[Senate Hearing 119-20] [From the U.S. Government Publishing Office] S. Hrg. 119-20 GOLDEN AGE OF INNOVATION: REFORMING SBIR-STTR FOR THE 21ST CENTURY ======================================================================= HEARING BEFORE THE COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP OF THE UNITED STATES SENATE ONE HUNDRED NINETEENTH CONGRESS FIRST SESSION __________ MARCH 5, 2025 __________ Printed for the use of 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 59-574 WASHINGTON : 2025 ----------------------------------------------------------------------------------- COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP ONE HUNDRED NINETEENTH CONGRESS ---------- JONI ERNST, Iowa, Chair EDWARD J. MARKEY, Massachusetts, Ranking Member JAMES E. RISCH, Idaho MARIA CANTWELL, Washington RAND PAUL, Kentucky JEANNE SHAHEEN, New Hampshire TIM SCOTT, South Carolina CORY A. BOOKER, New Jersey TODD YOUNG, Indiana CHRISTOPHER A. COONS, Delaware JOSH HAWLEY, Missouri MAZIE K. HIRONO, Hawaii TED BUDD, North Carolina JACKY ROSEN, Nevada JOHN R. CURTIS, Utah JOHN W. HICKENLOOPER, Colorado JAMES C. JUSTICE, West Virginia ADAM B. SCHIFF, California JOHN HUSTED, Ohio Meredith West, Republican Staff Director Sean Moore, Democratic Staff Director C O N T E N T S ---------- Witness Prepared Statements Page Mr. Austin Strawhacker, Associate State Director, America's Small Business Development Center Iowa, Ames, IA..................... 8 Dr. Ken Mahmud, Executive Vice President, Triton Systems, Chelmsford, MA................................................. 15 Mr. Caleb Carr, Chief Executive Officer, Vita Inclinata Technologies, Broomfield, CO................................... 23 Mr. David Rothzeid, Principal of Investments, Shield Capital, Washington, D.C................................................ 31 Additional Letters/Statements for the Record Alliance for Commerical Technology in Government-Letter dated March 7, 2025.................................................. 54 Iowa Economic Development Authority-Letter dated March 5, 2025... 56 MassBio-Letter dated March 5, 2025............................... 57 MassMEDIC-Letter dated March 5, 2025............................. 61 New England Innovation Alliance-Statement dated March 5, 2025.... 63 Open Source Investigation into Triton Systems Connections to China.......................................................... 70 Small Business Technology Council-Letter dated March 5, 2025..... 85 Software in Defense Coalition-Letter dated March 4, 2025......... 86 The Technology Association of Iowa-Statement..................... 89 Triton Systems Inc.-Memo dated March 19, 2025.................... 90 Triton Systems Inc.-Chair Ernst Additional Statement............. 94 Questions for the Record Dr. Ken Mahmud Responses to questions submitted by Senators Cantwell and Hirono..................................................... 97 Mr. David Rothzeid Responses to questions submitted by Senator Cantwell......... 105 Mr. Austin Strawhacker Responses to questions submitted by Senator Hirono........... 108 GOLDEN AGE OF AMERICAN INNOVATION:. REFORMING SBIR-STTR FOR THE 21ST CENTURY ---------- Wednesday, March 5, 2025 United States Senate, Committee on Small Business and Entrepreneurship, Washington, DC. The committee met, pursuant to notice, at 2:34 p.m., in Room 428A, Russell Senate Office Building, Hon. Joni Ernst, chairwoman of the committee, presiding. Present: Senators Ernst [presiding], Young, Hawley, Budd, Husted, Markey, Shaheen, and Rosen. OPENING STATEMENT OF SENATOR ERNST Chair. Thank you everyone, and I call the Committee on Small Business and Entrepreneurship to order. With its authorization expiring at the end of this fiscal year, today we turn our attention to the Small Business Innovation Research and Small Business Technology Transfer programs, or SBIR/STTR. This program has effectively partnered federal agencies with private sector entrepreneurs to scale research and development projects aimed at addressing the pressing challenges of the day. While we've seen a measure of success over the years through the committee's oversight efforts, agency studies and GAO reports, it is clear SBIR is in need of additional reforms to safeguard taxpayer funds and enable this program to meet its full potential. Despite the funding spanning 11 agencies and countless critical technology areas, SBIR has demonstrated an incredible potential to revitalize our small business industrial base and preserve America's technological leadership. The cutting-edge technologies being generated are already serving to enhance competition, improve supply chains, and increase overall readiness. For these reasons, I am excited to announce that today I'm introducing the Investing in National Next Generation Opportunities for Venture Acceleration and Technological Excellence or INNOVATE Act--we have to come up with these fancy names, okay--the INNOVATE Act, a bill to reauthorize and comprehensively reform the SBIR/STTR program. My legislation streamlines and simplifies existing processes, directs the funding toward projects based on merit, channels funding to help accelerate the most promising projects towards final stage commercialization, protects against waste and abuse, and introduces enhanced protections and accountability tools to prevent these new technologies from getting into the hands of our foreign adversaries. First, the INNOVATE Act reforms Phase I to provide new applicants with a simplified two-page proposal process with smaller, one-time awards, so that more innovators throughout the country can have access to this program, even if they can't hire professional grant writers. My bill also eliminates DEI preferences. These measures enable agencies to scout the best proposals based on substance from across the country. I am committed to ensuring open competition for innovators with traditionally lower engagement in the program. Second, my bill addresses the practice of SBIR Mills, where firms benefiting from their beltway connections and grant writing expertise have been able to collect an outsized portion of the funding, with fewer results to show for it. This problem was verified by both the GAO, the Government Accountability Office, and the DOD's Defense Industrial Board, which reported that the firms that got the most awards were less productive in terms of commercialization, investments, and patents than those who got fewer awards. To prevent the use of Phase I or II funding as a permanent source of revenue, my bill imposes a $75 million lifetime cap. It forces small businesses with dozens of awards to demonstrate commercial traction or follow on contracts with non SBIR dollars. Third, my bill empowers DOD to repurpose, underutilized and overly regulated STTR Phase II funding, to more efficiently scale the most promising technologies for long-term contracts for deployment through strategic breakthrough awards. For these awards of up to $30 million, the bill limits eligibility to small businesses making clear progress towards commercialization, and with an identified DOD end user. It also requires 100 percent matching funds to ensure that firms have skin in the game, and aren't just in it for corporate welfare. These reforms will enable more flexible use of SBIR funding to help bridge the valley of death for the companies on the verge of success. Finally, my bill builds on my longstanding work to safeguard these new SBIR technologies from being stolen by our adversaries. For years, China and other state actors have stolen intellectual property and proprietary secrets from American businesses and universities. That is why I championed the Foreign Ties Due Diligence Program Reforms in the 2022 reauthorization. But we have found that more needs to be done. That's why my INNOVATE Act introduces a new definition of foreign risk, to create a stronger risk assessment baseline standard, that must be applied consistently across all agencies. It implements a clear list of ties to foreign countries of concern, that disqualify an applicant. And it empowers agencies with clear clawback authority if a small business exposes SBIR funded products to adversarial influence post award. By targeting SBIR funds to the very best innovators in the country, by cutting off the unserious applicants who are just after corporate welfare, by providing a boost to the best companies who need it to get over the final hurdles and by better protecting our taxpayer funded innovations from going directly to China, the SBIR/STTR program can expedite new technologies, increase economic opportunity, and attract investment back into our towns and cities, and help to usher in a new golden age of innovation for America. I look forward to working with my colleagues to get this across the finish line. It's up to us, the members of this committee, to work together to optimize this important program. I'd like to thank the witnesses for being here today and being willing to share their experience and expertise with us. I now recognize Ranking Member Markey for his opening statement. STATEMENT OF SENATOR MARKEY Senator Markey. Thank you, Madam Chair. And today's hearing centers on American innovation and the small businesses that lead the way every day of the year. For decades, the Small Business Innovation Research Program, or SBIR, and the Small Business Technology Transfer Program, or STTR, have played an essential role in driving our country's innovation. And I'm extremely proud that Massachusetts small businesses have played such a prominent role. The Commonwealth is the second highest recipient of total awards in the country, receiving more than 24,000 SBIR awards, totaling $8.3 billion, and 2,000 STTR awards totaling over $720 million. This success is due to the Massachusetts business plan: attract the best and the brightest, provide a world class education, and provide opportunities for small businesses to compete on a level playing field, while having the best educated and the best trained workforce in the country. We start in the fourth grade, we're number one in the fourth, eighth, and 10th grade in America in math and verbal. It's a business plan; it provides that workforce. This has led to the development of America's high-tech highway, Route 128, which extends outside of Boston and into the surrounding area, akin to Silicon Valley in California, or the research triangle in North Carolina. SBIR was codified in 1982, and STTR 10 years later, both on a bipartisan basis. During this time, Congress was keenly aware that the federal research and development needs of the country were not being met. SBIR and STTR were designed to use America's small businesses to drive innovation. These highly competitive programs have contributed to the golden age of innovation in our country. We have experienced that over the last 40 years. Without these programs, Americans would not have novel technologies at their fingertips as they do today. For example, the very popular LASIK eye surgery, was developed in part due to an SBIR funding. SBIR also funded earlier Qualcomm wireless communications systems. I'm proud of the SBIR and STTR advancements that have come from Massachusetts. Just as Iowa is rich in nutrient filled soil makes it the premier producer of corn, it is Massachusetts technology ecosystem that provides a fertile ground for innovation