile Defense Agency (MDA) was seeking to exit the SBIR program. This led to a reduced number of MDA contracts in FY2001 and the “loaning-out” of MDA set-aside funding for use by other agencies. When this exit strategy was rejected by DoD, MDA found that the low number of Phase I contracts it awarded in FY2001 resulted in a reduced number of Phase II contracts in FY2002. But because MDA was now fully committed to spending its entire SBIR set-aside, it had to give out an extra-large number of Phase I contracts in FY2002.

The substantial increase in Phase I contracts in 2002 helps to explain the 59 percent increase in the number of Phase II awards between 2001 and 2003. Since this step jump, numbers have increased only slightly (see Table 3-1).

3.2.1. Phase I—Median Award Size

Figure 3-2 shows that DoD Phase I awards have generally averaged just under $90,000 since 1997. The increase from 1994–1997 resulted from changes in SBA guidelines after the 1992 SBIR reauthorization.

FIGURE 3-2

Phase I Awards at DoD: Mean award size, FY1992–2003. SOURCE: DoD awards database.

3.2.2. Phase I—New Winners

The share of Phase I awards going to new winners—firms that have not previously participated in the DoD SBIR program—is an important measure of the openness of the program. In this context, “openness” means the extent to which the SBIR program remains open to new entrants and has not been “captured” by a limited set of winning companies with well-established connections to DoD.

DoD has provided data covering FY2005 (as of March 2006) that show that 37 percent of awards went to firms that had not previously won a DoD SBIR award. An additional 50 percent of awards were given to companies with five or less Phase II awards. Only 13 percent of Phase I awards went to companies with more than five Phase II awards. (See Figure 3-3.)

FIGURE 3-3

Prior SBIR participation/success of the pool of Phase I award winners, FY2005. SOURCE: Michael Caccuitto, DoD SBIR/STTR Program Administrator, and Carol Van Wyk, DoD CPP Coordinator, Presentation (more...)

Data from the Navy also suggest that the program is open to outside firms without an SBIR track record. For example, about half of all Phase I contracts from NAVAIR go to companies which have never won an SBIR at NAVAIR before; about 40–45 percent of Phase II contracts go to “new” firms as well.¹

Figures for NAVAIR alone are naturally higher than for DoD overall, as some of the “new” winners at NAVAIR previously have won SBIR awards elsewhere within DoD, and would therefore not be classified as “new” winners for the department as a whole.

Fundamentally, the evidence is clear that DoD SBIR programs are systematically including large numbers of new entrants. SBIR awards have thus not become the preserve of a small group of multiple winners. While some companies have won a large number of awards, there are structural characteristics of DoD that tend to encourage staff to work with companies that have performed well in the past. Overall, the SBIR program is remarkably open to new entrants even as some companies are able to repeatedly win in open competitions for awards.

3.2.3. Phase I—The States and Regions

One of the persistent questions about SBIR concerns how the awards are distributed across the states. Like other federal R&D funding distributed by merit, SBIR funding tends to cluster in high-tech states and high-tech regions within those states.

DoD Phase I SBIR awards go disproportionately to states with well-established traditions of science and engineering (see Table 3-2). The top five award-winning states received 53.8 percent of all DoD Phase I awards between 1992 and 2005. California and Massachusetts together account for 37.42 percent of all Phase I awards between 1992 and 2005.²

TABLE 3-2

Phase I Awards 1992–2005 by State.

Concentration at the top is mirrored in the limited number of awards given to companies in low-award states (see Table 3-3). The bottom 15 states accounted for 1.85 percent of Phase I awards over the same time period, and 10 states averaged less than three awards per year.

TABLE 3-3

Phase I Awards to the 15 Lowest Award-receiving States, FY1992–2005.

This concentration of awards is not unique to the SBIR program. The GAO pointed out in its 1999 study of the SBIR program that, according to the SBA, one-third of the states received 85 percent of all SBIR awards, but also found that the distribution of SBIR awards tends to mirror the distribution of R&D funds in general.³ The same 1999 GAO study also noted concern about the concentration of awards, not only by company (see below), but also by geographic location. With regard to geographic distribution, the GAO report noted that “Companies in a small number of states, especially California and Massachusetts, have submitted the most proposals and won the majority of awards, although the distribution of awards generally follows the pattern of distribution of non-SBIR expenditures for R&D, venture capital investments, and academic research.”⁴

The study notes further that the data on the “proposal-to-award ratios show that proposals from companies in states with historically lesser amounts of federal research funding won awards at almost the same rate as proposals from companies in other states” (i.e. those receiving fewer awards).⁵ This suggests that rates of application are a major determinant of success in winning awards from the program.

