[Senate Hearing 117-212] [From the U.S. Government Publishing Office] S. Hrg. 117-212 A REVIEW OF THE SBIR STTR PROGRAM ======================================================================= HEARING BEFORE THE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP of the UNITED STATES SENATE ONE HUNDRED SEVENTEENTH CONGRESS FIRST SESSION __________ SEPTEMBER 22, 2021 __________ Printed for the Committee on Small Business and Entrepreneurship [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] Available via the World Wide Web: http://www.govinfo.gov __________ U.S. GOVERNMENT PUBLISHING OFFICE 47-001 PDF WASHINGTON : 2025 ----------------------------------------------------------------------------------- COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP ONE HUNDRED SEVENTEENTH CONGRESS ---------- BENJAMIN L. CARDIN, Maryland, Chairman RAND PAUL, Kentucky, Ranking Member MARIA CANTWELL, Washington MARCO RUBIO, Florida JEANNE SHAHEEN, New Hampshire JAMES E. RISCH, Idaho EDWARD J. MARKEY, Massachusetts TIM SCOTT, South Carolina CORY A. BOOKER, New Jersey JONI ERNST, Iowa CHRISTOPHER A. COONS, Delaware JAMES M. INHOFE, Oklahoma MAZIE HIRONO, Hawaii TODD YOUNG, Indiana TAMMY DUCKWORTH, Illinois JOHN KENNEDY, Louisiana JACKY ROSEN, Nevada JOSH HAWLEY, Missouri JOHN HICKENLOOPER, Colorado ROGER MARSHALL, Kansas Sean Moore, Democratic Staff Director William Henderson, Republican Staff Director C O N T E N T S ---------- Opening Statements Page Cardin, Hon. Benjamin L., Chairman, a U.S. Senator from Maryland. 1 Paul, Hon. Rand, Ranking Member, a U.S. Senator from Kentucky.... 3 Witnesses Glover, Mr. Jere W., Executive Director, Small Business Technology Council, Annapolis, MD.............................. 5 Kavetsky, Mr. Robert, Chief Executive Officer and President, Energetics Technology Center, Indian Head, MD.................. 32 Alphabetical Listing and Appendix Material Submitted Cardin, Hon. Benjamin L. Opening statement............................................ 1 Glover, Mr. Jere W. Testimony.................................................... 5 Prepared statement........................................... 7 Responses to questions submitted by Senators Coons, Rosen, Risch, Inhofe, and Young................................... 60 Howell, Sabrina and Lerner, Josh, The SBIR Program at 44 Statement dated September 27, 2021........................... 52 Kavetsky, Mr. Robert Testimony.................................................... 32 Prepared statement........................................... 34 Responses to questions submitted by Senators Coons, Rosen, Risch, and Inhofe.......................................... 79 Paul, Hon. Rand Opening statement............................................ 3 A REVIEW OF THE SBIR-STTR PROGRAM ---------- WEDNESDAY, SEPTEMBER 22, 2021 United States Senate, Committee on Small Business and Entrepreneurship, Washington, DC. The Committee met, pursuant to notice, at 2:15 p.m. in Room 301, Russell Senate Office Building, Hon. Ben Cardin, Chairman of the Committee, presiding. Present: Senators Cardin, Shaheen, Markey, Coons, Hirono, Rosen, Hickenlooper, Paul, Young, and Hawley. OPENING STATEMENT OF HON. BENJAMIN L. CARDIN, CHAIRMAN, A U.S. SENATOR FROM MARYLAND Chairman Cardin. The Senate Small Business and Entrepreneurship Committee will come to order. Today we are holding a hearing on the review of the SBIR- STTR program. I want to thank Senator Paul and our witnesses for agreeing to start this hearing 15 minutes earlier than the previously advertised starting time, because of the adjustment of a Senate schedule and voting. It gives us a little bit more leeway. So I just want to thank everyone for their cooperation. I know Senator Paul will be joining us, and he encouraged us to get started. So thank you all for joining us today for this important hearing, examining two of the Federal Government's most important innovation programs, the Small Business Innovation Research Program, also known as the SBIR, and the Small Business Technology Transfer Program, or the STTR for short. The SBIR and STTR represent the best of government and industry's partnerships. They harness the creativity and ingenuity of America's small businesses to solve the most pressing public health and national security challenges of our time. They also support the growth of small, high-tech companies that create high-paying, local jobs and keep the American economy on the cutting edge of the technology industry. Congress created the SBIR in 1982, to increase the participation of small businesses and federally funded research and development opportunities. Under the program, Federal agencies that budget at least $100 million annually for outside research must allocate a portion, 3.2 percent since fiscal year 2017, to support research and development in small businesses. There are currently 11 Federal agencies and departments participating in the program, including the Departments of Defense, Energy, Education, and Health and Human Services. The program awards funds in three phases. Phase I, awards are up to $225,000 and may be used to conduct a feasibility study to determine if the idea's scientific and commercial promise. Phase II awards are worth up to $1.5 million, and may be used to conduct further research and development on the feasibility of turning an idea into a commercial product. And Phase III does not award funds but denotes that an idea is ready to move from the laboratory to enter the marketplace. During the commercialization phase, small businesses are expected to raise funds from private sector or non-SBIR Federal funding. Congress created the STTR program in 1992. While the program is similar to the SBIR in structure, utilizing a similar three-phase progression, STTR awards are made to small businesses engaging in collaborative research and development with Federal labs as well as nonprofit, educational, and scientific institutions. The program requires Federal agencies and departments that spend at least $1 billion on outside research to allocate at least 0.45 percent of those funds to STTR opportunities. The American people may not be familiar with SBIR and STTR, but they definitely recognize the products and companies that were created through the program. The Sonicare electric toothbrush, the iRobot, Lasik eye surgery, and Qualcomm, the company that makes the technology that powers our smartphones, were all made possible through SBIR and STTR grants. The programs also help prepare our Nation's public health infrastructure for the COVID-19 pandemic. In 2013, the National Institutes of Health, which is headquartered in my home State of Maryland, awarded $2.53 million SBIR grant to the Seattle- based Adaptive Biotechnologies to support the company's development of adaptive immune system testing technology. On March 5th of this year, the Food and Drug Administration granted the company an emergency use for its T-Detect COVID test, which is able to detect a recent or prior COVID-19 infection. The development of this test was a direct result of the research and development the company was able to conduct through an SBIR. While the test cannot be used to detect a current infection, the FDA is confident that the test will be especially useful for people who may have exhibited symptoms previously or believe they have been exposed but have not tested positive for COVID-19. The test will deepen our knowledge of the virus and help keep our communities safe. Simply put, SBIR and STTR have been invaluable to our national economy, and they continue to help us keep safe. I have had many discussions with State government officials and leading scientists in Maryland who have told me that one of the most sensible steps we could take to improve the SBIR and STTR programs would be to make them permanent. Right now, SBIR and STTR are only authorized through September 