in the technology sector, which is why we're not just the Bay State, we're also the brain state. For example, Massachusetts small businesses have received more than 70 awards for projects related to the treatment of Alzheimer's disease, the brain, and it's approaching it for many different avenues. Today we'll hear from Triton Systems, a company from the Commonwealth, that used an SBIR award to help create the world's smallest heart pump, which is now universally used in hospitals because of an SBIR grant. Without SBIR and STTR funding, many of these products may have never seen the light of day. These programs are highly efficient and pay dividends for the American people. The return on investment for every dollar the government spends on these programs is anywhere from $20 to $30. SBIR and STTR awards from the Department of Defense alone creates over 65,000 new jobs every year. The SBIR and STTR programs work because they prioritize merit and competition- Darwinian paranoia inducing competition--that's the hallmark of STTR and SBIR. That's what it's all about-Darwinian competition; the best ideas prevail. We should not place limits on the number of awards or the amount of funding that goes to deserving small businesses. We should not put a limit on the best ideas or the best technologies. That's what we're going to need to compete against China. We would never limit the number of contracts that a large defense contractor receives from the Federal Government. So why would we consider limiting our most nimble allies in innovation-our small businesses? We don't tell Raytheon or Lockheed Martin, ``You've had enough Federal contracts; we're going to start with a smaller firm.'' We don't do that. We go to where the best ideas are. While SBIR and STTR have enjoyed bipartisan support for several decades, we have not yet been able to make them permanent. They're currently set to expire at the end of September. I've worked throughout my time in Congress to make improvements to the programs and ensure that their authorization never lapses. It's critical that we do so again, and I'm looking forward to working with you, Chair Ernst, on this issue, and I want to thank all of our witnesses for your help in us understanding this issue today. Chair. Great. Thank you, Ranking member Markey. And again, I want to extend a warm welcome to all of our witnesses today, and I will now introduce the three witnesses who are testifying today on behalf of the majority. I am thankful that all of you took time out of your busy schedules to join us in front of the committee and share your expertise and insight into the SBIR and STTR programs with this committee. First is Mr. Austin Strawhacker, who is the Associate State Director at America's SBDC in Iowa, at Iowa State University in Ames, Iowa. The Iowa SBDC operates 15 centers across the state, providing expert business counseling to entrepreneurs and small business owners. Mr. Strawhacker oversees the Iowa's SBDC's Technology and Commercialization team, which supports innovative entrepreneurs in leveraging federal and state resources in all 99 counties. He also chairs the Association of Small Business Development Centers Research and Data Committee, and serves on the Iowa Rural Development Council. Mr. Strawhacker also holds bachelor's degrees from Grandview University and a Master of Public Administration from Drake University, both in Des Moines, Iowa. So, Austin, thank you very much for being here today. Next, Mr. Caleb Carr is the CEO of Vita Inclinata, an aerospace and industrial company headquartered in Broomfield, Colorado. Vita Inclinata received six SBIR awards totaling just over $4 million that were crucial to the company's success. Mr. Carr serves as a board member for the Software and Defense Coalition, and is a professor of entrepreneurship at the University of Colorado. He graduated with a bachelor's degree from the University of Colorado at Denver and holds a Juris Doctor from Mitchell Hamline School of Law. Our third witness, Mr. David Rothzeid, is a Principal at Shield Capital, a venture capital firm focusing on investing in early-stage companies, developing technologies critical for national security. He served for eight years as an acquisition officer in the United States Air Force. Thank you very much for your service to our country, including a deployment with Special Operations Command in Afghanistan. He subsequently worked at the Defense Innovation Unit, ending his time there as Director of Acquisition Pathways. Mr. Rothzeid has a bachelor's degree from Miami University, and an MBA from the University of Colorado, Colorado Springs. Thank you again. And I now recognize Ranking Member Markey to introduce his witness. Senator Markey. Thank you, Madam Chair. The minority witness today is Dr. Ken Mahmud, who is the executive Vice President of Triton Systems, which is a business at the cutting edge of innovation. Triton Systems is a multi-award winning SBIR and STTR company and was awarded the Small Business Administration's TIBBETTS Award in 2016 for its success in the SBIR program. Dr. Mahmud has more than 35 years of experience in research and development, including managing Triton's participation in the SBIR and STTR programs. And we welcome you, Doctor, to the panel today. Thank you, Madam Chair. Chair. Thank you, Ranking Member. And briefly, I'd like to take a moment to explain our lighting set system to the witnesses. There are three lights in front of you; green means go, yellow means you are running out of time, and red means to go ahead and wrap up those remarks. So, I ask unanimous consent that the witness's full statements be included in the record. Without objection, so ordered. As your written testimony has been made part of the record, the committee asks that you limit your oral remarks to five minutes. And with that Mr. Strawhacker, you are recognized for five minutes for your testimony. STATEMENT OF MR. AUSTIN STRAWHACKER, ASSOCIATE STATE DIRECTOR, AMERICA'S SMALL BUSINESS DEVELOPMENT CENTER IOWA, AMES, IOWA Mr. Strawhacker. Chair Ernst, Ranking Member Markey, and distinguished members of the committee, thank you for the opportunity to testify on the reauthorization of the Small Business Innovation Research and Small Business Technology Transfer Programs. As the Associate State Director of America's SBDC Iowa, I provide oversight to our technology and commercialization center, which provides guidance to innovators, often including the exploration of SBIR and STTR funding. I'm proud to work for an organization that is vital to the success of so many small businesses. The Iowa SBDC fosters innovation, strengthens local economies, and drives small business success. We engage with approximately 5,000 clients annually, that in 2024 alone launched 225 new businesses, created 101,795 new jobs--I wish it was the bigger number, generated $174 million in sales and secured $57 million in new capital. This yields an ROI of 3.7 on all of our funding sources. Hosted by Iowa State University, the Iowa SBDC collaborates with various partners to provide tailored services that support businesses in both urban and rural areas. Our regional centers act as a pipeline to lead technology driven businesses to our technology and commercialization center for assistance with SBIR/STTR proposal development, intellectual property, and commercialization assistance. Today I would like to focus on three main points: the importance of the SBIR/STTR programs, the importance of localized support, and outline a couple of challenges and opportunities. For over 40 years, SBIR and STTR have ensured that small businesses play a significant role in the federal research and development. These programs help develop groundbreaking technologies, create high quality jobs, and enhance our global competitiveness. In Iowa SBIR and STTR fundings help bridge the gap between research and market deployment, particularly in key sectors like advanced manufacturing, agricultural technology, and biosciences. These programs also attract follow on investment, drive job creation, and expand local supply chains. In fact, over 50 percent of successful SBIR and STTR applications that we have assisted with, have leveraged their awards to generate additional funding that has more than doubled the overall investment in these companies. Rural entrepreneurs in particular exemplify the grit and innovation that define American small businesses. Despite facing challenges such as limited access to capital, workforce shortages and geographic barriers, they drive technological advancement and local economic growth. SBIR and STTR often provide the critical support needed for these entrepreneurs to take risk, push innovation, and continue to contribute to the national competitiveness. The success of small businesses, particularly in rural communities, depends on access to localized support. A prime example in Iowa is Senator Ernst Entrepreneur Expo, an annual collaboration between the Senator, the Iowa SBDC, and Iowa State University Center for Industrial Research and Service. This event connects small businesses with industry experts, government resources, and potential investors, fostering collaboration and showcasing innovation. Additionally, we have established the Great Plains SBIR working group with our partners in Kansas, Nebraska, and Oklahoma. This group meets monthly to share best practices, develop solutions and strengthen the regional support network. While SBIR and STTR have been highly effective, there are opportunities to enhance their impact. Streamlining the application process and introducing a smaller Phase I award could lower barriers for first time applicants, particularly in rural areas. This would allow early-stage research to explore commercialization potential before full feasibility and commercialization work begins. Many companies also receive very little feedback on their Phase I proposals if they're declined. Often the reason for declaration is something that SBDC could help with proactively if more guidance was provided. Increasing transparency and structured feedback would help applicants refine proposals and improve success rates. There should be recognition that innovation exists everywhere across our nation, yet just five states receive 46 percent of SBIR/STTR awards and dollars according to public data on sbir.gov. Addressing this disparity through targeted outreach, regional training, and improved evaluation transparency, could ensure fair access to funding no matter the geographic location of the business. In conclusion, SBIR and STTR awards have driven innovation, strengthened local economies, and created high quality jobs in America for over four decades. By leveraging SBDC's support, small businesses can access commercialization experts, funding strategies and technical assistance to maximize program benefits. Continued collaboration among federal agencies, local resource providers and entrepreneurs will be essential in maintaining the United States leadership and innovation. I thank you for your time and consideration today, and I welcome any questions. [The prepared statement of Mr. Strawhacker follows.