Awards are also distributed unequally within states. The top 20 winning zip codes account for 17.8 percent of Phase I awards overall (see Table 3-4). This is a lower degree of concentration than at NIH, but in both cases, the data illustrate that the SBIR awards, like other innovation activity, tend to be concentrated in relatively small geographic areas. These clusters of innovation are, in effect, the relevant unit of measure. Even states with high numbers of awards find that they are not distributed across the state but instead are concentrated in these innovation clusters. Moreover, other sources of early-stage funding such as venture capital tend to be concentrated as well, and normally in the same areas.⁶

TABLE 3-4

Phase I Awards—Top Zip Codes.

3.2.4. Commercialization and Multiple-award Winners

In the first eight years of the program, a number of companies were successful in winning multiple awards. Many of the projects funded by these awards were not commercialized. There are several reasons for this. In part, the low commercialization rates reflect the uncertainties inherent in the funding of relatively early-stage technology development. It may also reflect imperfect alignment between solicitations and the needs of procurement agencies and the complexities and long lead times of the procurement process. Perhaps most important, it may reflect the lower emphasis on commercialization in the early years of the program than is now the case.⁷ Lastly, it reflects the different goals of participating companies documented in previous NRC research.⁸ Understanding these different goals is important in this context.

Companies that participate in the program, like the agencies themselves, often have multiple objectives.

• Firms approach the SBIR award process at different stages of development and with different objectives. Some firms are developing technology concepts; some firms see their vocation as contract research organizations; others actively seek to develop commercial products, either for public agencies or for the marketplace.⁹
• Investigator-led firms, limited in size and focused on a single concept may seek multiple awards as they advance research on a promising technology.¹⁰
• For firms that carry out research as a core activity, success is often measured in multiple contract awards. Some firms, mainly at DoD, have won large numbers of awards over the life of the program. Yet, even with many awards, there is nothing intrinsically wrong with a process that provides high-quality research at a lower cost than might otherwise be available to the department.¹¹ Inexpensive exploration of new technological approaches can be valuable, particularly if they limit expenditure on technological dead ends. For research oriented firms, the key issue is the quality of the research and its alignment with service and agency needs.¹²
• In some cases, firms respond to an agency solicitation and “solve” the problem, provide the needed data, or propose a solution that can then be adopted by the agency with no further “commercialization” revenues for the firm.¹³
• Those firms that seek to develop commercial products may, in an initial phase, seek multiple awards to rapidly develop a technology. For the high-growth firms, this period is limited in time, before private investment becomes the principal source of funding.¹⁴

In short, the participating firms, like the services and agencies, use the program in a variety of ways. Some are start-ups, some are well-established firms, all have differing strategies and objectives, and many are new entrants. Some are strong performers with regard to the commercialization metric, while others make valuable, if less commercially oriented, contributions.¹⁵

(The DoD commercialization database provides the best data on overall outcomes from awards to FAWs, not least because it is specifically designed to do so.¹⁶)

3.2.4.1. Background to the Multiple-award Winner Issue

As the 1992 SBIR reauthorization approached, there was some concern on the part of the Small Business Committee that “large, multiple-award winners might hurt the program. . . .”¹⁷ This concern was included in the second GAO evaluation of the program, required by the 1982 legislation, and released in March 1992.¹⁸ The GAO evaluators found very preliminary evidence that in the 1984–1987 period, SBIR companies receiving five or more awards (deemed “frequent winners”) had a somewhat lower commercialization record than companies receiving fewer than five awards.”¹⁹ The preliminary nature of this analysis was not fully appreciated at the time, despite the GAO’s qualifications concerning the limited time between, for example, the 1987 awards and the study’s analysis in 1990–1991.