30 of next year. The high-risk research that grant awardees are engaged in requires more certainty. Instead of leading the researchers who will create the technology that will power the economy of tomorrow wondering about funding for SBIR or STTR, we in Congress have an opportunity and an obligation to make these programs permanent, which both the Pentagon and NASA have urged us to do. Acknowledging the importance of these programs is not meant to imply that they are perfect, by any means. Today we must also discuss how to best improve the speed of grant reviews, how to assist and target potential applicants in underserved communities, the disbursement of award funds, and whether to increase the percentage of funds that agencies and departments are required to set aside for these grants. I look forward to hearing more from our witnesses about how we can improve the SBIR and STTR programs to ensure that American technology and research industries remain the standard-bearer for the global economy. As I pointed out earlier, these programs have enjoyed strong bipartisan support in the United States Senate, and for good reason. They have really resulted in a very fine investment for America's economy and America's future. With that let me recognize the distinguished Ranking Member, Senator Paul. OPENING STATEMENT OF HON. RAND PAUL, A U.S. SENATOR FROM KENTUCKY Senator Paul. Thank you, Mr. Chairman. When the Federal Government spends other people's money it has little incentive to spend it wisely. Unsurprisingly, when taxpayers are compelled to support research proposals without any expectation of a return on investment, the results often have been bad science and wasted dollars. The Small Business Innovation Research and Small Business Technology Transfer programs are no different. We should look at the history of SBIR and ask ourselves whether the taxpayers should be compelled to continue funding the folly of this program. For instance, the National Science Foundation spent nearly $1 million to genetically engineer an alternative hops- flavored beer. Now why would the government, which is trillions of dollars in debt, offer this almost million-dollar donation when the $100 billion beer industry would likely finance such a project? The SBIR not only funds projects that would be taken on by private actors but it also is duplicative and funds projects that no one in their right mind would spend their money on. SBIR funded studies for a phone app that measures your gratitude. Yes, that is right, a phone app that measures your gratitude, whatever that means. The SBIR also funded an app to promote virtual clothing fittings. Really? I wonder what cretin thought that was a legitimate function of government. SBIR even provided seed funding to test a new show that teaches children to eat their fruits and vegetables first. Well, one would think the proposal would call to mind something we already do through Sesame Street, the pro-veggie kids' show that the Federal Government already spends millions of dollars annually on. Maybe we should not be surprised that the bureaucrats at the SBIR program offices have never heard of Sesame Street. If they had they might be able to count all the way up to $28 trillion, which is our national debt at the moment. A country approaching $30 trillion in debt cannot afford such frivolous spending. Now is the time to put a stop to such waste. A century of economic history proves, beyond a doubt, that the free enterprise system is best suited to provide capital to help small businesses grow and succeed. When private investors have skin in the game they will prudently invest their own dollars rather than roll the dice with taxpayer subsidies. Milton Friedman got this right. He explained succinctly when he said, ``Nobody spends somebody else's money as wisely as their own.'' When those investments pay off, everyone in the market wins. But only a select few win and have figured out how the SBIR program worked for them, and them alone. Some companies have been so successful in creating an entire business model and revenue stream that solely for these grants they are known as SBIR mills. An analysis by the State Science and Technology Institute showed that from 2009 to 2019, 21 percent of the awards were made to the mills, which the institute defined as firms who received more than 40 Phase I awards. Forty grants to just one company may raise a few eyebrows as unnecessary and excessive and somebody abusing the system. According to SBA's public data, 196 businesses received more than 100 awards each. Some businesses received more than 900 awards. It sounds like somebody has figured out the system here. Various studies show minimal or no program benefits for firms that receive multiple awards. They typically do not commercialize their products or move on from the program. Instead, they crowd out new small businesses from participating. The question is, why do these firms receive so many awards without any limitations from Congress? The SBIR program is typical of government programs that pick winners and losers. The SBIR mills, the winners, will always ask to continue the flow of free money. It is somebody else's money anyway. It is the small businesses that are crowded out of this program that are not heard from, and the taxpayers, the people who pay all the costs while others get the benefits. These people are the losers in this game. We need to question whether this program should continue to exist. We need to hold agencies accountable, and at the very least, we need to stop the abuse of the SBIR mills. Thank you. Chairman Cardin. We will now go to our witnesses. Our first witness will be Mr. Jere Glover, who is the Executive Director of the Small Business Technology Council, a group of small, high-tech companies, most of which are involved in the SBIR and STTR programs. Mr. Glover's experience with the SBIR is extensive, as he is one of the fathers of the program. As counsel to the House Small Business Committee, he directed an extensive set of hearings on small business innovation that laid the groundwork for the SBIR in 1978. He was also the lead witness before Congress in 1982, when the SBIR program was first proposed. Our second witness will be Mr. Robert Kavetsky, who is the Chief Executive Officer and President of Energetics Technology Center, a research and development organization headquartered in the great State of Maryland. ETC executes technology development and tech transfer programs for the Department of Defense and other agencies. We will start with Mr. Glover. And for the information of our witnesses, your entire statements will be made part of the record. You may proceed as you wish. STATEMENT OF JERE W. GLOVER, EXECUTIVE DIRECTOR, SMALL BUSINESS TECHNOLOGY COUNCIL, ANNAPOLIS, MD Mr. Glover. Thank you. Good afternoon, Chairman Cardin, members of the Committee. I am Jere Glover, Executive Director of the Small Business Technology Council of the National Small Business Association. We know America's small business, which employs 35 percent of our scientists and engineers, are the primary innovators and job creators led by entrepreneurs developing new products and services and focusing on building their businesses. Yet Federal R&D is still done primarily by large businesses, government labs, and universities. Congress realized this disconnect, and with President Reagan passed the SBIR in 1992, to make sure that at least a small portion of the Federal R&D dollars was done by small business. The resulting SBIR has become a primary driver for American innovation and jobs. Seventeen countries have copied the SBIR program around the world, and China is even going further, making investments in businesses, even American businesses. The European Union invests over 20 percent of its R&D dollars on small businesses, more than twice what the United