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chair. Thank you very much, Mr. Strawhacker, and we will go next to Mr. Mahmud, and you are recognized for five minutes for your testimony. STATEMENT OF DR. KEN MAHMUD, EXECUTIVE VICE PRESIDENT, TRITON SYSTEMS, CHELMSFORD, MASSACHUSETTS Dr. Mahmud. Good afternoon, Honorable Chair Ernst, Ranking Member Markey, and all other members of the Senate Small Business Committee. Thank you for the opportunity to speak at today's hearing. I'm pleased to share my insights into how Triton has supported SBIR's successful track record of both advancing national security and the economy. I'd like to share a few examples with the committee, mainly to show the different paths to commercialization and the benefits to both the war fighter and the United States as a whole. First, a few words about myself. I received my Master's and Ph.D from RPI in upstate New York, in chemical engineering. I have been in leadership roles as Senator Markey mentioned in U.S. industry for over 35 years. I'm an inventor with over 30 patents, and I received the Tibbetts award from the SBA on behalf of Triton for commercial success and commercializing SBIR derived technologies. Triton is a hundred percent U.S. owned company with significant employee ownership. Most of our technical staff have security clearances and carry an incredible passion for helping the country and the war fighter, as you will see. Let me show you some examples of the impact on national security and the economy as a whole. We supply a critical component to the F-35 aircraft, which is the largest DOD platform ever. It is expected to save the Air Force over $550 million in sustainment costs. We supply another critical component to the F-22 aircraft, which will enable another $200 million in sustainment cost savings for the Air Force. We have set up a venture in the state of Washington to manufacture long range aerial mobility systems, to support a Navy program of record. To do this, we are setting up an entire Berry compliant U.S. supply chain, bringing back capability that had moved overseas. This involves companies across the country, primarily starting with North Carolina, but also companies in Tennessee, Massachusetts, Rhode Island, Pennsylvania, and of course final manufacturing in the state of Washington. Our hearing protection product is being qualified for Army helicopter air crew. I do want to point out here that hearing loss and tinnitus is two of the biggest health issues affecting our veterans. With over a million veterans affected, it is estimated that the VA provides over a billion dollars in disability benefits related to these conditions. Our bladder relief product for aviators is being qualified for navy combat missions, and Air Force recon missions. Our SBIR derived sensor technology enabled the world's smallest heart pump for use in cardiac failure intervention. I do want to mention here that heart disease is the number one cause of death for Americans today. We are also investing in the first large area metallic 3D printing capability in the country, with internal funding. This will be a new capability for the United States, allowing for the manufacturer of 3D printed large metallic parts for aircraft, missiles and other DOD platforms. I would like to finish by offering some suggestions to the committee for improving the SBIR program based on our experience with it. The SBIR program is one of the most successful technology programs in the federal government, as indicated by all National Academy of Science Studies and multiple agency studies. We believe this is because of the merit-based nature of the program, the competition, the ruthless competition that it fosters, and the flexibility, and this is very important, the flexibility given to the agencies to adapt it to their needs. Our suggestions to the committee include: number one, provide meaningful incentives for transition to Phase III for DOD platforms in particular. I will just add on a personal note, that you know, for a small business when most of the platforms are owned by the prime contractors, it is incredibly hard for a small business which is focused on a sub component or a component to de-risk it, mature it, qualify it, and integrate it. It requires a tremendous amount of cooperation with the primes. And I do want to add here that, small businesses like ours, who have developed a rare expertise in working with academia to reduce ideas to practice and working with primes, to then take them to a platform and transition it to a program of record, offer a unique skillset in our innovation ecosystem. Number two, streamline the contracting process. I believe this is a request that all of the witnesses will make, streamline the contracting process by mandating standard contracts. Number three, adequately resource the agencies to implement the foreign risk management provisions. And number four, reauthorize permanently, or at least for a longer term so that small businesses and agencies have some certainty in their business planning. I wish to end by thanking the members of the committee for your continuing support for the program, and for the opportunity for me to speak to you today. [The prepared statement of Dr. Mahmud follows.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chair. Thank you very much, Mr. Mahmud. I appreciate that. We'll move next to Mr. Carr. You're recognized for five minutes of testimony. STATEMENT OF MR. CALEB CARR, CHIEF EXECUTIVE OFFICER, VITA INCLINATA TECHNOLOGIES, BROOMFIELD, COLORADO Mr. Carr. Chairwoman Ernst, Ranking Member Markey, and members of the committee. Thank you for having me today. I founded my company following the death of a friend of mine. While we were on a search and rescue exercise in the mountains, he experienced active cardiac arrest and we called the rescue helicopter to come and rescue him. The helicopter proceeded to lower a rescue basket down to us, but due to the winds of the helicopter, the rescue basket kept swinging, and because of it, we couldn't get it through the trees above. As a result, we called off the mission and called time of death. Several years later, my business partner and I founded what would be known today as Vita, a company focused on designing technology that would eliminate the swing and sway of suspended loads on rescue helicopters and save lives. Preventing the reality that happened to my friend over a decade ago and drastically improving upon the current solution that our war fighters and rescue personnel use today, a rope. We started in a cold garage in Denver, Colorado, working tirelessly to find a solution to the problem. Investors would turn us down, left, and right due to the lack of market knowledge on the issue and more importantly, the amount of complexity that designing a solution and selling said solution to the U.S. government would entail. It wasn't until something else took a risk on us in late 2018-the SBIR program, specifically the open topic AFWERX SBIR program. The SBIR program took a risk on us, our three-page white paper, and our idea. And in doing so, it empowered us to quit our jobs, hire a team, and design a solution that we now call the Vita Rescue System. Subsequently, the company went on to secure two Phase II contracts and eventually a Phase III transition, $50 million IDIQ to the U.S. Army, which we anticipate putting into motion later this year. Meanwhile, that system is now deployed to the battlefields of Ukraine, CALFIRE's fire attack helicopters that were used recently during the Palisades in Eaton fires, multiple Army National Guard units, including South Carolina and across the entire Air National Guard. Yet that was just the beginning. Thanks to that investment by the SBIR program, Vida expanded into providing the essential gear that crews need to fight the mission, such as harnesses and rescue bags, to the point whereby just two weeks ago, we received the following message from a son. ``I just wanted to thank you for making such a great product. My father was in a horrific helicopter accident and his best friend died on impact. He was in the backseat and had your harness on, and despite the helicopter being destroyed, he actually walked away from the incident with only bumps and bruises''. It's this type of mission, this type of capability, these products, would not be here today without the support of the SBIR program. You are going to hear a lot today about what the SBIR program is and is not. But I come to you as someone who used the SBIR program for what it was meant to do-transition real life solutions into the hands of the people that need it most. What I can tell you is the SBIR program should not be a welfare program to award 50 plus contracts to the same party. The SBIR program is an investment program, an investment in ideas to facilitate solutions that take what was a rope for decades, and make it into a technology solution. An investment to empower Americans and frankly, the market to validate scale and deploy new capabilities that never thought about until today. The SBIR program is a mission-focused initiative, that advances the objectives of the agencies it supports, providing structure and funding to enable companies to directly address these missions head on, whether for organizations like CALFIRE or the South Carolina Army National Guard. I wonder, would those crews have this capability today if the capability remained in the R&D environment. Yet at the end of the day, the SBIR program is the bedrock of transitioning the future into reality. Therefore, as you consider how to improve the SBIR program during the upcoming reauthorization, I encourage you to support the following. One, dedicated funding mechanisms for companies that can demonstrate, private sector demand for commercialized technology and government demand for innovative solutions. As we must provide the tools to transition and transition quickly. Two, the use of firm fixed price contracts for SBIR's default contracting vehicle, reducing the bureaucratic overhead, and allowing the SBIR program to take the small risk on people like me, and empower us to do something great. And three, limits on SBIR awards for those repeat offenders, specifically companies that continue to receive SBIR awards without commercializing a viable product from the vast majority of their SBIR awards, directly to the end user, not to a prime to an end user. In doing so, you'll prevent the SBIR program from becoming a welfare program, and keep it focused on being an investment vehicle to allow entrepreneurs like me to ideate, innovate, and create the critical solutions that don't just sit on the shelf for someone to talk about one day, but instead are used in reality, executing the mission that it was designed to complete. Thank you for your time today, and I look forward to your questions. [The prepared statement of Mr. Carr follows.