On the Importance of the Small Business Innovation Research (SBIR) Program, the CEO and Founder of a ‘Mind to Market’ company
Letter to the WSJ Editor,
Re: “U.S. Small-Business Programs’ Future Is Clouded by Congressional Fight” in the Wall Street Journal on July 07, 2022
I read WSJ’s July 7th article and find that on the one hand, it’s great to bring attention to this issue, on the other hand, you are missing a few key points.
There’s a lot to unpack from your article about the ongoing congressional battle over the SBIR program. However, to start, I would assert that the SBIR program is the most successful economic development engine the U.S. currently has, despite some of its challenges, issues, and abuses. It’s accessible to anybody in the U.S., in all states, who has an idea. It’s an important tool in the economic development toolbox and one of the few national programs that can grow national economic competitiveness and address inequality, creating new opportunities and jobs from innovation — a true endogenous economic growth engine.
It’s because it’s a free-market program, open to anybody in the U.S., that it is also very competitive. On top of that, innovation is very difficult under any circumstances as one brings a technology from idea to market. However, the SBIR program provides just enough funding to start something, but not enough to commercialize. For example, a $50k -$1mm grant is not enough to bring a medical device to market. Doing so requires ~$50mm and ~8 years, typically, provided everything is executed flawlessly.
To improve the odds of bringing an innovation to market, we manage risk in three buckets. Technical risk, execution risk, and market risk. Note that all these risks are difficult to navigate, but the biggest risk, >50% of the risk, is market risk. One can be too early, or too late to market and the market can suffer black swan events — e.g., the pandemic, the war in Ukraine, etc. There are few ways to manage market risk. One way is with access to large amounts of capital, which is accessible only in a few places across the country, like Silicon Valley, Boston, or New York City. The other way to manage market factors is through a risk-adjusted research portfolio. This requires pursuing many different ideas persistently and simultaneously, so that when the market is in the right place and the time is right, one can pursue commercialization with scarce access to capital. Each approach has its pro’s and con’s, but for most of the U.S. population this is one of the few options available.
While the SBIR program is imperfect, it’s still arguably the most successful economic development engine in the U.S. — one that truly operates across the entire nation and is accessible for anybody with an idea who can write a “good” proposal. I tell young researchers interested in SBIR that the odds of winning an SBIR research project are about 1:10 — they must write 10 good proposals and lose 9 to win just one. I would call this par for the course. Some can learn to do better, but it takes work and discipline.
There are always those that complain that losing was unfair, that their ‘baby’ is not ugly. I coach those who will listen to grow up, improve their arguments, re-think how they articulate their ideas, and try again. Some get better, some give up. We like to work with those who learn to get better and beat the 1:10 odds. This may seem unfair, but in reality, it’s the free market speaking — it’s not always fair.
The current proposal being considered by Congress to limit companies to three programs each makes no sense — just as it would be unthinkable to demand Tom Brady retire from football because he’s won too many Super Bowls so we can give some of the under-performers better odds at winning. The fundamental issue always comes down to “too many meritorious ideas competing for too scarce resources.” Note that venture capital (VC) also builds a risk adjusted portfolio of investments. To compare SBIR and VC investing, the odds of SBIR funding are much better. VC’s make their money via a “2 and 20” model — 2% fee and 20% carry for a 10-year fund. They receive lots of proposals and reject most , the odds are more like 1:500. Most of their investments also fail, but the few that are successful produce adequate returns to cover all the failures, and pay the VC’s salary and bonus, and produce a return for the Limited Partner (LP) investors. This is normal in the VC world. Whereas venture capital finance is roughly available in somewhere between 4–8 geographic locations in the U.S., it is practically unavailable to 95% of the country.
Also, in your article, the question posed by Mr. Warren Katz, ‘is the SBIR program a research program or a productization program?’, underscores a major misunderstanding about innovation and what it takes to develop new possibilities from research. It misunderstands what it takes to commercialize these ideas to make them available, at scale and in the market to impact humans and society.
Innovation requires the research and productization processes work together. Both are important, both are very difficult to execute, both need each other. Nevertheless, they are also two different cultures — the culture of research takes a certain mindset, which is not for everyone. Bringing a product to market takes a much different mindset. I would argue that research is the lifeblood of the future, and is essential for everything from National security and defense to healthcare. However, most major investments into research across the US are pointed at a few institutions and companies. One could argue whether it’s a good use of taxpayer funds to support National laboratories, FFRDC’s, Universities, and a handful of the largest defense contractors. However, disruptive innovation generally does not come from these institutions. They tend to be institutionally risk-adverse, more interested in self-preservation than disruptive innovation. Disruptive innovation tends to come from entrepreneurial scientists and engineers in small groups. It’s not mysterious why this is — it’s just human/business nature.
For example, the digital camera was attributed to a clever engineer at Kodak, but its creation threatened their chemical film processing franchise. And so the digital camera was developed and commercialized elsewhere. Kodak lost the business it dominated to a new technology that it created, but that had threatened their business model. Senior management was more interested in protecting their jobs than risking a new technology that could disrupt their business. So, somebody else did it for them. This same story repeats itself through time and history.
Lastly, there are certainly challenges with China. The recent Financial Times (July 7) quotes FBI Director Wray saying that, “field offices across the US open an investigation into Chinese espionage every 12 hours.” Although some SBIR programs are more vulnerable, the U.S. Defense SBIR program has been implementing measures with its CMMC (Cybersecurity Maturity Model Certification) program to protect U.S. small businesses from espionage by requiring all DOD SBIR recipients have a CMMC program in place.
However, the China issue not being discussed, or purposefully avoided, is the large amount of capital China invests into VC firms, obscured through their LP participation. It’s difficult because VC’s have a much larger voice than small businesses. The elephant in the room is U.S. government acquisition reform. The last major push to restructure acquisition of the Department of Defense was led by the late Senator John McCain. He realized that the current system, built just after WWII, has evolved into a slow, complex process, that protects a few major defense contractor franchise holders. This makes it very, very difficult for the government to acquire innovation — unless its innovation offered from a handful of these few defense contractors. Lack of access to disruptive innovation from small disruptive companies makes it harder for the U.S. to keep up with current and future adversaries. That’s why the Dept. of Defense likes SBIR programs; they offer windows into disruptive innovation that they need for national defense. Although U.S. Defense acquisition reform is a complex issue, it can be reformed with the right level of attention.
I’ve been working in this innovation space for over 40 years. I founded Oceanit, a “Mind to Market” company, over 35 years ago and have deep experience in nearly all aspects in the world of innovation. I also released a book that reviews how we think at Oceanit, “Intellectual Anarchy — The Art of Disruptive Innovation,” available with Barnes & Nobel, Amazon, Apple, etc. Our ‘Mind to Market’ business model creates technologies from fundamental science and drives these technologies to market. In my company’s first five years or so, Oceanit worked on hard-to-solve engineering problems in the private sector. Later, we added research and development, spun-out companies, raised capital, worked with private equity, venture capital, and executed corporate-co development. We have consistently and successfully commercialized science into usable technology and products. For example, with SBIR support from US Defense and the Defense Logistics Agency, we developed a simple and inexpensive rapid COVID-19 antigen test, called ASSURE-100, which received EUA authorization from U.S. FDA in February 2022.
Dr. Patrick Sullivan, CEO & Founder of Oceanit
Read the Wall Street Journal article here.