States does. The genius of the SBIR program is it enlists our Nation's small businesses to competitively convert American science into scientific breakthroughs, useful technologies that meet the Federal needs while engaging entrepreneurs to build their businesses and create jobs. SBIR does not cost anything. It redirects a portion of the Federal R&D dollars to small business, the most innovative sector of the economy. These small firms must be based in and owned by Americans, and the work must be done in America. Why does SBIR work? One, it gets Federal R&D done by small business, the most innovative sector of the economy. Two, there is a merit selection based on technology. Three, it is highly competitive. Four, it focuses on agency needs and there is a commercialization focus. Attached to my testimony is a list of links to hundreds of SBIR success stories, but let me just mention two in particular that are on everybody's cellphones these days. One is the GPS and Bluetooth, and the second is CMOS, which is the camera technology used for almost all cellphones. Let me talk about the DoD. Two agencies, DoD and the National Cancer Institute, have both had detailed studies showing over 95 percent of all Phase II SBIR awards. Looked at it. Out of an investment of $16 billion by those agencies, it attracted additional $30 billion in additional assets and R&D, and returned $130 million in sales, $56 billion for acquisition of SBIR technologies by those two agencies. The market really loves SBIR. Fifteen of the leading 20 biotech companies have SBIR awards, 15 of 2000. Two thousand SBIR firms have been acquired, DoD firms, have been acquired. Most major prime contractors recognize the importance of SBIR technology and actually acquire them. Most of them have acquired at least 10 SBIR firms. Over 4,000 SBIR firms have received $170 billion worth of venture capital. The SBIR rate of return at the DoD is 22-to-1, and 33-to-1 at National Cancer Institute. The SBIR returns in tax money, State and Federal tax income, over $3 for every dollar invested in the National Cancer Institute of Health and just slightly under $3 at DoD. The best program at DoD is the Navy. Its SBIR program will reach $1 billion per year in follow-on contracts. That is $2 for every dollar invested. In conclusion, the SBIR program works. I am sorry. One other thing. In many sectors, SBIR funding is the primary source of R&D funding. SBIR and STTR invest in the innovation stage, well before venture capital and banks will provide risk capital. VCs focus on sectors such as software, internet, telecommunications, and health care. These get 83 percent of VC investment deals. SBIR, on the other hand, invests in a broad spectrum of technologies in all sectors and regions of the country. In conclusion, after 19 National Academy of Sciences studies, 4 economic impact studies that have found the SBIR program meets the congressional goals with over 50 percent commercialization. The SBIR program works and should be reauthorized as soon as possible and should be grown. Thank you. [The prepared statement of Mr. Glover follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chairman Cardin. Well thank you for your testimony, and more importantly, thank you for your service in regard to these programs. We really appreciate it. Mr. Kavetsky? STATEMENT OF ROBERT KAVETSKY, CHIEF EXECUTIVE OFFICER AND PRESIDENT, ENERGETICS TECHNOLOGY CENTER, INDIAN HEAD, MD Mr. Kavetsky. Chairman Cardin, Ranking Member Paul, and members of the Small Business Committee, my name is Bob Kavetsky. I am the CEO of the Energetics Technology Center. ETC is a 501(c)(3) headquartered in Maryland. It has been my great pleasure to head ETC for past 15 years. I am an engineer by training, and prior to joining ETC I served 32 years at the Department of Defense, working on hypersonics and undersea warfare programs. I greatly appreciate you giving me the opportunity to share my thoughts on the role of small business, in general, and the role of the Small Business Innovative Research program specifically with you today, and I look forward to, after my testimony, answering your questions. You are all acutely aware of the important role small businesses play in our economy. My fellow panelist has addressed the critical role the SBIR program plays in not only getting new technologies into the hands of warfighters but also serving as an economic catalyst in many parts of the country. I would like to direct my comments today to the role small businesses play in what I like to call technology-based innovation ecosystems, and the importance of these ecosystems to our national defense. MIT economists, Gruber and Johnson, in their seminal work, ``Jumpstarting America,'' do an excellent job of documenting the benefits realized from government investments in creating science-based innovations that came out of World War II. More importantly, they recommend that the Federal Government make additional investments to position the U.S. to continue its leadership role as a major economic and military power. Specifically, they identified 100 regions of the country that were ripe for the creation of technology-based innovation ecosystems. They suggest, and I agree, that such an investment will result not only in distributing our economic prosperity across the country more evenly but also contribute a strong national defense. Innovation ecosystems bring together industry, academia, and government to provide technology solutions to the government and private sector markets. Two prime examples of this are Silicon Valley's semiconductor and computer industries and Boston in life sciences. There is an opportunity now to create a whole nation of ecosystems using programs such as SBIR as a primary engine for this development. This is a critically important issue, not only for our national defense but in addressing what I see as a developing economic inequality between regions of the country that have these ecosystems and those that do not. My organization recently completed a study of energetics for the Department of Defense. Energetics are explosives and propellants that are used in our weapons systems. We brought together experts from industry, academia, and government, led by Dr. Theresa Mayer, Vice President of Research at Purdue University, to examine what has led to now well-documented shortfalls in U.S. military capabilities when compared to China and Russia. These shortcomings can be traced in part to two major issues: one, our inability to develop and then transition new material developments into our weapons systems, and two, the fragile condition of the existing supply chain, especially chemicals needed to produce energetic materials. Small businesses can play a role in addressing both of these challenges. For example, the SBIR program has a strong record of creating solutions to defense requirements in critical sectors. We envision such an investment in energetics would bring new and innovative companies into the energetics research arena. Second, we need to develop a network of specialty chemicals manufacturing and production facilities to ensure a robust supply chain for energetics. Currently we need approximately 350 specialty chemicals to produce the energetic materials the Department of Defense needs. There is absolutely no reason these chemicals cannot be produced by small and medium-sized companies. This production does not need to be from industry giants. Most critically, we cannot continue to buy these chemicals from our adversaries, such as China. The second example I would like to highlight is the work the Navy's SBIR program currently has us conducting to reach out and involve underrepresented communities and companies in the program. The catalyst behind this effort is to ensure that the Navy is tapping into the full potential of all of America, not just a handful of