Government Stories 1998

Stories that earlier appeared in Nelson's News 
Note 1: Carl Nelson Consulting, Inc is not an investment adviser and may hold a financial interest or client relationship in companies discussed.
(Note 2: Carl Nelson Consulting does not endorse these companies or organizations or their activities.) 
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Why do voters who vote for term limits also routinely vote to return senior incumbents to office? Why don't they vote the bums out? The answer is straightforward. Voting your bum out is not a solution when what you want to do is oust the other districts' bums. For that you need term limits. [E Elhauge, CATO Policy Report 328, Dec 98]

Exxon's mobile laboratory performs on-the-spot fuel testing at service stations in Puerto Rico. There's a tiger roaming the tarmac jungles of Puerto Rico. A "Tiger Lab," that is--a specialized van equipped with a portable analyzer that verifies fuel quality using Fourier transform infrared (FTIR) analyses. ... the portable FOx FTIR analyzer from MIDAC Corp., Irvine, Calif., was used to measure fuel composition. This information can be extrapolated to identify fuel properties and components. "If you were to do this testing in the lab, it would take two days; we can do it in three minutes." Of course, FTIR spectroscopy is nothing new. What makes the Fox analyzer unique is its link to a computer that uses mathematical models to identify both chemical components and their properties, such as octane and distillation percentages. [Amy Merrick R&D Magazine, Nov 4] Small innovation. MIDAC claims the world's leader in innovative FTIR Spectrometer Systems. MIDAC was the first company to produce a small, rugged, low-cost FTIR in the 80's, and is now the pioneer in applications-specific FTIR systems. How did MIDAC do it with no SBIR when Advanced Fuel Research and Foster-Miller have millions of SBIR over a decade for a portable FTIR? Was the government was too dumb to know an economically dead product? If the government discovers its mistake, will it blame itself or AFR? In this case the government is Defense and Energy.


Nice Theory; Shame It's Wrong. Congress and the beneficiaries of R&D programs sing a chorus that economic growth depends on R&D in our world-leading technology nation. Nice theory. Paul Segerstrom ["Endogeneous Growth Without Scale Effects", American Economic Review, Dec 98], though, notes that despite a doubling of the number of R&D workers 1968-1989, the economic growth rate correlates only with population growth and number of patents per capita is the same as 1968. Why? Good question. If we find that answer, we can maybe then explain why the situation is even worse in Germany and France where R&D has tripled and in Japan where it has quadrupled. Could those R&D beneficiaries have lied? Should we then impeach them? Segerstrom in typical academic style has developed a mathy model for economics journals that postulates that innovation gets tougher as technology progresses. In a striking admission of error, the Japanese government released a report yesterday blaming official inaction and delay over the past decade for triggering the country's deepest recession since World War II. The EPA pointed to several reasons for the failure to act more quickly: optimism that prices would recover; uniform delay by banks in dealing with bad loans; lack of a system for bad-loan disposal; and lack of transparency in the financial system. [Boston Globe, Dec 28] Notice that in the US, the government isn't responsible for the economy (no matter what the politicians claim when it is good). Government activism is frowned upon (except for corporate welfare like tax breaks, marketing orders, import restrictions, SBIR...).


Only Philosophers, Pul-e-e-ease DOC seeks SBIR proposals for Automated Mediation of Ontological Perspectives because Collaborative efforts of a collection of individual stakeholders (e.g., engineering design) involves the manifestation and reconciliation of the individual "world views" of the stakeholders and the forging of a shared "world view" that facilitates and mediates their interaction. So, NIST wants development of tools and techniques needed to facilitate the interpretation and reconciliation of individual stakeholder perspectives and resulting in socially-constructed shared world view. How about a 69-cent comb for scratching one's head? Proposals due Jan 13. Phase 2 would never end and even the meager $200K for a DOC Phase 2 could keep this philosopher in groceries a long time. Market prospects? Who needs markets when the government will pay for open-ended philosophy? Not too worry, though. Each proposer will assert "tremendous" commercial potential as Intelligent Computing Technologies (Austin, TX) did for its 1998 Phase 1 on methodology and software for a production control code on the apparent assumption that the world of manufacturing is waiting expectantly for an automation SBIR. Or Intelligent Automation (Rockville, MD) with the dream of applying its already well funded neural nets to e-commerce. (If IAI's claims were real, it would already be so covered in money from past SBIRs with the same claim that it wouldn't have its hand out for a government dole.} OK, so it's in NIST's interest to believe such claims. Where you stand still depends on where you sit.