Notwithstanding the tentative nature of the findings, the problem of “SBIR mills” was established and the focus shifted to efforts to enhance commercialization. To this end, Section 9(e)(4) of the Small Business Act (15 U.S.C. 638(e)(4)) was amended in 1992 to require that agencies consider “the small business concern’s record of successfully commercializing SBIR or other research” when making Phase II awards. Thus Section 9(e)(4) of the Small Business Act (15 U.S.C. 638(e)(4)) was amended as follows—

(B) a second phase, to further develop proposals which meet particular program needs, in which awards shall be made based on the scientific and technical merit and feasibility of the proposals, as evidenced by the first phase, considering, among other things, the proposal’s commercial potential, as evidenced by—(i) the small business concern’s record of successfully commercializing SBIR or other research; (ii) the existence of second phase funding commitments from private sector or non-SBIR funding sources; (iii) the existence of third phase, follow-on commitments for the subject of the research; and (iv) the presence of other indicators of the commercial potential of the idea.

3.2.4.2. The Creation of the Commercialization Achievement Index

At DoD, this requirement led to development of the “Commercialization Achievement Index (CAI),” which normalized reported sales and further investment resulting from the Phase II based on the length of time since the award and allowed a numerical comparative evaluation of a firm’s success in commercialization to firms with comparable SBIR experience.

The CAI is one component of the Company Commercialization Report (CCR), which is electronically included in every proposal. The CCR also captures other indicators of the commercial potential, such as firm growth, IPO resulting from SBIR, number of patents received as a result of SBIR, firm revenue and the percent of that revenue that is SBIR. Evaluation of the proposal’s commercial potential is based on the commercialization plan, which would include any funding commitments for Phase II for or Phase III from private sector or non-SBIR sources, and on the CCR. The CCR also allows the firm to describe commercialization that may have small sales dollars, but major impact, such as in health care or cost savings.

Firm winning more than four or five awards (the number changed in 2005) are now required to complete a CCR with every application for further DoD SBIR awards. As the report requires information about all awards, not just those at DoD, it includes some data on awards at other agencies, for firms which also apply at DoD.

3.2.4.3. Commercialization Outcomes from DoD Commercialization Data

Table 3-5 shows commercialization data for firms by number of Phase II awards.²⁰

TABLE 3-5

DoD Commercialization Data on Multiple-award Winners, All Agencies, 1992–2005.

3.2.4.4. Reconceptualizing Multiple-award Winners

Criticisms of multiple-award winners seem in general to be misplaced. They result from an overly negative reading of limited data, focused on one element of the program, often using a highly simplified, essentially linear conception of commercialization.

A more comprehensive assessment of the role of companies with multiple awards reveals multiple dimensions.

1. Evolution in Company Revenue. Data from the NRC Phase II Survey shows that larger companies tend to rely less on SBIR as a source of company revenue. This is supported by case research: At Radiation Monitoring, for example, SBIR is now only 16 percent of total firm revenues.²¹
2. Graduation. The companies evolve over time. Some of the large Phase II winners have “graduated” from the program either by growing beyond the 500 employee limit or by being acquired. In the case of Foster-Miller, a particularly strong award winner, the company was acquired by a foreign-owned firm.
3. Meeting Agency Needs. Case studies show that some of the biggest award winners have successfully commercialized, and have also in other ways met the needs of sponsoring agencies. Some are effective at contract research. Contract research is often a valuable contribution in its own right. DoD staff indicate that SBIR fills multiple needs, many of which do not show up in sales data. For example, agency staff suggest that SBIR awards permit efficient probes of the technological frontier, conducted in a short time frame, with a very limited budget. These awards can effectively explore new technological approaches, saving time and resources; and some companies succeed in providing viable alternatives to program managers.²²
4. Company Creation. Some frequent winners frequently spin off companies—like Optical Sciences, Creare, and Luna. Creating new firms is a valuable contribution of the program especially with regard to the defense industrial base. The creation of these firms creates new opportunities for defense contractors, greater competition, and permits more rapid development of new defense solutions.
5. Flexibility and Speed. Some FAWs have provided the highly efficient and flexible capabilities needed to solve pressing problems rapidly. For example, Foster-Miller, Inc., responded to needs in Iraq by developing and the manufacturing add-on armor for Humvees.²³

3.2.4.5. Conclusions

The data and analysis above suggest three core conclusions:

1. While some companies win a substantial number of awards, perhaps not unlike leading universities, there does not appear to be a widespread problem inherent to the program at DoD (or at other agencies). The most recent data suggest these companies commercialize on average more than companies with fewer awards.
2. Analysis of other dimensions of the program also strongly suggest that frequent winners provide powerful benefits: Given that our analysis of selection procedures suggests that in general these are both fair and competitive, the presumption must be that this limited number of companies are winning awards because they meet the needs of the agency, as expressed in published solicitations. More broadly, it is too narrow an approach to evaluate company performance solely on the basis of commercialization: The SBIR program is designed to meet other equally important congressional objectives as well.
3. The current focus on commercialization records is a valuable stimulus. DoD is currently meeting congressional requirements in this area by maintaining the CAI and requiring completion of the CCR, and by including commercialization information with Phase II applications. Efforts to further enhance reporting and analysis are recommended elsewhere.
4. DoD has implemented what might be called the “enhanced surveillance model for FAWs—requiring closer scrutiny of the commercialization efforts in the course of the selection process. While elements of this process will undoubtedly be adjusted and fine-tuned in light of ongoing experience, the fact is that DoD is already taking steps to ensure that “research for the sake of research” is not encouraged.

Given that SBIR awards meet multiple agency needs and multiple congressional objectives, it is difficult to see how the program might be enhanced by the imposition of an arbitrary limit on the number of applications per year. The evidence supports the conclusion that the department does not have a general problem with multiple-award winners.

If, over time, agencies see issues emerging in this area, they might consider adopting some version of the DoD “enhanced surveillance” model, in which multiple winners are subject to enhanced scrutiny in the context of the award process.

3.2.5. Phase I Awards—By Company

Some companies are very successful in winning Phase I awards at DoD. The most successful applicant between FY1992 and FY2005 won 361 Phase I awards (and is no longer a small business). The top 20 Phase I winners among the 7,113 companies that received at least one Phase I award from DoD over this period accounted for 11.2 percent of all Phase I awards (compared to 8.9 percent at NIH).

Twenty-seven companies received at least 50 awards from DoD during this 14-year period, and ten received more than 100. Two received more than 300. (See Table 3-6.) These data indicate a considerably greater degree of concentration of awards among the top winning companies than at other agencies, including NIH, which has the second largest SBIR program.

TABLE 3-6

Multiple-award Winning Companies at DoD FY1992–2005.

It might also be observed that a number of the companies listed in Table 3-6 have grown and are now large firms, no longer eligible for SBIR. Of course, this successful growth is a desirable result of their prior SBIR work.

On the other side of the spectrum, 95 percent of SBIR awardees received less than 10 awards, and 74 percent received no more than two.

3.2.6. Phase I Awards—Demographics

Data from the DoD awards database indicate that the percentage of DoD SBIR awards going to woman- and socially and economically disadvantaged small business concerns has hovered around 20 percent for years (see Figure 3-4). Within that 20 percent, the percentage going to woman-owned firms has slowly increased, while the share going to minority-owned firms has fallen steadily from a peak of 14 percent in 1999 to 9.3 percent in 2005. However, the actual numbers of awards to both have increased during this period as the overall number of SBIR awards has expanded with DoD research funding.

FIGURE 3-4

Phase I awards to woman- and socially and economically disadvantaged small business concerns. SOURCE: DoD awards database.

3.2.7. Phase I Awards—By Agency and Component

The substantial size differences between the various components of DoD mean that different components award different numbers of contracts. The percentage of Phase I contracts awarded by each component is displayed in Table 3-7.

TABLE 3-7

Phase I Awards, by Agency and Component.

The data show that the three largest components—Army, Air Force, and Navy—account for a fraction under 70 percent of all DoD SBIR awards between 1992 and 2005. This dominance varies substantially, however, ranging from a high of 83 percent in 1995 to a low of 59 percent in 2002 (as shown in Figure 3-5).

FIGURE 3-5

Army/Air Force/Navy Share of All SBIR Phase I awards, 1992–2005. SOURCE: DoD awards database.

3.2.8. Phase I Awards—Size of Awards

None of the DoD components has experimented with oversized Phase I awards in the same way as NIH. In general, awards are kept slightly below the SBA guideline maximum of $100,000. Some components hold back up to $30,000 of a possible Phase I award as an “option” which can be released as bridge funding between Phase I and Phase II after a Phase II contract has been awarded but before the contract is in place.