communities. We have created a process called ``City TechFire'' which we are starting to pilot in Houston, San Diego, Phoenix, Detroit, San Antonio, El Paso, Jacksonville, Cleveland, Greensboro, and Harrisburg. It is already abundantly clear to me that there is a massive untapped potential in these communities. In closing, I would like to make a few recommendations for the Committee to consider. First, make the SBIR-STTR programs permanent. Second, increase SBIR allocation to 7 percent. Third, increase the STTR allocation to 1 percent. Fourth, expedite security clearances for SBIR and STTR firms. And fifth, require all agencies to set goals of at least 15 percent of all R&D goes to small businesses. Thank you. [The prepared statement of Mr. Kavetsky follows:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chairman Cardin. Thank you very much for your testimony, and particularly your specific recommendations, which we very much appreciate. We will start five-minute rounds. I want to take a little bit of my time to respond briefly to Senator Paul's opening comments. We disagree. I would like to see us devote more Federal resources to research and development. I think it has shown that this is in the best interest of our country. I was proud to be part of efforts to increase the amount of research dollars at NIH, and the amount of research dollars we do in defense, the amount of research dollars we have under NASA, because those partnerships that we have with the private sector has paid off big time for our national security interests and our public health interests. And the SBIR and STTR program are not really about the size of the programs. They are more about making sure that the part of the business partnerships are done with small companies, because we know small companies is where innovation takes place at a higher level and jobs are created. So we want to make sure that small businesses are part of our technology firms that we do partnership with. So I really do not quite follow the point that Senator Paul was raising, but I just want to put on the record that the SBIR and STTR program does not deal with the size of the programs. It does more in making sure the allocation of the private sector, that there is fair allocation for smaller companies. I also want to point out that as you look at the Federal agencies that support this, the Department of Defense supports these programs, because they know they are getting a better product as a result of the partnerships under the SBIR and STTR programs. So they are supporting it. NASA supports it, because they know it helps them in their mission, their science mission, which is very important to my State and very important to the agenda of climate change. They know that their partnerships with small tech companies helps them complete their mission in a more successful manner. And you gave us the ratios of benefits to cost, which is 22-to-1, 33-to-1. These are pretty large numbers. I want to ask one question to both of you, if I might, and that is, there have been several studies and reports that have been done on both the SBIR program and the STTR program. They are all very, very positive, about meeting the missions that Congress set to stimulate technology innovation, to use small business to meet Federal research and development needs, to increase private sector commercialization of innovation derived from Federal research and development. All very high grades. There is one part of the mission that has not gotten high grades, and that is to foster and encourage participation by minority and disadvantaged persons in technology innovation, and I add to that the women-owned small businesses. So my question to both of you is, how can we do a better job in making sure there is real diversity in the companies that we are working with so that there is opportunity among all of our communities? Mr. Glover. Well, the immediate answer is better outreach and things like FAST and the incubators innovation. That is interesting. Probably a more in-depth, there is a recent study--not a recent, I am sorry, several years old now, that I just discovered that the National Academy of Sciences has even pushed as one of their own, which looked at pitch days. And what they found was that pitch days discriminated against women in particular. When you see a venture capitalist, we all know tend to discriminate, directly or indirectly against women and minority-owned businesses. They simply do not fund as many proportionally as they do other things. So the system obviously favors, quite frankly, white male-owned businesses. One of the things the Navy is doing right now is their pitch days are gender neutral. There is no face-to-face contact and there is no way to know whether it is run by a man or a woman. And I think that is working. GSA, which you guys have allowed to happen a few years ago, now is doing $4.6 billion of Phase III contracts. Their process is gender neutral and does not really have people coming in and talking to them face-to- face. Over 40 percent of their $4.6 billion is to women-owned businesses. It is an interesting phenomenon. If we speed up the process, make it happen very quickly, which it should, then I think you take some of the gender out of this and you will see that the awards are going to be more like the GSA, and we will overcome some of that inherent bias. But we have still got to do a lot more educational outreach. Women business owners need to be able to have places to go and people to work with. But I think there is some hope here that we can make this process work better. Chairman Cardin. Mr. Kavetsky? Mr. Kavetsky. So I have a couple of near-term pragmatic things that we are actually involved in, as we speak, to address the issue, Chairman Cardin, you raised. As a matter of fact, this morning I had a discussion Vic McCrary, who is at the University of the District of Columbia, in terms of how we can work with UDC to build an innovation ecosystem around his university, tying that actually into DARPA, one of the Defense Department's, as you know, cutting-edge agencies. Because in many cases DARPA program managers do not know about specific technical capabilities at some of the HBCUs, such as University of District of Columbia, North Carolina A&T--we are engaging in discussions with Dean Robin Coger at North Carolina A&T--Morgan State, in your own State, Senator. But the thing is you have to be present there and start making those connections, intimate connections in the case of the HBCUs, between faculty members and, in my arena, in the world of the Defense Department. Relative to the issue of females involved in SBIR, a number of states, such as yours, have programs such as ACTiVATE, which was created many, many years ago, encouraging female entrepreneurship. And I think, again, a pragmatic idea we have is to go where the females are. For instance, Purdue University graduates, I think, more female engineers than most universities in the country. We have a partnership arrangement with Purdue where we are seeing how we can tap into female engineers coming out of Purdue to both start companies and actually work in the defense sector. Thank you. Chairman Cardin. Thank you. Senator Shaheen. Senator Shaheen. Thank you, Mr. Chairman, and thank you to both of you for being here and for your testimony. Mr. Glover, I especially appreciate all of your support for the SBIR program. I have been a big fan, as I am sure you know. It was originally introduced by New Hampshire Senator Warren Rudman, and so our businesses in New Hampshire really like the SBIR program. And Mr. Kavetsky, I appreciated your comments about the Navy. I had the opportunity to do an embark on the U.S.S. New Hampshire submarine several years ago, and one of the things they told me was that the biggest concern on a submarine is the potential for