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chair. Thank you very much, Mr. Carr. And now I recognize Mr. Rothzeid for five minutes of testimony. STATEMENT OF MR. DAVID ROTHZEID, PRINCIPAL OF INVESTMENTS, SHIELD CAPITAL, WASHINGTON, D.C. Mr. Rothzeid. Thank you, Chair Ernst, Ranking Member Markey, the members of the committee, Senator Rosen, thank you for the opportunity to testify. I'm an investor at Shield Capital, where I work with over 40 early-stage startups, building technology at the intersection of national security and commercial applications, colloquially known as dual use technology. Before this, I spent over a dozen years on active duty as an Air Force acquisition officer, including at Defense Innovation Unit, where I helped pioneer a new model for working with venture-backed startups. The reality is that America's technological edge is eroding. While we maintain clear dominance in Iraq and Afghanistan, we face a very different challenge in the People's Republic of China, yet our defense and commercial technology ecosystems continue to operate in parallel universes. If we are going to win the global power competition, then we must leverage America's private capital markets backing the most innovative ideas. Private capital is critical to accelerating the development of next generation defense tech. Venture capitalists bring funding, expertise, and a culture of iteration needed to develop cutting edge capabilities. Venture-backed startups thrive on rapid R&D, allowing them to develop, test, and scale disruptive technologies efficiently. In recent years, the investment in defense tech has surged, growing from 8 billion in 2016 to 42 billion just last year, seven x increase. And this trend, it's driven by geopolitical instability and emphasis on streamlined processes from organizations like DIU and AFWERX, and a growing recognition of private capitals value in national security. The SBIR and STTR programs were created as America's seed capital for innovation, avenues for non-dilutive funding, which have contributed to major technological breakthroughs developed by venture-backed companies. These program, SBIR or STTR should be reauthorized, but with vital improvements. I outlined a number of policy solutions in my written testimony, including addressing an obstacle course that favors entrenched companies so-called SBIR Mills. A naval postgraduate school study found that of nearly 5,000 SBIR companies, the top 25 alone secure 18 percent of all DOD Phase I And Phase II funding. That's over 2.3 billion between 2012 and 2021. Many of these firms focus on securing grants rather than fielding operational capabilities. Meanwhile, true high growth startups like the one here on my right, the ones building the technology of the future, organized to scale, employing thousands, and attracting billions of private capitals, are often locked out. We must ask, shouldn't America's government backed seed capital be an entrepreneur's first step and not a bureaucratic bottleneck? Even when startups win SBIR awards, too few transition to Phase III procurement contracts. That same MPS study found that only 16 percent of SBIR companies transition beyond Phase II, the rest remain stuck in perpetual R&D. Programs like TACFI and STRATFI in the Air Force and Space Force and Catalyst in the Army provide a model for bridging this gap. As a former acquisition officer, it is these types of programs that would incentivize a federal government program office to engage with SBIR companies rather than ignore them to the purview of government labs. Without these transition pathways, startups struggle to gain meaningful traction and investors hesitate to back them. At Shield Capital, we have four startups that have successfully transitioned from a SBIR Phase II to winning a STRATFI contract, enabling them to integrate into emerging programs of record. We expect these startups will likely graduate from the SBIR program, creating an onramp to scalable operational technology. This is the paradigm we need to solve for. VC financing on a grand scale-it is small but mighty force. Just like SBIR within federal R&D, by working together, we ensure that SBIR will be a true launchpad. Venture-Backed startups will gain a real onramp into government markets, and both private capital and federal investment can work together to co-fund the technologies our war fighters need. R&D-it's a bipartisan issue that impacts the workforce and economy of every state in America. Chair Ernst, Ranking Member Markey, your states represent two critical sectors of American innovation. Iowa's ag tech drives food security, while Massachusetts biotech sector pioneers' life-saving advancements. Neither thrives without investment, scale, and clear pathways to impact. In conclusion, I want to thank all the members of the Senate Small Business Committee. Now is the time to modernize SBIR as a bridge between government needs and America's private capital system. The golden age of American innovation will not be won by government funding alone, it will be secured by unlocking the full potential of America's arsenal, leveraging our free market system, ensuring economic prosperity, and national security resiliency. I look forward to being a resource and answering your questions. Thank you. [The prepared statement of Mr. Rothzeid follows.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] Chair. Great. Thank you, Mr. Rothzeid. And now I recognize myself for five minutes of questions. We'll move into questions. So, we'll start with you. Mr. Strawhacker, thank you for your amazing work and support of small businesses in Iowa. I am very familiar with what you do, and thank you for it. I believe it's in our national interest to scale the best technologies with strong potential to solve America's challenges no matter where they are located. What bureaucratic obstacles exist for small businesses who are new to SBIR and what reforms should Congress consider? Mr. Strawhacker. Thank you, Chair Ernst, for that question. As I mentioned in my testimony, local support is critical for early-stage development, particularly when it comes to learning about what these programs can and cannot do for companies. The expo that we jointly host in the state has done tremendous work in educating people about these resources, but it has also brought federal agency representatives to our state to have firsthand conversations with those business owners. That's where I believe the most work occurs. When someone can sit down with someone who can answer their questions, right then and there, and provide firsthand technical assistance in the moment, leads to significantly better planning as people start to enter this space. In 2022, the year before the expo was launched, we held a very similar event. And while it was impactful--because it was the first one that we had done in quite some time, it was very difficult to get a lot of our agencies to come and have a presence at that event. Those that did come, were blown away by the amount of innovation that occurs in our state. Thankfully we have many more of them coming to our event right now. But in addition to the expo, the other things that were mentioned in the testimony such as introducing a smaller Phase I award, will be very helpful as well as increasing the transparency and feedback when awards are not approved. Thank you. Chair. Thank you. And if we could move on to you, Mr. Rothzeid. In your written testimony, you stated, ``innovation thrives in a competitive market where the best ideas rise to the top''. Over the past five years, just 10 percent of DOD's SBIR/STTR funding went to companies without prior government contracts. I'm concerned about whether SBIR is living up to its potential, and from what I've been able to see, a system so skewed towards the status quo and entrenched players is not utilizing competition to drive the innovation America needs to stay ahead. So how can we ensure real and open competition in the SBIR program? Mr. Rothzeid. Thank you, Senator Ernst. And I agree with you, it is not okay that only 10 percent of SBIR recipients are new entrants. This ought to be seed capital for the next emerging ideas. I think one of the major bottlenecks for that program is the idea of these esoteric, very nuanced, specific topics that are clearly wired for specific companies based on prior existing relationships with a company and government labs. If we can start to generalize the topics more around different technology areas that an innovator can come and create a new solution around, that is what's going to create disruptive technology for the future. It's also what's going to address the problems for the program officers that are responsible for fielding operational equipment to the war fighters. The labs have a different perspective with R&D, versus the program office that are trying to deal with near and dear issues. Additionally, I do find it hard to believe that a company, a small business, can work on a myriad of different technology areas. For my startups any more than two or three, and they're very tapped out. So, we sort of have to ask ourselves, why is there such a market efficiency where a company can still be a small business, but work across a dozen different SBIR at the same time? Thank you, ma'am. Chair. Thank you for pointing that out. I appreciate it. And I will now turn to Ranking Member--Oh, I can, yes, sir, I can. I will now turn to Senator Rosen for her questions. Thank you. Senator Rosen. Thank you, Madam Chair, thank you. Senator Markey. I have a 3:30 and I didn't want to miss, this is such a great hearing and it's so important. And I just want to thank you all for your ideas, for your energy to bring them into reality and to really think out of the box when you see a problem, be that those real problem solvers, and it is very exciting. This is a great committee to see the entrepreneurship and the way people think. And so, the SBIR, the STTR, the programs, they're just critical sources or capital for startups, and for people who see a problem and think, how can I make it better? How can I fix it? How can I find that solution? But unfortunately, some states aren't receiving their fair share of this vital R&D funding. Like the Chair, State of Iowa, Nevada sadly is ranked in the bottom third of SBIR and STTR award recipients. In 2023, we received only 23 of the SBA awards compared to the national average of 118 awards per state. I hope to maybe move that up. But the Federal and State Technology Partnership Program was created to address this gap. The FAST program provides funding to economic development entities, research institutions, and that in turn provide that technical assistance and support to the small businesses who are applying, you often just don't know how to get started, right? That's a big issue. So FAST Mission to strengthen the competitiveness of underserved businesses seeking the SBIR/STTR grants, it's critical. And Congress, I believe must continue to support it alongside its innovation initiatives. So, Mr. Strawhacker, as a FAST recipient, I know you know how important it is, can you discuss the ways your SBDC has better served businesses who struggle to navigate the SBIR/STTR process. And what challenges are you facing that we can address here? Mr. Strawhacker. Thank you, Senator Rosen. You are absolutely correct that the FAST program is tremendously valuable to this overall equation, but it does play a complimentary role to the business owners and the innovators. We are there to connect them to resources, connect them to people who can ultimately invest in these companies. But it's their idea and their innovation that drives us forward. We have brought on a myriad of different proposal development tools. We have sent our advisors to as many trainings as we can possibly get to. And I'm confident in saying that the proposals coming out of Iowa right now are as strong as they have ever been. We have developed deeper partnerships with state agency, Iowa Economic