‘Dual Use’ of Small Business Set-Aside Touted Amid Paul’s Attack

Government officials are coming to the defense of a federal small business contracting program that’s under fire for its recurring award winners whose research doesn’t immediately yield a tangible product.

The Small Business Innovation Research program (SBIR), used by eleven federal agencies, gives “early catalytic funding” for startups with few employees and years of experience, said Ben Schrag, SBIR program director for the National Science Foundation.

A SBIR award “fills a capital gap” that a company might not get from venture capital funds because its research services or products don’t have a clear commercial application, according to a senior Defense Department official.

Small companies that receive multiple SBIR awards and seem to use them as a primary revenue stream have garnered the attention of Sen. Rand Paul (R-Ky). He wants to curb their awards as part of the program’s reauthorization that will lapse Sept. 30.

Those investments can still pay off. Technologies used to address niche DOD needs “more often than not have commercial applications,” the DOD official said. “The dual-use nature of this is really built into the SBIR program at its foundation.”

Over the last several years, program managers and industry participants are assigning more value toward transitioning SBIR contracts out of the research phase toward a sales-worthy product or service. That raises new questions on the return on investment for SBIR dollars.

Schrag said there’s tension in the SBIR goals written by Congress. First, the program aims to fill agency needs for research that fuels policy decisions, infrastructure creation, and technology needs. Second, the government investment is intended to drive “commercialization”—a sale-able product or service—that may serve both the government and the private sector.

“I do think it’s tricky for a company to do both well,” he said.

What’s It For?

Ben Van Roo, CEO of Yurts Technologies Inc. and former researcher at The RAND Corporation, said program officials need to figure out what and who the SBIR program is for. Is it intended for small companies providing basic federal research? Or is it for startups needing venture capital to develop technologies for both the public and private sectors?

Government officials say the program can do both. Van Roo says some SBIR awardees are getting something of value with federal dollars, like a patent, where there’s no demonstrable taxpayer return.

“If this is a seed capital fund as it’s defined, as it’s described everywhere and marketed, if that’s what the purpose is, there’s 30 to 50 companies that are not commercializing at all and they’re maybe getting some patents out of it,” Van Roo said in an interview.

Paul wants to set benchmarks to limit multiple award winners and require commercialization goals that would exclude many small research companies that have existing relationships with the DOD.

That would be a problem, according to the DOD official, because these companies have the required security clearances and specialized focuses, making it easier to develop Pentagon technologies or supplies and get them onto larger contracts. If the innovation isn’t useful or relevant, the R&D helps change the research trajectory and “future decision-making for the department.”

Companies Weigh In

Veeraraghavan Sundar, technical marketing manager at UES Inc., a small R&D firm that works on about six SBIR awards a year, said the federal government invests in private research because it lacks resources for niche problem solving and can be an early adopter of federally-funded innovations that end up in the civilian market.

Companies with multiple SBIR awards also work toward commercialization, said Kenan Ezal, a senior scientist and lawyer for Toyon Research Corporation.”We’re doing exactly what Congress intended for us to do and I think we’re doing it well. And we are trying to commercialize, we’re not like sitting on that and only doing SBIRs,” he said. “We’re a very well managed, conservative company that goes out looking for good research topics and things that we can create into military products.”

Research funded through SBIR can also fulfill an unrelated need, said Jay Rozzi, vice president and principal engineer at Creare, an engineering research firm.

He gave the example of a colleague who designed a laparoscopy tool for tumor detection with the help of a SBIR award, which was useful to manufacturers that needed to inspect things without touching them. The invention is now used to inspect F-35 aircraft by Lockheed Martin.

“It was a great technology, but it didn’t really go anywhere from a transition perspective,” Rozzi said. It then “played a key role in the success of a major defense program.”

Another example of useful SBIR-funded technology that goes in the opposite direction—a commercialized product derived from its original military solution—is the Roomba vacuum robot, which was initially designed for intelligence gathering and bomb disposal.

Fueling Competition

In interviews, several researchers noted the difficulty in planning their funding around SBIR awards due to the competitiveness of Phase I and II—where firms that win the first round compete against each other for the second phase of awards.

“It’s a hard way to make a living,” Sundar said.

The competitive nature of SBIR is intentional, the defense official said. It’s important to finding the best industry solutions and using taxpayer dollars most effectively.

“If companies receive multiple awards,” he said, “that’s because they’ve been able to compete effectively within those competitions.”

To contact the reporter on this story: Patty Nieberg in Washington at pnieberg@bloombergindustry.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloombergindustry.com