the ''politics of economic nonsense,'' as James Lister-Cheese of London-based Independent Strategy calls it. Europe's center-left governments are howling for more jobs yet won't pursue policies, such as liberalizing labor rules or slashing taxes, that might create them. [Business Week, Dec 28] The same politics of economic nonsense pervades SBIR. Politicians and agencies blather about commercial payoff while evading hard analysis and pursuing funding policies that assure little but nominal commercialization. If companies can get $750K with fanciful promises of commercialization, guess what government will see a lot of in proposals. And if government doesn't ask any hard questions about past commercialization, why should it expect anything but fanciful stories? But then, as long as Congress won't ask any hard questions either as long as the money flows into the beneficiary class, real commercialization will never appear and the politics of economic nonsense will continue.

Wanting It Both Ways. The politicians are at it again: wanting it both ways on high-tech business. They want SBIR and commercially competitive small businesses to export a lot of products but they must want foreign buyers to buy the products without taking delivery. Again the Washington talk is of restricting high-tech exports [Wall Street Journal, Dec 18] as a House committee wants to keep China from getting computers, machine tools, and other sensitive technology (whatever that means).

IBM is a good place to look for cutting-edge technologies. Consider its investment in research and development. Big Blue spent $5.5 billion in 1997 on R&D, far outstripping the likes of Compaq and Hewlett-Packard. Out of that research have come breakthroughs in holographic data storage, copper-chip technologies, tiny storage devices and advances in so-called "nanotechnology," which deals in computer parts that are minute. [Paul Gilster, Raleigh Observer & News, Dec 20] And what has come out of SBIR except temporary jobs? How many workers in small companies are now paid by a revenue stream from SBIR output? Let's have GAO ask that question in its next evaluation (don't bet on it) and then divide the result by the number of SBIR dollars to get the cost per job created. It'll probably be bigger than the big costs for jobs created by welfare funded employment and training programs.

(Dec 2) Energy Saves Energy The Dept of Energy has quit its long-time fast Phase 2 SBIR program whereby the fast burners could propose earlier than the norm. Just as DOD's Fast Track is beginning to show results. Its 1999 Phase 1 solicitation closes March 2. Among the 40 topics it is looking for a way to get rid of 687,000 metric tons of depleted uranium hexafluoride. Note that every agency thinks its program is competitive and bureaucrats are always looking for the easiest way to do things. Energy says: Please note: (1) The technical topics are to be interpreted literally; DOE personnel are not permitted to further interpret the narrative description of the technical topics. (2) The award selection process is extremely competitive. Last year, only 1 out of 4 grant applications were awarded. Only those applications with the highest scientific/technical quality will be competitive. Nonsense; 25% selection is one of the highest in the government; only BMDO is consistently higher. And besides, selection rate by itself is NOT a measure of competitiveness. In fact, Energy should pat itself on the back for cutting the number of hopeless proposals. It saves energy for everyone concerned: bureaucrats, reviewers, and proposers. Only the SBA should weep over such stats. When you don't have a performance goal under which you could be fired, you opt for the easiest process that frees you for your 26 vacation days and ten holidays a year.

Ahoy, Navy Proposers! The Navy says, The Navy is very interested in companies that transition SBIR efforts directly into Navy and DOD programs and/or weapon systems. The proposing company should make reference to the attached success stories in the "Commercialization Strategy" section of their proposal so the evaluator knows to look for them. You're on your own to interpret "very interested". While the Navy has always wanted mission SBIRs, it is under pressure to do something commercial with its SBIR and so needs anecdotal evidence it can advertise.

Bucks County has grown into an affluent string of bedroom communities with more than 20,000 small businesses, from plastics to biotechnology to printing. [Washington Post, Dec 18] America's economic organization is shifting as old industries die a natural death, this case being big steel in Pennsylvania. Small business is filling every gap well in accordance with the idea of the Microcosm articulated by Gilder. Government's role is negligible although politicians love to blather about small business. Still, programs like SBIR throw money at small business, which might help some of them if it were intelligently directed. Funding research for advancing knowledge (which is what many mission agencies do) has no long term benefit for the company and probably little for society either. Only a seed program for the potentially explosive contributors to the nation's economy makes much economic sense. When the SBIR re-authorization debate starts in 1999, expect the entrenched interests who lap at the saucer of research milk to spout the platitudes that politicians love and to avoid the hard questions of economic sense.