Development Authority, who provides some of the matching funds. But there is still a lot of work to be done. I hope that other states will look at implementing an entrepreneur expo where they can bring firsthand agency representatives. Senator Rosen. I've already written that down. We're going to contact you on that. Mr. Strawhacker. Happy to share any details. Thank you for your question. Senator Rosen. Thank you. I want to talk a little bit about rural business access to SBIR funding. Because we know small businesses are the key economic drivers in every Nevada community, in fact, Nevada is known for our large, obviously, casinos in Las Vegas, but to be honest, 99 percent of businesses in Nevada are small businesses. They bolster our industries, they support the good paying jobs, local jobs. It's true both urban and rural. And despite their importance, rural small businesses historically face a lot of challenges accessing capital and small business resources, I know you know this as well. So again, I'm going to stick with you today, Mr. Strawhacker. What challenges do you think the rural businesses have and how can we help them address that maybe more specific need they have and the ways the FAST program can really better connect our resource partners to the SBIRs? Mr. Strawhacker. Thank you, Senator. It is often remarkably difficult to physically get to certain parts of rural states. Senator Rosen. You've been to Nevada, so, you know, deep frontier, rural states, most mountainous state in the lower 48, I might add. Mr. Strawhacker. I did not know that. Thank you. [Laughter.] That is why we have utilized the longstanding success of the SBDC network to come alongside the FAST program. We have 15 offices strategically located around the state of Iowa through 11 partnerships with community colleges. And then four centers hosted by our three public institutions in the state. Those people are in the community where those business owners are developing their ideas. They're constantly networking with different economic development agencies, different lenders. They serve as the pipeline for that technology-based business into our technology and commercialization center who can ultimately get them to that finish line. Senator Rosen. Well, good. We might be reaching out to you for some connection with Nevada. Mr. Strawhacker. Absolutely. Senator Rosen. Thank you all for being here and what you do. And thank you again, Senator Markey, Madam Chair. Chair. Yes. Thank you so much, Senator Rosen. Next, we'll go to Senator Husted for five minutes of questions. Senator Husted. Thank you, Chair Ernst. Appreciate that. So business is hard. Many startups fail, particularly if you're in tech because there's somebody else out there, all the time, who's also innovating and trying to identify a path, a use for their technology. And how do you go about the process of identifying who should receive assistance, who shouldn't? Because in a marketplace, it's so much easier in the sense that when it's your real money and it's your decision, you are far more discerning than when it's not. And so, how does that process work right now? And how can we make it more like how a real marketplace works? And I'm open to whomever can answer that question the best. Mr. Carr. I mean, I'll jump in, it's an elevator pitch. At the end of the day, it's a quick white paper with a quick summary, 1, 2, 3 pages, and that's it. The reality is, the SBIR program has continuously gotten longer and longer and longer in regards to its proposals. I can tell you with a team of three people working in a garage, I did not have time to write a hundred-page proposal. I have an elevator pitch. And the question is, are you-as the person on the other side, willing to buy into that elevator pitch or do you think that something else should be awarded instead? Senator Husted. And does the process that we're using in this, is it entrepreneurial enough? Does it work? Mr. Carr. I think the bureaucracy, as much as I would love to make it simpler, it forces you to be an entrepreneur. Because at the end of the day, you got to figure out how to navigate the market. And if you're trying to navigate the U.S. government, you've got to learn and be that entrepreneurial self to be able to figure out how you complete that navigation. And so, from my perspective I believe a lot of the proposals, supporting, making that elevator pitch much easier for smaller companies to make it, you will continue to see more and more entrants coming into the program to be able to validate whether it's real or not. Senator Husted. As I was doing a little research on this, one of the common complaints is that, hey, the people who do figure it out are the ones who are getting all the money. And the people who haven't figured it out, you know, and there's just a barrier that it's like a mystery of, what door I go into and how I do this? How do we improve upon that? Mr. Rothzeid. Well, if I may, you know, I've been somebody on the other side as a government evaluator. And a big part of it, because on certain areas, you get so many proposals that you try to take the easy way out, and you say, who didn't cross their t and dot their i perfectly. And so that sort of sentiment certainly favors those who have gone through the process before because they're able to rinse and repeat a lot of their proposals going forward. And I think that's why with Chair Ernst and her recommendations of putting a cap, sort of gets us away from being more process oriented and more about the spirit of the idea. Because when the same companies can submit 50 applications at a time in a given window, and the resources to be able to evaluate all of the incoming solicitations, there has to be a level of empathy for the reviewer on the government side. As a venture capitalist, I take pitches all the time. Right? I've got three more scheduled later today on different companies. Most of them are going to receive a no, and that's just the reality. Because I'm looking at the competitive marketplace, the ins, you know, how good is the founder? What is the opportunity for them to sell into? These are difficult things that you learn over years and reps. And our government stakeholders don't necessarily have that same background, but we just need to make it easier for them to evaluate less companies. Senator Husted. Thank you. My time is going to run out. And I want to ask a question because I'm not sure how to do. Is it more difficult the way we set up particularly for our contracting with the U.S. military? I was told one time that small businesses--that the big contractors welcome them as long as they stay in their box. And if they can't have a they really try to--we have bidding rules that make it hard for a small business to do entry. Is that accurate for anybody who's worked on that? Mr. Carr. I can jump up and say absolutely not. As a lawyer, one of the best things I ever did was go to law school, because I'll tell you the NDAs that I signed with some of the big primes, they take your IP, they absolutely take the knowledge, the idea, and then they fit you into that box, and they force you into that box. Senator Husted. And you must stay in that box. Mr. Carr. You must stay in that box, which is completely against the idea. Senator Husted. Yes. Madam Chair, an opportunity maybe to explore that issue on another occasion. Thank you. Chair. Yes, absolutely. Thank you, Senator Husted. And Senator Markey, we'll go back to you. Senator Markey. Thank you so much. And I agree with-- listen, this whole idea of the big companies, like Microsoft just swiped the browser idea, you know, from Netscape, just swiped it. Oh, we're going to give it away. We've innovated it so we can give it away--the Internet Explorer. Big companies actually don't make breakthroughs, it's just a joke, they steal it from younger companies, whoever, they'll buy it up. But a lot of stealing goes on. You got to protect these people from the highway robbery of Silicon Valley companies. They just put more police on that beat. The SBIR and STTR programs provide small businesses early- stage funding when private sector funding is less likely. Many small businesses have said that without SBIR and STTR funding their businesses and the technologies that they successfully develop may not exist. More often than not, companies utilize SBIR to develop technologies that ultimately reach the market to benefit Americans across the country and provide critical technology to the government. So, Dr. Mahmud, can you speak to the impact that SBIR and STTR funding have had on Tritons ability to innovate technologies that benefit everyday Americans? Dr. Mahmud. Thank you, Senator, for the question. So, as I had mentioned at the beginning, just because of the passion of our employees, we do target benefiting the war fighter for a lot of the technologies that we develop. And it turns out in many cases that the technologies have a dual use. In fact, in our business model, when the technology has a commercial use, we completely spin off the company to go raise money in the venture capital market, as has been discussed. Because the commercial market operates, you know, the venture capital industry has very tight timelines and expectations, as was just mentioned. So, one example that I can cite, which is benefiting everyday Americans, is when we started and we created a spinoff for a sensor technology, a location sensor technology, and the application--the biggest application turned out to be for a heart pump. A heart pump that is used as I had just mentioned, for Cardiac disease, heart attacks and cardiac disease are the number one cause of deaths, for Americans. This heart pump used this sensor, they enabled the heart pump to become the smallest heart pump and heart pumps are inserted through the artery, it has to be very small. And so, it enabled this technology and that heart pump is now widely used. So, this is an example of something that has widespread application, but did come from an SBIR technology that was targeting a different application. Senator Markey. Again, half all SBIR and STTR awards are made by the defense department. Dr. Mahmud. Correct. Senator Markey. The Defense Department has to approve these SBIR awards, this is the technology the defense department wants, to protect our country. And, ultimately our advantage over China or any other country is that we're technologically superior to them. My mother would always say to me, when she was disappointed in me as a boy, she would say, Eddie, your father and I are going to donate your brain to Harvard Medical School, it's a completely unused human organ. Okay? So, you have to learn how to work smarter, not harder. So that's what technology is, and it has to be the best technology if you're going to surpass the Chinese, this is a ruthless Darwinian world that we're in right now. So, in your opinion, doctor, does the Defense Department make those kind of ruthless Darwinian decisions to enhance our defense capability when they're deciding who gets these SBIR awards? Dr. Mahmud. I can only speak to my company's experience; I can't speak to DODs practices. In our experience, we tend to focus on trying to understand what the gap is for the war fighter. We focus a lot to understand that. Oftentimes the commercial application may not be obvious to us. And