fires, because the dryers, the way the dryers are vented. And I was able to tell them that I had just been to a company in New Hampshire that had an SBIR contract to try and address the problem of dryers on submarines. So obviously a very important program when it comes to innovation and what we need to do, both in the defense industry but also in terms of innovation throughout the economy. Mr. Glover, I understand that one of the things that you have been working on is the question of commercialization of SBIR technology, and, as you know, that is one of the issues that comes up again and again with respect to SBIR. Can you tell us what you have found in your investigation of this issue and what we can do to encourage commercialization of SBIR technologies? Mr. Glover. Well, in 2000, Congress added the requirement in the reauthorization for commercialization would be an evaluation factor. Obviously, the technology, the personnel, a lot of other things go in there, but one factor was added. And commercialization added then has changed the SBIR world. And what you see is every company knows that they have to have a commercialization component. There was some discussion of multiple award winners. Well, those award winners learned, and the companies now have all focused on commercialization. You know, 2,000 of these companies have been acquired. They did not get acquired because their technology was not commercializable. It was because somebody wanted that technology to put in their weapons system, to put in their business. There is real success there. Sonar and a lot of components of the submarine are SBIR-driven. We gave an award to Dick McNamara, who ran the submarine program at the Navy, many years ago, for reaching $1 billion of SBIR subcontracts on the submarine. So commercialization has changed. They all do it. They all do it very well. There are many success stories, and the idea that somebody is in this business to win a $1 million award, no. They are in this business to develop a technology that somebody will pay lots of money for, whether it is DoD or somebody else. Senator Shaheen. Thank you. Do you agree with Mr. Kavetsky that we should make the program permanent? Mr. Kavetsky. Oh definitely, yes. I believe the ROI on SBIR is pretty clear-cut, so I think the evidence speaks for itself. Senator Shaheen. And do you agree with that, Mr. Glover? Mr. Glover. Yes, indeed. Senator Shaheen. I thought you might. Mr. Chairman, I hope that this Committee can make the SBIR program permanent, because I think it would be good for innovation in the country. So thank you. Chairman Cardin. As I think Senator Shaheen is aware, we do have hopes of getting legislation that can accomplish that purpose during this Congress. Senator Coons. Senator Coons. Thank you, Chairman Cardin, and thank you to both our witnesses today. I am intimately familiar with the SBIR and STTR programs, and the Small Business Development Center in Delaware has done a great job over many years to help make sure that there are small businesses in Delaware, in our community, and our innovation ecosystem who are able to take advantage of the resources that this pries loose from otherwise very large research-oriented conglomerates. And it creates opportunity, opportunity for small businesses to innovate and opportunity for the agencies that this is essentially directed at to achieve their mission. So I see real value in making SBIR and STTR permanent programs. I was proud to contribute to the Support Strong Startup Businesses Act to the NDAA, and to introduce the RAMP for Innovators Act, which I hope we will consider again on the path toward reauthorization. Mr. Glover, if you would, what would be the outcome for businesses if we failed to reauthorize these programs? What would be the consequences, both for the agencies that rely on them and for the businesses that have participated? Mr. Glover. Well, there is very little that we have in American as an advantage over the rest of the world. SBIR is one of those things. Now it is being copied, but not doing it as well or as effectively as we have. You lose SBIR, you lose that innovation spur. Most of the companies that get SBIR funding would not have developed that technology otherwise, the studies have shown. So we would lose that. We would also lose a lot of job-creating potential. In my testimony I list all the success stories, and I list, in particular, a number of companies that have come out of the SBIR program and have grown and developed. Things not only like your cellphones, Qualcomm starting, but some Symantec and a whole bunch of other companies would not have gotten their start. Eleven of 15 top biotech companies would not have gotten their money. At critical stages in economic development the government needs to provide funds because the private sector will not. Half of venture capital now goes overseas. It is no longer just an American phenomenon. And SBIR, without that, you would lose thousands of companies, thousands of individuals who would never have a chance to see if their technology, their ideas could grow into new markets and new businesses. Senator Coons. Mr. Glover and Mr. Kavetsky, some criticize SBIRs and tend to try to characterize them as just sort of repeat funding by the Federal Government of businesses that never actually produce anything, that do not commercialize, that do not come to scale. What do you think are the biggest remaining barriers to helping those who are successful in winning SBIR-STTR contracts and then developing technology? What are the biggest barriers to actually getting integrated into larger systems, or getting acquired, or being able to scale, that we should be mindful of as we move toward reauthorization? Mr. Glover. As I understand the question--and there is a little echo here so I might not have gotten it exactly right-- -- Senator Coons. What are the barriers to commercialization? Mr. Glover. The commercialization is in areas one never expects it to be. Innovation drives new industries, new technologies that did not exist before, and they make things a lot better, and the SBIR program, by and large, goes into those areas. But it does provide one thing that is very important. The government needs research done. And when a company gets a 2nd or 3rd or 10th or 100th award, it is because the people reviewing it decided that was the very best proposal, the very best company to give them the research they need. Senator Coons. Mr. Kavetsky, did you want to contribute briefly, and then we will move on. Mr. Kavetsky. I have a very specific answer to that, that-- I do not know if it is DoD unique. I think perhaps it is--and that is we need to make sure that people in the defense contracting business understand the contracting flexibilities that have, under the SBIR program, to rapidly acquire products and further R&D work from these companies. Many of our defense contract shops are very wedded to what we call the FAR, the Federal Acquisition Regulation system---- Senator Coons. I am quite familiar with it. Mr. Kavetsky [continuing]. That would choke an elephant if you tried to eat it. And frequently they do not take advantage of the flexibilities afforded them under SBIR to more rapidly transition technology, which, from our standpoint, is imperative that the Defense Department be able to move nimbly in acquiring new technology. Senator Coons. Thank you for that input. Thank you, Mr. Chairman, for this hearing. I hope that we will proceed with reauthorization. Chairman Cardin. Thank you, Senator Coons. Senator Hirono? Senator Hirono. Thank you, Mr. Chairman. I always wonder why people who say that they support small businesses and yet criticize programs such as the SBIR and STTR programs, without which small businesses would not be able to compete for the billions of dollars in Federal money that the Federal Government