Overall, less than 0.15 percent of all Phase I awards were made for more than $150,000, although it is worth noting that in recent years some large Phase I contracts have been awarded, as shown in Table 3-8.

TABLE 3-8

Maximum Size of Phase I Award, 1992–2005.

DoD staff have suggested that these extra-large awards—and similar extra-large Phase II awards—have resulted from the addition of non-SBIR funding to existing SBIR awards. This technique is a permissible and apparently not uncommon event at DoD and is considered by many to be a very desirable additional incentive and success measure. Ideally, the award data should indicate such additional funding.

3.3. PHASE II AWARDS

As R&D funding for DoD has increased, the number of Phase II contracts awarded has increased. The trendline in Figure 3-6 reflects growth in the number of Phase II contracts awarded, from about 400 in 1992 to about 1,000 in 2005. The substantial jump in numbers awarded in 2003 partly reflects the 2002 increase in Phase I awards.

FIGURE 3-6

Phase II awards at DoD, 1992–2005. SOURCE: DoD awards database.

One strategic question for all SBIR agencies is the balance between Phase I and Phase II funding. Too many Phase I awards might leave insufficient funding to provide for the critical Phase II research that can result in technologies that the agencies will use, or that can be commercialized. Too few Phase I awards, and agencies find they have starved the “pipeline,” and must subsequently award Phase II funds to projects that may not deserve it. This balancing act is captured by the percentage of total SBIR funds that are allocated to Phase II, described in Figure 3-7. DoD allocates about 75–80 percent of funding to Phase II awards.

FIGURE 3-7

Percentage of total DoD funding spent on Phase II, 1992–2005. SOURCE: DoD awards database.

FIGURE 3-8

Phase II median award size, 1992–2005. SOURCE: DoD awards database.

3.3.1. Phase II—Average Size of Award

As with Phase I, the data show that DoD Phase II awards are closely aligned with the SBA guidelines. The median size of award rose when the guidelines were increased after the 1992 reauthorization, but has remained at slightly under $750,000 in nominal terms since 1997.

The DoD awards database does not distinguish clearly the source of funding on a contract. As a result, the database includes contracts where substantial additional funds were added from non-SBIR sources to an SBIR contract. As a result, the awards database indicates some significant extra-large awards (see Figure 3-9).

FIGURE 3-9

Oversized Phase II awards at DoD, 1992–2005. SOURCE: DoD awards database.

The extent to which these awards are actually oversized SBIR awards rather than SBIR contracts supplemented with non-SBIR funds cannot be determined conclusively from the DoD awards database.²⁴

3.3.2. Phase II Awards—By Company

As with Phase I, some companies have received numerous Phase II awards. The companies receiving many Phase I awards are often also successful in applying for multiple Phase II awards, as on average, 42 percent of Phase I winning proposals receive Phase II awards.

Table 3-9 shows the top Phase II award winners. Note that these results are estimates only.²⁵

TABLE 3-9

Phase II Multiple-award Winners 1992–2005 at DoD.

Together, the top 20 winners account for 11.5 percent of all Phase II awards made at DoD from FY1992 to FY2005. This compares with 11.1 percent at NIH. It is also worth noting that some of the top 20 winners are no longer eligible. For example, Foster-Miller, Inc., has been purchased by a foreign-owned corporation; Alphatech, Inc., Digital System Resources, Inc., and Triton Systems, Inc., have each been acquired and are now part of companies which have more than 500 employees.

3.3.3. Phase II Awards—By State

As would be expected with merit-based R&D awards, the geographical distribution of Phase II awards approximates but does not equal the distribution for Phase I awards. As can be seen in Table 3-10, the states with many Phase I award-winners tended to get the most Phase II awards. Not surprisingly, states with few Phase I awards had few Phase II awards.

TABLE 3-10

Phase II Awards—By State.

Still, states do vary substantially in the degree to which their companies successfully convert Phase I awards into Phase II. Table 3-11 shows the percentage share of Phase II awards between 1992 and 2005, by state, expressed as a percentage of the Phase I awards between 1992 and 2005, by state. This metric indicates which states appear to be particularly successful at converting Phase I awards into Phase II awards.