when we do find a commercial application, as I said, we spin off the company to raise money in the venture capital market. And as I've showed in our examples, when we understand the problem, and I'll give you the example of the F-35, there was two problems there. One is of course sustainability costs, the source was a foreign source, and then the second problem was that it was causing a significant health hazard to the war fighter, the maintenance depots, and the service depots. And so, we worked with the primes, and as I mentioned, you do have to work with the primes because they own the F-35. They own most platforms. We work with the primes closely to incorporate this new material to solve this problem, which as the Air Force has announced, is going to save them over a half a billion dollars. So, I'm not sure if I answered your question. Senator Markey. Well, you did. You have a technology that the military's going to use, would work smarter, not harder, saves money, you know, it works better. It's a smart technology. And you did it in conjunction with the Defense Department wanting a solution and you did it with the prime, but the prime itself wasn't coming up with the answer. And the SBIR incentivize you to find the answer to the problem. Is that correct? Dr. Mahmud. That's correct, Senator. And if I may add, you know, cost savings that we bring to the government, like in this case, and there are other cases, there's another case where we save $200 million for the F-22 platform. They do not show up in any metrics. None of our metrics, SBIR metrics, success metrics, they don't show up. So, it's highly unlikely if we don't solve this problem that anyone else will do it. Because there's no financial incentive for most companies to take on a problem that has a low return for the company, relatively speaking, versus the government. Senator Markey. And if I may, so you are saying essentially venture capital money is looking to make a big profit. And here there's not a big profit, but there's a big problem that has to get solved by the Defense Department because of some medical condition that they want to see solved. Dr. Mahmud. I will just say, you know, our spinoffs are very active in the venture capital market, so we understand, you know, how the venture capital market works very well. I will just say that there are problems that are debilitating and life-changing and very, very difficult for the war fighter. I just mentioned the hearing loss problem. The hearing loss problem is a significant problem for the war fighter. The F-35 problem was really exposing them to a lot of toxic dust. The bladder relief problem which we worked on, and is now being evaluated by the pilots in the Navy and the long-range recon missions that the Air Force is running over our adversaries. You know, there is no restroom for female pilots. There is no solution. You know, some pilots practice tactical dehydration. It is not a good situation. And, you know, we came in with a solution that was optimal for female pilots, female aviators actually. And also, for male aviators now. So, these are not problems that the traditional marketplace looks to address because the market is too small. There's only so many pilots. There's only so many--the market is just not big enough to attract those investments. And those are the ones where we feel we have brought tremendous benefit to the war fighter. Senator Markey. Thank You, doctor. Thank you. Chair. Thank you. And I now recognize Senator Shaheen. Thank you. Senator Shaheen. Well, thank you Madam Chair and Ranking Member. I'm delighted that we're doing this hearing on the SBIR and STTR programs. Thank you to all the witnesses for being here. I apologize for missing your testimony. I was at Armed Services hearing subcommittee, so that's why you weren't there, Senator Ernst. [Laughter.] Senator Shaheen. But the reason I'm so enthusiastic about, one of the reasons I'm so enthusiastic about the SBIR program is that it was created by New Hampshire Senator Warren Rudman back in the 1980s. And so, I've had a chance to see it up close from that time to see how it's grown and to see the difference that it's made for small business in New Hampshire. And I know that you have stories about the differences that it's making in Massachusetts and Iowa and across the country. And you may have already asked this question, question, Senator Markey, because I just came in on the end of it. But as I understand Dr. Mahmud, in your testimony, you described millions of dollars in savings to the Defense Department from SBIR work that your company has done. And do you know if those savings are counted in statistics about the SBIR return on investment or on in the commercialization data that's provided? Dr. Mahmud. Thank you, Senator. I did, you missed that part, that question was asked, but I will repeat that. Thank you for asking that. So, you know, cost savings that we realize for the government and just as importantly benefits to the war fighter's health, preventing hearing loss, once a war fighter is exposed to noise, and they are exposed to a lot, air crews are exposed to a lot of noise, it is a permanent condition, it's impossible to reverse it. It's very difficult to reverse it, I should say. It's not impossible, it's very difficult to reverse it. And I also mentioned that the VA, there's a million veterans with hearing loss right now, and 2 million with tinnitus, which is related. So, we have focused in terms of our support to the war fighter on developing technologies for air crew protection that's being qualified for Army helicopters. And we are developing bladder relief for female pilots for long distance recon mission. Senator Shaheen. I did hear you talking about that. Dr. Mahmud. Okay. Thank you. Senator Shaheen. Apologize my attention because you were talking about hearing loss, and we have a New Hampshire company that's developed a new hearing protection helmet system for aircraft carrier deck crew for that very reason. And they estimate that the Navy's going to save about $500 million because of their SBIR award. So, it is something that I think we ought to think about how we include that information in the statistics about the program. Mr. Strawhacker, I think you talked about working together with neighboring states on the FAST program. Do you think more funding for FAST would help with those partnerships and or how can we encourage that kind of collaboration? Mr. Strawhacker. Well, I do think that that type of collaboration should definitely be looked at being implemented everywhere across the nation. Especially those FAST awardees who exist within an SPDC program. We already have a nationwide network that builds in geographic subgroups, that meet together some annually, some quarterly. I know the Southeast area is very strong in the SPDC network. Those that have the FAST grant in addition to the SBDC program, have that natural group already there. They just need to tap into bringing the right advisors to the table and having that. The FAST grant plays a complimentary role to the business owners, they are the innovators, it's their technology. They just need us to support them and help them access the correct resources. Thank you, Senator. Senator Shaheen. Thank you. Dr. Mahmud, I know that there has been some discussion about limiting the number of awards that a business can get through the SBIR program. And I would ask you and others on the panel, if that's something that would be helpful. I know that we have a number of companies in New Hampshire that have been very successful at getting multiple awards, and I would hate to have them be limited in what they could get. So, I don't know, maybe you could speak to that and others could speak to it if you have a view on that issue. Dr. Mahmud. Sure, thank you, Senator, for the question. I think one of the most powerful foundations of the SBIR program, it was set up very wisely, that the agencies have a tremendous amount of flexibility to adapt the program to their mission needs. So, they have the flexibility to decide on limiting the number of applicants. They have the flexibility to decide on how many open topics, they have tremendous flexibility to adjust to what they need. So, you know, from our view, we support the mission of the agencies. And if we are allowed to, if we see a problem, we'll put in our idea. And if it is a good idea or the best idea, it is often recognized. And if it's not, its not. We think the tent is wide and we have a shrinking defense industrial base. We have no opportunity to take out good ideas. We are not going to win if we take out good ideas. So, there's no reason to cap good ideas. Senator Shaheen. Thank you. I'm out of time, Madam Chair, but I don't know if anybody else would want to speak to that? Mr. Carr. I would just add, so I'm a large proponent of putting some type of cap in, especially for Phase I and Phase II. And the specific reason for it, is we're talking about small businesses here, we're not talking about primes. If you're a small business, I can't chase 20, 30, 50, a hundred different technologies with different market applications and different things. I can't raise money for it. These guys would never give me money. Because the reality is, I've got to be super focused as an entrepreneur, to be able to scale that capability into an actual product and then naturally into a company. So, if we have companies that have hundreds of different products and technologies, what are they working on? And in fact, I would argue that they're absolutely getting disincentivized to be able to take that one particular technology that we say. Senator Shaheen. And do we have any that fit in that category? Is there information that shows that we have multiple companies that fit into that category? Mr. Carr. I would argue that SBIR Mills would be the way to do it. Senator Shaheen. And do you also feel that way if it's done not simultaneously, but serially, so the company gets an award, is successful, then applies again, and gets another award and is successful or not, applies again. Are you concerned about that aspect of it as well? Mr. Carr. I mean, for us we actually--because of the dual use aspect of the SBIR program going into, we actually diversified into construction cranes and now stabilize loads on suspended cranes. But it's tangential technology specific to what we are building. What I would argue there is that if it continues to be linear and you go from one technology to the next, are you really exiting the business or are you just continuing to basically create kind of a new product at the bequest of the U.S. government, i.e., the SBIR program, but never taking that to the final step, which is, Hey, you're my customer. How do I get this to you? And how do I get it to you as fast as I can? But not just you, but the whole market as a whole. Senator Shaheen. Thank you. Thank you, Madam Chair. Chair. Thank you. And Senator Budd, you are recognized for five minutes. Senator Budd. Thank the Chair and thank you all for being here today. Mr. Rothzeid, every day I hear from small businesses in North Carolina particularly small businesses with innovative solutions to real problems facing our war fighters who discuss challenges to working with the DOD. We hear it all the time. So, the PPBE reform report, or the commission on