lets out. And so I always wonder, you know, what the thinking is, but maybe there is not that much thinking going on. Okay. So when we meet with small businesses, particularly with women-owned small businesses, they always say that access to capital is one of the real barriers to them being able to get started. That is why I have been a very long-term supporter of both SBIR and STTR programs. You talked a little bit, both of you, about what would happen if these programs were not in place. And, in fact, there is a lot of innovation that comes out of the small business sector of our economy, not from the big corporations. Isn't that true, there is a lot of innovation that comes out of small, you know---- Mr. Glover. Absolutely. Years ago there was a study that showed two-thirds of major innovations come from small business. More recently, there is a study that says 20 percent of key innovations come from the SBIR program itself. Senator Hirono. And that is why, for a lot of us, it is very clear the import and importance of these programs. I do want to ask you a question, for both of you, about the SBA's Growth Accelerator Fund Competition, which has been an effective program when it comes to promoting startups, but especially those by women and minorities and those in underserved areas. Senator Booker and I recently introduced legislation to expand the program, called the SOAR Act, which would provide increased support for organizations that work with these businesses, and I am happy to report that Accelerate Hawaii, which is a growth accelerator in Honolulu, recently received an award through this program, and that President Biden has requested increased funding for fiscal year 2022, from $10 million compared to $2 million in fiscal year 2021. Can either or you, or both of you, discuss why growth accelerators are so important for businesses in the SBIR-STTR programs and the broader innovation ecosystems more generally? Mr. Kavetsky. Well, I think Mr. Glover mentioned earlier, these types of programs, these funding sources provide some critical capital in the development cycle, even before, sometimes, the venture firms get involved. We find that is absolutely critical. That actually also applies to even technology and research done in defense labs as well. We call it the ``valley of death,'' that we try to get these companies through, if you will. So I think programs such as you were mentioning, Senator, are absolutely critical for providing those kinds of resources. Mr. Glover. The growth accelerators, FAST, those operations--and I attached two of those to my testimony to sort of what local organizations can do to increase the SBIR program and make them do work better--is critical, absolutely. And there are many states. Hawaii has had some great SBIR firms through the years. But it needs some additional infrastructure to help it match and compete with companies coming from Silicon Valley; Austin, Texas; Boston. And those accelerators and FAST programs do provide that knowledge and training that helps them understand. If you are in Boston you walk down the street and ask somebody what to do. You cannot do that in most of the country. Senator Hirono. So, of course, you would support increasing the funding for these accelerator programs, and I am glad you mentioned that. It is not easy for the entrepreneurs and innovators in Hawaii. We are kind of removed from the venture capital community, and often they want to be right there. And so you need these programs to get these companies to the point where they could attract venture capital. Would you agree? Mr. Glover. Absolutely. Senator Hirono. I also wanted to ask you about the SBA's Federal and State Technology Partnership Program, the FAST program, which provides competitive grants that can be used to promote diversity in the SBIR-STTR programs. I am very committed to increasing the opportunities for women and for minority-owned enterprises to have access to these kinds of grants. And so the FAST program is a partnership with the states to really facilitate this kind of diversity. President Biden has requested a substantial increase for the FAST program next year--$10 million compared to $4 million for 2021. I take it you would support that kind of increase also. Mr. Glover. We strongly support FAST. It is a great program. There is a chance to succeed if you are just really good and do everything right, without any help. But boy, it sure helps to be able to meet with people, talk to people, have people who know what they are doing, to facilitate your learning curve. It makes it much quicker, much faster, and much better. Senator Hirono. Thank you. Thank you, Mr. Chairman. Chairman Cardin. We were joined by Senator Young via Webex. I just really wanted to acknowledge that he was present. He indicates he has no questions he wants to ask. I will recognize Senator Hawley. Senator Hawley. Thank you, Mr. Chairman. Good timing. Thank you for waiting for me. Thanks to the witnesses for being here. Mr. Glover, if I could just start with you. I have seen some reports depicting the distribution of the SBIR awards, and I noticed that some of these reports include heat maps that suggest that there is a relative concentration of awards that are allocated to the East and West Coasts and to larger metro areas that already have a lot of capital, I mean, just by the nature of what they are and who they are. By comparison, more rural states like mine, Missouri, have been granted relatively fewer awards, and that is true even when you adjust for the population differences. So my question is, what do you think accounts for this geographical discrepancy? Mr. Glover. As an individual from a small rural town of 1,400 people in Tennessee, I have had that fight and debate and discussion for a long time. And I entered into a debate at NYU some years ago in which they were saying that the Boston folks were saying there was no venture capital shortage in America. And I explained, I said, ``To the women in the audience, and to anybody outside the coast, it is a problem,'' and it certainly is. What we see, though, is that the SBIR program does about as well on science indicators, or maybe actually better in different science indicators like R&D, scientists, engineers, money going to universities--it does a little bit better than average in most states. Indiana has a very good system, and it works pretty well. We need to do more, and I think the FAST, the growth accelerator programs and others, one, should be increased, and two, should focus on underserved areas and populations. I was surprised and disappointed when I saw some limited FAST money going to California and Boston. Now, I understand it was going to rural areas that might be a little underserved, but quite frankly there are a lot of other states that are much more underserved. So we can do more there. It is a merit-based program, which is the beauty of it. If you do put a geographical requirement or a quota or a percentage, you would lose the merit-based, and that would make it have ripple effects in terms of getting people to accept the technology. Right now, when you win an SBIR and you go through a competitive round, your technology is vetted and reviewed in most cases, and people say this technology has at least a government seal of approval, so let's look at it. You take that away and it is just like anything else. The hardest thing to do is to convince somebody your technology has merit. Senator Hawley. Let me ask you--thanks for that answer--let me ask you about something that you wrote in your testimony. You said the SBIR program needs to do a better job of attracting high-quality, rural technology companies. So on a similar theme here, what tangible steps do you think the program can take to try to attract and recruit companies that fit that profile? Mr. Glover. You know, the universities