TABLE 3-11

Phase II Awards—Conversion Rates for Phase IIs by State, 1992–2005, Expressed as a Percent of Phase Is.

The data show that the top 10 states on this metric had companies that converted Phase I into Phase II at a rate of 50 percent or better; the ten lowest receiving states all converted at rates of less than 35 percent. This suggests avenues for state-level research. It is possible that enthusiastic outreach efforts at the state level—perhaps by state S&T or economic development agencies—have encouraged firms to submit Phase I proposals that in the end have not justified Phase II funding. This may not necessarily be a good strategy for either the firm or the state. On the other hand, states can perhaps help companies learn to develop a more successful approach to Phase II. These data may also be impacted by sample size. None of the 15 states with the most Phase II awards are on either list.

The number of “low award” states—those with 10 or fewer Phase II awards per year—has fallen substantially between 1992 and 2005, from 28 to 16. This may be partly explained by the substantial increase that took place during this period in the number of awards. Nonetheless, it is clear that companies from areas traditionally not regarded as S&T hubs do have opportunities to win Phase II wards at DoD, an advantage of the program given the required concentration of early-stage capital.

Naturally, Phase II awards are further concentrated within states. However, the zip code with the largest number of Phase II awards received only 1.6 percent of Phase I awards, and 1.5 percent of Phase IIs. Overall, the top 10 zip codes accounted for 11.2 percent of both Phase I and Phase II awards. This contrasts with NIH, where the top zip code accounted for 19.9 percent of Phase I awards, and the top 10 zip codes for 13.6 percent. Science and engineering talent in the disciplines relevant to DoD appear to be more widely distributed than that in the life sciences.²⁶

3.3.4. Phase II—Awards by Component

Like Phase I, Phase II awards are concentrated in the major components of DoD—Army, Navy, Air Force, MDA, and DARPA (see Table 3-12).

TABLE 3-12

Phase II Awards, by Agency and Component.

As shown by Figure 3-10, Army, Navy, Air Force, and MDA account for 83 percent of Phase II awards on average since FY2000: The remaining 17 percent is largely accounted for by DARPA.

FIGURE 3-10

Distribution of Phase II awards by component, FY2000–2005 (annual average percent). SOURCE: DoD awards database.

These percentages vary somewhat over time, although that has stabilized at about 85 percent since 2002 (see Figure 3-11).

FIGURE 3-11

Percentage share of all Phase II awards for the four largest components, 1992–2005. SOURCE: DoD awards database.

3.4. WOMAN- AND MINORITY-OWNED FIRMS

One of the stated objectives of the SBIR program is to expand opportunities for women and minorities in the federal S&T contracting process. One way to measure program performance in this area is to review the share of awards being made to woman- and minority-owned firms.

While Phase I awards to woman-owned firms have continued to increase as a percentage of all Phase I awards, the percentage of Phase I awards being made to minority-owned firms has declined quite substantially since the mid-1990s. The percentage fell below 10 percent for the first time in 2004.

DoD data suggest that the decline in Phase I award shares for minority-owned firms is reflected in Phase II, although there was in fact an uptick in the percentage of awards to minority-owned firms in FY2005. (See Figure 3-12.)

FIGURE 3-12

Phase II awards to woman- and minority-owned firms. SOURCE: DoD awards database.

These data also indicate that both woman- and minority-owned firms are converting Phase I awards into Phase II at a rate very close to that of all award winners. On average, their share of all Phase II awards is 0.3 percent higher than their share of Phase I awards. This suggests that the overall quality of Phase I awards from woman- and minority-owned firms is comparable to that of all firms, in that these awards appear equally deserving of the substantially greater investment required from the agency at Phase II.

Further analysis of applications data is required to determine whether the declining Phase I awards rate for minority-owned firms reflects a declining share of applications, the rejection rate that is increasingly greater than that for all other applicants, or whether the rate of increase in awards is growing faster than number of minority firms.