Planning, Programming, Budgeting and Execution, I'm sure you're familiar with it, highlights the barriers to new and emerging defense companies in working with the DOD. Specifically, PPBE commission finds that ``A challenge SBIR faces, is that promising Phase II projects are not deployed as often as would be preferred by the DOD.'' So, what do you see as the principal barriers to Phase II projects deploying further within DOD? Mr. Rothzeid. Thank you, Senator Budd. And I would just recognize that the managing partner of Shield Capital Raj Shah, was one of the commissioners on the PPB and E. Senator Budd. You might have a little insight then. Mr. Rothzeid. So as far as you know, the transition rates which I highlighted in my testimony being about 18 percent, moving from Phase II to Phase III, is a low number. And I'm not here to argue that it needs to be a hundred percent right. We're talking about seed innovation; we're trying out ideas. The war fighters can provide feedback. If it's not meeting a need or if it's not a scalable need, then there's no need to continue it forward. But I think one of the areas that really hampers the Department of Defense is, while you can win an SBIR in the year of execution, so within this current fiscal year, the planning programming and budgeting, and execution is inherently a two year long process. So, there's no gap year to be able to fill that need, so that what the war fighter likes and sees and wants to scale, they now have to sort of sit on their hands and wait for the PPB and E to now catch up for the ensuing fiscal year, often two fiscal years ahead. And that can be a really big challenge for a company that is trying to sell a product that is very specific to the war fighter. Now, in a lot of cases in the companies that we invest in, they're dual use tech. So yes, we want them to sell to the Department of Defense National Security, we also want them to be selling to the commercial environment. That sort of leverage provides them an opportunity to stay afloat while the PPBE cycle catches up. However, why should our war fighters have to wait for a solution that they need today? Right? We're working for a readiness that allows us to be prepared tomorrow. Senator Budd. So, in simple terms, what's the fix there? Other than just getting cash flow, I imagine from the commercial applications. Mr. Rothzeid. Absolutely. And so, one thing that the Department of the Air Force came up with in March of 2020 was the STRATFI/TACFI program. And it allows them to leverage additional SBIR funding up to 15 million with just SBIR funding, to carry forward on promising technology that has matching funds. In that so far as the DOD has non SBIR funding allocated to them, and they've also erased third party venture capital. Senator Budd. Okay. So, you mentioned that 18 percent kind of make that gap over to Phase II, right? Mr. Rothzeid. From Phase II to Phase III. Senator Budd. Phase II to Phase III. So, 82 percent don't. So, with this new system, if you will, in place that you just mentioned, what does that number go to? It goes from 18 percent to--what would you estimate it to be? Mr. Rothzeid. Well, with the reality of an opportunity cost, where now more of that funding that would've gone to fund more Phase I, more Phase IIs being put into this other bucket of STRATFI or a bridge if you will, you're probably going to see a shrinkage of the amount of total number of SBIR Phase I, Phase IIs, a larger number of opportunities to transition to Phase III. I would expect it to go more to the 35 percent, ideally doubling. Senator Budd. And you're saying in that 82 percent, which would diminish in this scenario, the 82 percent fails. There's a lot of good useful things. It doesn't, need to be a hundred percent that passes, but the 82 percent that fails, there's a lot of useful things in there for our war fighters that are unnecessarily failing. Mr. Rothzeid. Unfortunately, that is the case. Senator Budd. Okay. The PBBE Reform Commission also recommended aligning the SBIR program to the DOD overall science and technology strategy by ensuring that the programming and budgeting process includes specific analysis of SBIR and STTR projects as budget requests are being developed. So, can you speak to your views on that recommendation? Mr. Rothzeid. I'm sorry, sir, I wasn't quite following. Senator Budd. So, I think there's the question of, they want to align the PBBE Reform Commission, they want to align it with the DoDs overall science and technology strategy. And they want the budgeting process to include specific analysis of SBIR and STTR projects as the budget requests are being developed. So, do you have any thoughts on that? Mr. Rothzeid. I would just say that 11 of the 14 critical technology areas as identified by the Department of Defense, 11 of them are commercially developed. We need to align our S&T strategy with where the emerging market trends in the commercial sector are occurring, and make sure we are providing healthy amount of financing in those areas for DOD programs. Senator Budd. That's very helpful. Thank you all. Chair. Thank you, Senator Budd. I'll go ahead and start, if you'd like a second round. Senator Markey. If I may, if you don't mind. Chair. I'll go ahead and--if you want to go ahead, I'll close up after you. Absolutely, Ranking Member, go ahead. Senator Markey. No, I thank you so much. Two weeks ago, the House Small Business Committee held a hearing on SBIR and STTR where Chairman Williams in the house, talked about the importance of preserving merit-based competition in the program. He said, innovators thrive in an environment where competition reigns supreme, where they are free from the limitations or caps on their success. And I agree with that. We should prioritize merit without adding extra layers of bureaucracy. So, Dr. Mahmud, through Triton Systems we have seen great success in meeting the increased commercialization benchmarks for experienced small businesses. And I understand that the company did not meet the increased transition benchmarks leading to a limit on the number of Phase I and direct to Phase II awards Triton can receive. How have these caps impacted your company's strategy in determining what you would be proposing in the future? Dr. Mahmud. Thank you, Senator, for the question. I think we can all agree that the commercialization benchmark, this is what everybody's talked about, is very important. Everything needs to have a purpose. Everything needs to--we need to maximize commercialization. That's how all companies should be measured, at least in my opinion. The Phase I to Phase II conversion metric does not have a commercialization meaning, you know. For example, we just talked about bringing in more companies, giving out a lot of Phase I awards. Air Force did that, by the way. They gave out a lot of small Phase I awards, and then maybe they had one or two Phase IIs in mind. I don't know. Senator Markey. Maybe they had one or two? Dr. Mahmud. Phase II's in mind. Because they want to see what's out there. So, this is the idea, is to make small investments and capture the best idea. So, I certainly don't feel that the Phase I to Phase II conversion metric carries any commercialization meaning. Having said that, the Phase II awards as was discussed here, it was just discussed in a number of questions. Oftentimes the small business has no control, the need may have gone away. The customer no longer needs it, or the agency no longer needs it, or there's no funding. Or they will award many, many Phase Is and determine one Phase II. So, what we have done based on these new benchmarks is really become extremely risk averse and we only focus now on Phase Is where we totally understand how to transition this, you know, what is the best endpoint---- Senator Markey. So, you just look now at surefire commercialization? Dr. Mahmud. That's right. We do not take high risk. Senator Markey. You don't focus as much on the breakthrough technology that can be transformative because it's not a surefire commercialization yet. We need to be taking the risk to find the breakthrough because, in China, they're throwing tens of hundreds of billions of dollars at the breakthroughs. Dr. Mahmud. Correct. We do not pursue high risk opportunities even if we have a good idea because we are not sure what the outcome is. Senator Markey. Which is very, very helpful. And can you explain the process of transitioning from proof of concept, or a Phase I award, to a Phase II award and how rigorous that process can be even for the most innovative technologies? Dr. Mahmud. Dr. Mahmud. Would you like me to explain the process, or excuse me, I didn't catch the question? Senator Markey. The question is, can you explain the process for transitioning from a proof of concept or a Phase I award to a Phase II award? How rigorous is that process? Dr. Mahmud. I'd be delighted to. So, you know, the, the philosophy of the SBIR program is to invest low in the Phase I's and then to see which of these proof of concepts is demonstrated. That's the process. But agencies have very different practices, as I just mentioned. Some may have a path to a Phase II, some may have no funds for a Phase II, this happens quite a bit. So, the agency itself may not have a plan on moving it forward, and oftentimes the need goes away. So, the process for a general small business is understand, you know, if you can show the concept in the Phase I, then compete to demonstrate you have the best solution for the Phase II. And you know, that's the process. But as I said, because the agency practices are very different and the situations are different, the Phase II may become irrelevant, and then the small business has no control. Senator Markey. No, and I thank you for that. And I thank all the witnesses. I thank you, Madam Chair. And I can just finish up, if I may, just by saying that we've heard the word ``Mills'' thrown around today disparaging some of the most innovative and dedicated small businesses. Massachusetts is proud of its mill culture. Our economy was built off of the textile mills during the Industrial Revolution. The only reason Thomas Markey left Ireland to go to Dover, New Hampshire was the mills were in Dover, New Hampshire, where Senator Shaheen's husband was being raised. So that's the only reason I'm here--is those mills. And today the Senate Republicans, they're trying to paint a picture that innovative, ambitious, and productive small businesses or ``mills,'' as they like to call them, are bad. These mills that they want to end, they're small businesses that delve into novel ideas and bring them to reality. They are small businesses that develop cancer therapy technology and the world's smallest heart pump. Small businesses that save hundreds of millions of dollars for the federal government and have a huge return on investments, small businesses that advance the national security interest of our country. If being a mill means being an efficient and effective small business innovator, then I don't think that's a bad thing. And Massachusetts and many other states are hubs of innovation, and that's why we produce such tremendous technology. And we don't have big businesses that much in Massachusetts that drive our economy, we have small businesses that come up with good ideas that serve our nation and save lives, especially in this