are really helpful, but they are, again, more geographically focused. Like in Indiana you have got major universities doing good things and it is easy to build a company around university-driven technology. When you get away from that in the area, so that is when you get into--and SBA is doing a much better job than it used to, of online education, online training, so that a good, smart inventor, entrepreneur anywhere in America can win. And while we focus on the general area, we always want the best science to win but we want to make sure that the best scientist has an opportunity to compete and a fair chance. Senator Hawley. Mr. Kavetsky, do you have any thought on that? Mr. Kavetsky. Yes, I do. Relative to rural activity, I had a couple of thoughts. First, there are large businesses in all these rural areas. Frequently they are farming or agricultural businesses. If you talk to a farmer, and actually I happen to be married to the farmer's daughter so I have some experience in this arena, you find they have a whole host of problems that technology and programs like SBIR could help them with. And so I think part of it is really engaging with the major industries in any region and really understanding their problems, and bringing them then to the program that can actually help them. I am mainly a defense guy, but, you know, there is SBIR in agriculture and other arenas, and certainly I think that would be part of a specific thing. I have seen, as well, some states actually offer an SBIR match. They have seen the SBIR program is so good for them economically, you know, from an economic development standpoint, that the State actually matches an award from the Federal program with State dollars, which I would encourage rural states to consider as well. Senator Hawley. Very good. Thank you both for your testimony, and thank you for being here. Thank you, Mr. Chairman. Chairman Cardin. Thank you. I know that we were joined by Senator Rosen, and I understand that she did not have questions. I know Senator Markey has been with us. I am not sure he is ready now for questioning. Senator Hickenlooper is on his way, I have been told. So what I am going to do, I have a couple of questions I would like to ask. Mr. Kavetsky, in your recommendations you are suggesting that we increase the percentages that are allocated to both programs. I have been in the Congress when we have increased those numbers, and I know at times we have had different views from different stakeholders in regard to the changing of the percentage. I am just interested as to your assessment as to if the various stakeholders are prepared for us to increase the percentages of these two programs. Mr. Kavetsky. Yes. Thank you, Chairman Cardin. I think the short answer to that question is yes. Again, I work mainly in the defense sector, mainly with the Army and the Navy, and I know both of those program offices are ready to scale their program dramatically. They suffer, if you will, from many more proposals, good proposals, that they would like to fund that they cannot fund because they just do not have the resources to do that. I think that would engender additional competition, which is important to delivering quality products to our military, and also it would be an increased economic development engine across the country, if you will. Chairman Cardin. And a related question is that there are different eligibilities for agencies that are part of the SBIR and STTR programs. Do we have that right on the agencies that are included in those programs, obviously more on SBIR program because of the lower threshold than in the STTR program. Do we have that right? Mr. Glover. I pretty much think so. I think an SBIR program--and it is permissible for any agency to do an SBIR. And there have been some discussions about some of the agencies below the threshold, you know, could take advantage of using the program. And that may have been tried once or twice. But SBA can facilitate that if it is desirable. Chairman Cardin. So we will be looking at--we are looking at permanency, and I appreciate both of you strongly support that. At the same time, we would look at whether there are provisions that need to be updated or changed. And it seems like you are saying that increase the percentages should be under consideration but the eligibility of agencies that have to participate, you think it is pretty well--working fairly well, at the current dollar amounts? Mr. Glover. The real concern that I hear most often is the uncertainty that the program's life, and when we went through that with 14 continuing resolutions over a period of three years or so, the agencies stop-start, everybody cannot plan, cannot budget. It becomes a real serious problem not to have it continued, and that is why we would urge SBIR be continued as quickly as possible. Chairman Cardin. And Mr. Kavetsky gave us some specific recommendations. Mr. Glover, do you have other specific changes that you would like to see in the statute, other than permanency and perhaps considering increasing the percentage amounts? Mr. Glover. We have a variety of those. I will be happy to send you those. But yes, they are very similar to Bob's list of recommendations. Chairman Cardin. Good. That would be helpful if you have that information. I believe Senator Hickenlooper may be on the Webex? Senator Hickenlooper. I am here. Chairman Cardin. You are up. Senator Hickenlooper. Sorry about that. I was out racing around trying to, you know, get through wind and peril and other aspects of it. Give me one second here. All right. And part of this we heard as I was listening in, in transit, or my staff was. Colorado is a center of tech innovation. I think our State is home to over 30 Federal labs. How much further can we support STTR in bridging that gap between these labs and the smaller innovators? The innovators would be entrepreneurs, you know, putting that research into action. That is for both witnesses. Mr. Kavetsky. Yes, I would like to comment on that, Senator. We are actually working on just such a program with the Army Research Lab, and the Army Research Lab is the Army's corporate research institution, about 1,500 Ph.D.'s there. They have actually asked us to focus on finding those small businesses that should be collaborators with the Army Research Lab scientists and engineers, and that is a national effort. That is not just in the State of Maryland, where ARL is headquartered. Some of you may be aware that the Army Research Lab instituted a program called ``Open Campus'' about six years ago under Dr. Tom Russell, where they opened up branch campuses. They are all across the country. And part of the motivation for that was to tie into these innovation ecosystems across the whole nation and not just those geographically proximate to ARL headquarters in Maryland. So I think that is one example I would offer as a specific example of the type of work that, in this case, the Army Research Lab has an organization like us helping them with in terms of being kind of a tech scouter, tech hunter, and connecting small businesses to their researchers. Thank you. Senator Hickenlooper. All right. And then the second question, and the famous ``valley of death'' that, you know, stage between research and successful innovation. In other words, that period where you get up and going but then you find all the glitches. Beyond making the SBIR-STTR permanent, how do we, or should we require agency goals around R&D to go specifically to small businesses? How do you look at that? Mr. Glover. Interestingly enough, the SBIR law never expected to be the only program driving small business to the Federal R&D. They expected there to be goals, and there is a very specific requirement in the law that there be goals for small business, in general. We always expected there would be follow-on programs, once