Finally, a note on data. NRC research has determined that the DoD applications database is a poor source of information on the woman/minority status of the approximately 15,000 entries for a given year. The data come directly from the proposals, but firms are sometimes inaccurate in what they enter for ownership status. In FY2005 we identified 53 firms that listed minority or woman ownership on some, but not all of the proposals they submitted. Looking across years, firms were identified that showed woman ownership some years, then no status, then woman ownership again. One firm that had about ten proposals annually listed itself as minority-owned, then several years of no special ownership, then woman-owned. After awards are made and moved to a separate database table, DoD works to correct some obvious errors in the demographic status.

Footnotes

1

Carol Van Wyk, NAVAIR SBIR Program Manager, presentation to PMA-209, September 2005.

2

As a comparison, California and Massachusetts accounted for 36.5 percent of Phase I awards at NIH.

3

The SBA study mentioned in the report (no citation given) referred to SBIR awards from FY1983 through FY1986. U.S. Government Accounting Office, “Federal Research: Evaluation of Small Business Innovation Research Can Be Strengthened,” GAO/RCED-99-114, Washington, DC: U.S. Government Accounting Office, June 1999, p. 17.

4

Ibid., p. 21. See also pp. 26–27.

5

Ibid, p. 27.

6

For example, venture capital investment is widely recognized to be concentrated in California with some 47 percent of national venture funding, yet 35 percent of the nation’s VC investments are in Silicon Valley, just under 7 percent in Los Angeles/Orange County, 4.6 percent in San Diego, while the rest of California receives 0.5 percent of the $7.6 billion invested there in 2005. See the presentation “The Private Equity Continuum” by Steve Weiss, Executive Committee Chair of Coachella Valley Angel Network, citing PricewaterhouseCoopers Money Tree data at the Executive Seminar on Angel Funding, University of California at Riverside, December 8–9, 2006, Palm Springs, California.

7

As a Creare representative, Nabil Elkouh, points out, in the early years of the program, small companies had not figured out how to use it, nor had the departments figured out how to run the program, and the award process was less competitive than it is today. Emphasis on commercialization was minimal. Program managers defined topics that represented an interesting technical challenge. See the case study of Creare, Inc., August 2005, in National Research Council, An Assessment of the SBIR Program at the Department of Energy, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2008.

8

National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of the Defense Fast Track Initiative, Charles W. Wessner, ed., Washington, DC: National Academy Press, 2000.

9

See Reid Cramer, “Patterns of Firm Participation in the Small Business Innovation Research Program in the Southwestern and Mountain States,” in National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, op. cit., p. 151. The author describes the incremental nature of technical advance, which sometimes necessitates several awards. See also John T. Scott, “An Assessment of the Small Business Innovation Research Program in New England: Fast Track Compared with Non-Fast Track,” in National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, op. cit., p. 109, for a discussion of Foster-Miller, Inc.

10

Ibid. The mirror image of this approach is the program manager that makes several awards for similar technologies among different companies. In fact, it is not uncommon to have multiple awardees on the same Phase I topic. For an example, see the Navy’s SBIR Web site selections page for their FY-06.1 awardees, available at <http://www​.navysbir.com/06_1selections​.html>. This page not only shows several awardees for each topic, but if you click on the “Details” link, you can see the differences in companies’ approaches to the topics.

11

To secure additional awards, a small company has to resubmit its proposal through the regular review process. These awards are relatively small in amount—the normal Phase I and Phase II awards would total $850,000. As a point of comparison, the top three U.S. prime contractors in 2004 garnered over $86 billion in defense revenues.

12

For example, Foster-Miller, a multiple-award winner, developed robots for use in Iraq to identify roadside improvised explosive devices. Creare is also won a large number of awards and tends to focus engineering problem solving rather than commercialization. Nonetheless the firm has 21 patents resulting from SBIR-funded work, has published dozens of papers, and licensed a variety of technologies. These technologies include high-torque threaded fasteners, a breast cancer surgery aid, corrosion preventative coverings, an electronic regulator for firefighters, and mass vaccination devices (pending). Products and services developed at Creare include thermal-fluid modeling and testing, miniature vacuum pumps, fluid dynamics simulation software, network software for data exchange, and the NCS Cryocooler used on the Hubble Space Telescope to restore the operation of the telescope’s near-infrared imaging device. See the case study of Creare, Inc., August 2005, in National Research Council, An Assessment of the SBIR Program at the Department of Energy, op. cit.