defense sector. Okay, this is where we specialize. Department of Energy is high on the list as well, but 80 percent as we know of the Department of Energy budget is just nuclear weapons, nuclear management. Right? You need the smartest people thinking about that, NASA all the way down the line. Those are the agencies that are asking for these technologies to be invested in, okay? And it's to keep us ahead of our geopolitical rivals in the rest of the world. It's using our brain power, and we just have to ensure that these small businesses are able to freely compete for government funding and are not penalized for their excellence. If someday they want to sell to a big company, Raytheon or Lockheed, that's their right. But the innovation's going to come for our defense and for many other areas, from these smaller companies, and that has to be the primary thing. Is it going to likely produce that breakthrough or not? And does the Defense Department want to take a risk over here with some breakthrough technologies that may or may not get the result they're looking for in the first or second round? Okay. That's the decision I think we have to make as a country. And I thank you, Madam Chair, for this very valuable hearing. Chair. Thank you. I do have just a couple of additional questions and we'll demonstrate why we think there is a need for reform. And so, Dr. Mahmud, again, thank you for being here. And please answer yes or no for this question. Are you aware of any ties between your leadership team, personnel, or spinoff companies with foreign countries of concern? Dr. Mahmud. May I answer the question? Chair. Yes. Dr. Mahmud. So, we are a cleared facility. We are audited by the Defense Counterintelligence and Security Agency (DCSA). We work closely with DCSA on vetting out any kind of foreign intrusion into the company. As I had just mentioned, when our spinoffs go out in the venture capital market, you know, we have no control of them. The spinoffs, you know, they will go and raise money in the venture capital market. We have no say on that. We have taken in consultation with DCSA incredible safeguards to isolate our technologies and our personnel from everyone, including the board and the management of our company. We have worked very closely with DCSA to do that because of this exact concern that spinoffs, we have no control over what they do. Chair. So, you are aware though, that there have been ties to countries of concern? Dr. Mahmud. I've read in the press. I am not personally aware, but I've read in the press that, you know, one of the spinoffs, has made--raised money globally. So, there is concern about that, and we cut off all ties with those spinoffs a long time ago. Chair. Okay. And just so for the record, Triton has received 902 SBIR/STTR awards, accounting for more than $350 million. And that is really hard for me to explain to Iowans how someone who has received over $300 million can still be considered a small business. So that's really difficult for me to explain in the Heartland. So, I do want to enter into the record open-source data that I found on ties between Triton CEO and joint ventures with Triton spinoff companies. You did state that you can't control those companies, but they are ties between your spinoff companies and companies in China, and without objections, so ordered. Chair. So again, what we found in 2020, was that Tritons current CEO then was appointed to serve on the board of CITIC Capital Acquisition Corporation, which is a Chinese financial service sponsored by a state-owned financial conglomerate in China. Further, FRX polymer, a spinoff again of Triton, received $22 million from CITIC and pursued a joint venture with a Chinese company in 2019. Tritons biotech division also merged to become Chinook Therapeutics, which in 2021 pursued a joint venture with Pivotal bioVentures China. Triton, CEO was the chairman of FRX until last month, and was a board member of Chinook Therapeutics. I would like to enter into the record open-source data on these ties with China, and without objection, so ordered. Chair. I also want to point out the SBIR due diligence disclosures require Triton to disclose joint ventures and foreign investment. Spinning these companies off to do joint ventures and taking Chinese investment appears to be a loophole, and this track record should be accounted for when Triton applies for SBIR awards. Triton does not seem to care who they are selling taxpayer funded research to. This is a national security risk and why I've proposed strengthening the due diligence evaluation standards, to make sure agencies are catching all of this open- source analysis and making prudent judgment calls on who they award repeat contracts to. So, again, the SBIR mills, I understand that while there may be opportunity out there for these small businesses, I'm going to set the record straight with this. Success is not measured in the number of SBIR awards a company wins, but rather the commercial and mission impact made by leveraging SBIR dollars. I think a number of you stated that. We should not reward firms that game the system and use SBIR known by many as America's Seed Fund, as their primary revenue source, yet have fewer sales, fewer investments, and fewer patents as GAO reports. SBIR mills push out innovators in the heartland states like mine of Iowa, and like Senator Jackie Rosen's in Nevada. I have a hard time justifying again to Iowans that companies that can take hundreds of millions of dollars of SBIR grants can still pass as a small business. So those concerns outline exactly why I am pursuing changes to the SBIR/STTR program. I do hope that we will have a bipartisan bill that we will be able to move forward. We have been joined by Senator Young. Senator Young, do you have questions before we close today's hearing? Senator Young. Well, I do Chairman. Thank you so much, Chair Ernst, I thank the Ranking Member for holding this important hearing. Thank all of our witnesses for being here. As Congress continues to consider reauthorizing this important SBIR/STTR program, I think it's critical that we take this opportunity to review the framework, look for ways in which we can improve it. Relatedly, over the last year or so, I've had the privilege of chairing a commission, the National Security Commission on Emerging Biotechnology. And one of the topics that will be included in our report to Congress, is how China is outspending and out strategizing the United States when it comes to critical technology investment, and development of those technologies, especially in the area of biotechnology. And, and so I asked Mr. Rothzeid, how can the federal government better ensure that funds of this program are translating into material technology innovation, especially in the areas that require sustained capital to scale? Mr. Rothzeid. Thank you, Senator Young. In my mind, the only way that the U.S. can compete with China when it comes to technology is by leveraging its greatest asset, and that's the private capital marketplace, the envy of the world, because it attracts entrepreneurs both here in the United States and abroad to want to come build here. The days of the government being able to foot the bill with its R&D budget are long gone past, but the systems and the programs and the structures that we've put in place, were predicated on that paradigm. Just going back to 1960, 24 percent of all the world's R&D expenditure were happening in government labs, today, it's less than 1 percent. So, if we're going to compete, we have to get smarter about how we're leveraging taxpayer dollars and leveraging third party capital providers, to build technology companies of consequence. Thank you, sir. Senator Young. Well, thank you. Your points of emphasis are well received, especially in light of the fact that I've been working with, I think every member of this committee, on something outside of the jurisdiction of this committee, but it's to preserve research and development deductions through the tax code for our small businesses and frankly, for emerging high growth potential businesses pre profitability, to offer them an R&D tax credit to incentivize their early-stage R&D and then hopefully growth as a company. Mr. Rothzeid, to continue, do you have additional thoughts on how the SBIR/STTR program can better support American tech innovation and biotech and other critical sectors? Mr. Rothzeid. Yes. Senator Young, I think what Chair Ernst has proposed with creating bridge programs within the SBIR program to provide larger pots of funding for technology of consequence as signaled by the federal agencies, similar to what the Air Force and Space Force have done with STRATFI and the Army with Catalyst, these are the types of signals that help ensure that the investors can then understand what's really important to the federal agencies, provide additional capital to those companies so that they can hire the right amount of people, invest in cutting edge equipment, and continue to scale and grow. Because if we're not building companies that want to scale and grow, then they won't be able to meet the needs of national security and outfitting thousands of soldier sailors, marines, airmen, and guardians. Senator Young. Thank you for that. I have about a minute left and would just like to briefly explore with you, Mr. Rothzeid, something related to DODs integration of open topic solicitations. My office has been impressed with these and their importance. These allow small businesses to propose solutions, to more broadly define problems. As we think about ways to support small businesses that are working on innovative technologies, it seems like expanding what departments and agencies can solicit open topic proposals for, might make some sense. Can you offer any reflections on this topic? Mr. Rothzeid. Senator, I believe that the open topic is the reason why this convening is happening today, getting interest from venture capitalists like myself and startup founders, like Mr. Carr. It's because innovators are building solutions that the department hasn't even imagined. If we leave it to the whims of the department, they'll come up with very bespoke requirements around the things that they've already thought of. But that's a very small pool of people. Instead, we need to open it up to open topics. What are the solutions to the problems I didn't even know I had, and let the entrepreneurial class of America go to work. Senator Young. In light of the fact that I've already gone over my time. Might I work with you on an ongoing basis to explore ways to expand the scenarios and situations with which open topic proposals can be utilized and related topics? Mr. Rothzeid. Senator Young, absolutely. Senator Young. All right, great. Thank you, Chair. Chair. Thank you. Are there any additional questions? Okay. And with no further questions, I want to thank the witnesses for being here today. I ask unanimous consent that the record of today's hearing remain open for two weeks for members to submit questions, revise, and extend their remarks, and submit additional information into the record. Chair. Without objection, so ordered. And with that, the Committee on Small Business and Entrepreneurship stands adjourned. [Whereupon, at 4:11 p.m., the hearing was adjourned.] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] [all]