SBIR was proven to be so good that there would be other programs. That is a requirement. I think it is absolutely important. It is essential. With the most effective sector of the innovation economy, why shouldn't the government be spending more than maybe 6, 7, 8 percent with small business? The government ought to be spending a lot more. There definitely should be goals. I know that the Air Force is considering putting goals in place for small businesses, and I think the other agencies should do so as well. Senator Hickenlooper. Good. Well, we agree on that, and I think there are a lot of avenues that we can do to work on that. Another one of our priorities is ensuring equitable--you know, a level playing field for entrepreneurs who may come from socially disadvantaged background. Can you expand on how SBIR and STTR support diverse entrepreneurs and innovators? Mr. Kavetsky. If I could offer a specific example, Senator, that I touched on briefly in my comments, the Navy SBIR program actually is funding my organization to do exactly that. We have, over the last year, created a methodology. We call it ``City TechFire'' to give it a little bit of glitz. We have actually identified an initial set of 10 cities across the country, 10 regions, where our focus is really on reaching into underrepresented groups, if you will, of businesses, and even colleges, if you will. Because in many cases you find the entrepreneurs, you need to get to them when they are in college so that when they are coming out of college those that have an entrepreneurial bent have a forum and a pathway ahead for creating their own business. So again, the Navy program actually has us doing that as a focused effort, with the idea being we could expand that from our lessons learned from this initial set of 10 cities to cities all across the country, cities and regions all across the country. Senator Hickenlooper. Does that seem viable at this point? Mr. Kavetsky. Oh yes. I mean, what we are finding is there is a real appetite in each of these communities, not surprisingly. We are working with the P-TECH network which is, in some cases, an underutilized network. But we are really finding a real hunger for this. And as with any other program, you find some areas are hungrier than others, and those are the organizations we like to work with, where a local economic development group is really trying to do what we like to call technology-based economic development. And we focus in on working with those organizations. But we are having some initial success, especially in places like El Paso, as one specific example where we are getting some really good traction. Chairman Cardin. If we can I want to go to Senator Markey and allow him to ask the questions so I do not have to go into recess, because of a vote that is pending, with Senator Hickenlooper's cooperation, if you have completed your questioning. Senator Hickenlooper. Yes, absolutely. Chairman Cardin. Senator Markey. Senator Markey. Thank you, Mr. Chairman, very much, and thanks to our witnesses from Maryland who have joined us today. Maryland and Massachusetts are not that dissimilar in terms of the overall makeup of our economy. And there is no question that SBIR and STTR programs have played a crucial ingredient in the economic vibrancy of Massachusetts, like Maryland itself. So far, 24,000 SBIR and STTR grants have been given to Massachusetts companies, which is an astounding number, 24,000. And just in 2020, we had 718 Massachusetts companies receiving over $400 million worth of investment. And it works. It has created hundreds of thousands of jobs, ultimately, in Massachusetts. And they are smaller companies, innovative companies. And I know, Mr. Kavetsky, that you support making SBIR and STTR programs permanent. I do as well. Why don't I just give you a minute to make the case for why these programs should be permanent. How long, oh Lord, do we have to go while recognizing the absolutely indispensability that these programs play in the economic growth of our country. Mr. Kavetsky. Yes. Thank you for that question. I will give you a very specific example of why the permanency is absolutely critical, and that has to do with the time it takes for the Defense Department to implement what we call a program of record, whether it is a weapon or a ship or whatever platform we are developing. And those program executive offices, we call them, they need to know that the SBIR program is going to be there. And people like Dick McNamara, many years ago, as Mr. Glover noted, used SBIR to really disrupt the base for submarine technology companies, and used SBIR as the fulcrum to do that. If he did not know that SBIR was going to be around for five or six or eight years during the development cycle of that submarine, he would not have stuck his neck out as he did, as the PM, to make that happen. So I think there is a very pragmatic reason, at least in the world of defense, that we need this program to be permanent, so if a PEO does want to stick their neck out and look at adopting emerging technology they know SBIR is going to be there to provide that critical funding to mature the technology to the point where the program can adopt it. Senator Markey. Thank you, and I think you put your finger right on it. We need predictability. Companies, private sector companies, they need predictability. And over to you, Mr. Glover. Can you give us an example of an agency, a Federal agency, that takes the SBIR program and simplifies it, streamlines it in a way that you believe is absolutely a model for how the program should be operating across the whole country, because so many different Federal agencies participate. But can you give us a good example of one that does it, in your mind, at the top of the level of excellence? Mr. Glover. I really cannot give you a model agency that has simplified it. Congress passed a law a couple of years ago that said the agencies should standardize, simplify, and expedite the contracting process. There has been some improvement in that area, but we still do not have that compressed. The shocking GAO study said it was taking 300 days between Phase I and Phase II to get contracts. That ought to be automatic. You ought to have a simple contract, you go to Phase I. Some grant agencies send you the grant when they tell you you have their word. Why can't contracting the agencies do exactly the same thing? The same for Phase II and Phase III. What we do know about GSA, when they started writing Phase III contracts they cut that down to 90 days, that had been well over a year, and almost impossible in some cases, ever. They get it down to a year and they are doing a very good job of it. And I want to reiterate that over 40 percent of their awards are going to women-owned business. That process is not discriminating against women, because they are doing very well under the program. Senator Markey. And how about minorities? Mr. Glover. Minorities are doing okay, but the women is what was really shocking, how much better they were doing. But minorities are doing better than the regular. Senator Markey. Well, let's hope that a year from today we can say how shocking it is how well minorities are doing, as well as women. That should, in my opinion, be the objective which we seek to achieve. So thank you both for your great testimony today, and back to you, Mr. Chairman. Chairman Cardin. Thank you, Senator Markey, and I want to thank both of our witnesses not only for their testimony but for what you have done in regard to these programs. This testimony will be very helpful to us as we look at legislation in regard to both programs. With that the Small Business and Entrepreneurship Committee will stand adjourned. [Whereupon, at 3:23 p.m., the Committee was adjourned.] APPENDIX MATERIAL SUBMITTED [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] [all]