13

There are cases where a small business successfully completes the requirements and objectives of a Phase II contract, meeting the needs of the customer, without gaining additional commercialization revenues. For example, Aptima, Inc., a multiple-award winner, designed an instructional system to improve boat handling safety by teaching the use of strategies that mitigate shock during challenging wave conditions. A secondary goal was to demonstrate how an innovative learning environment could establish robust skill levels while compressing learning time. Phase I of the project developed a training module, and in Phase II, instructional material, including computer animation, videos, images, and interviews were developed. The concept and the supporting materials were adopted as part of the introductory courses for Special Operations helmsmen with the goal of reducing injuries and increasing mission effectiveness. Michael Paley, Aptima, Inc., personal communication, September 30, 2006.

14

For a discussion of Martek as an example, see Maryann P. Feldman, “Role of the Department of Defense in Building Biotech Expertise.” in National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, op. cit., pp. 266–268. See also Reid Cramer, “Patterns of Firm Participation in the Small Business Innovation Research Program in the Southwestern and Mountain States,” in National Research Council, The Small Business Innovation Research Program: An Assessment of the Department of Defense Fast Track Initiative, op. cit., pp. 146–147, who discusses several firms that realized commercial success after several awards.

15

One of the earliest (1992) GAO studies on SBIR found a positive record on commercialization. The study noted that “even though many of the SBIR projects have not yet had sufficient time to achieve their full commercial potential, the program is showing success in Phase III activity,” with the majority of this activity occurring in the private sector, a goal of the program. U.S. Government Accounting Office, Federal Research: Small Business Innovation Research Shows Success but Can Be Strengthened, GAO/RCED-92-37, March 1992, p. 4.

16

The DoD database does not contain information on all companies or all awards. According to BRTRC, which manages the database, the data collected from the agencies on Phase II awards made from 1992 to 2001 identified 2,257 firms that had received at least one Phase II, but were not in the DoD database, and were therefore not included in Table 3-5. Of these 2,257, only six had received 15 or more Phase II during the ten years for which BRTRC received award data. Although inclusion of pre-1992 and post-2001 awards would have increased that number, it seems reasonable to conclude that the firms in the DoD data represent a large majority of the multiple winners.

17

House Report (REPT. 102-554) Part I (Committee on Small Business), The Small Business Research and Development Enhancement Act of 1992, p. 17.

18

The GAO analysis was carried out between August 1990 and August 1991. At the time, the GAO cautioned that the group examined consisted of the Phase II awardees from the first four years in which Phase II awards were made, the GAO analysts chose the earlier recipients “because studies by experts on technology development concluded that five to nine years are needed for a company to progress from a concept to a commercial product.” U.S. Government Accounting Office, Federal Research: Small Business Innovation Research Shows Success but Can Be Strengthened, GAO/RCED-92-37, op. cit. p. 17. They note further that “even with this early group of Phase II recipients, additional time is required for projects to mature.” They add that “about ten percent of the projects responding to our survey had not even completed Phase II,” adding that “our findings therefore represent an early interpretation of the trends in Phase III.”

19

House Report (REPT. 102-554) Part I (Committee on Small Business), The Small Business Research and Development Enhancement Act of 1992, op. cit., p. 17.

20

Although the database covers all agencies, some agencies are underrepresented owing to the focus on DoD-oriented firms. NIH awardees, for example, account for only 7 percent of entries in the database.

21

Michael Squillante, Vice President, Radiation Monitoring, private communication, June 2004.

22

See National Research Council, SBIR and the Phase III Challenge of Commercialization, Charles W. Wessner, ed., Washington, DC: The National Academies Press, 2007.

23

Foster-Miller’s LAST® Armor, which uses Velcro-backed tiles to protect transport vehicles, helicopters and fixed wing aircraft from enemy fire, was developed on two Phase I SBIRs and a DARPA Broad Agency Announcement. The technology has helped improve the safety of combat soldiers and fliers in Bosnia and Operation Desert Storm. Access at <http://www​.dodsbir.net​/SuccessStories/fostermiller.htm>.

24

Component-level data is, according to the data contractor BRTRC, likely to be more detailed in this regard but is not maintained centrally and has not been used for this analysis.

25

Because companies change names, and in some cases tax ID numbers, a precise count would require a manual examination of all records.

26

Data from DoD awards database and NIH IMPAC database respectively.