Michael S. Dell has shown he can build a company from the ground up. The $1,000 he used to start Dell Computer Corp. in 1984 is worth some $14B today. Now, the 34-year-old computer magnate is putting some of his profits into other people's dreams. Long a private investor in start-ups, he has quietly launched MSD Capital LP, a New York investment company, with resources of $1B and a team of professional managers. ... In the past, Mr. Dell backed start-ups through funds created by venture-capital companies like Austin Ventures and investment banks like Goldman Sachs. But as his wealth and reputation grew, a spokeswoman says, he was "flooded with proposals." ... A year ago, he paid $3 million for a one-quarter stake in Austin, Texas, start-up Jato Technologies Inc., a designer of high-speed network chips. Last month, Jato agreed to be acquired by Level One Communications Inc. for $80 million in stock, yielding a profit of $17 million in little more than a year. He also hit a home run with his 1995 investment in Rambus, a designer of PC memory chips. The company, which counts Dell Computer among its customers, was the best-performing initial public offering in 1997, with a 281% gain. [Wall St Journal, Dec 16] Start-ups turn to cash-rich giants: More young companies are agreeing to alliances with their much-bigger brethren pathway to profits? Or a road to regrets? Glenn House had stood at this crossroads before, as vice president for strategy at an Oregon software company. There he sought out young companies with promising technology that suited his employer's needs, invested in them - and when all went well, tried to engineer an acquisition. Last spring he was on the other side of the intersection, as chief executive of a 2-year-old Cambridge company, Atreve Software Inc., since renamed WebSpective Inc., now headquartered in Needham. The company produces load-balancing applications that smooth out delivery of Internet Web pages, and it needed investment cash. Up stepped Cisco Systems Inc., the $8.5-billion California maker of computer servers used to direct Internet traffic, wanting to join in the financing alongside three venture funds. ... Once viewed as a sure avenue to a takeover and resisted by many small companies, strategic relationships, partnerships, and alliances between giant technology firms and entrepreneurial start-ups are growing in number and frequency, reflecting the complexity of the Internet, telecommunications, and technology in general. And rich with the profits of their own successes - Microsoft Corp. alone has $17 billion in spare cash - companies such as Microsoft, Cisco, Intel Corp., and Novell Inc. are welcomed as allies in promoting the development of software or other products. Along with the cachet that comes from associating with a big gun, small companies say they gain broader understanding of their industry and leads on new customers. [Jerry Ackerman, Boston Globe, Dec 16]
With all such money pouring into new high technology, why does the government need to pour $1B+ into SBIR? Well, one way to look at it is that government is NOT pouring seed money into high tech start-ups; it is buying what it always bought with its R&D funds. Academic research in NIH and NSF, and predictable mission contribution in DOD and NASA. The disdain of the SBA and SBIR funding agencies (except BMDO) for co-investment suggest that the government has little interest is seed capital investments. When and if the government ever evaluates SBIR by any investment criteria (which seems highly unlikely), Congress could either re-direct the program to pre-competitive investment (not fantasy hobbies) or close it for lack of purpose. But as Congress consumes itself in partisan impeachment battles, SBIR will be shoved way back with more of the present bumbling. (BTW, students of why impeachment for historically minor pecadillos has such a partisan hold should read Jackie Calmes's front-page analysis in Dec 16 WSJ.)

Need an inflation indicator? The Civil Service pay for the grade I started in 1973 is now 2.8 times that pay.

Archibald and Finifter, two William & Mary academics sponsored by NASA Langley, have analyzed the SBIR program at Langley. They will present a paper at the American Economic Association annual meeting in a session devoted to commercialization by NASA. Although only drafts of two similar papers are available, they will likely conclude that SBIR's commercialization, however valuable it was, came at the expense of basic research. The commercialization success rates for Langley SBIRs were about the same as for all SBIRs - no surprise.

If One Incubator is Good, Three is Better. Brevard County (Florida) so loved the 66 jobs from 17 companies in its first incubator that it will do two more in Palm Bay and Melbourne. To get in, says Director Rainey, a company needs a viable business plan and the makings of a solid team. Tenants can stay up to three years. Part of the money comes from NASA which has been trying incubators for several years. [story from Orlando Business Journal, Dec 14]

One agency that does not seem to get it is the Small Business Administration. It seems to favor politics over progress. The BMDO SBIR is under regular attack, inside government, for requiring co-investment for its more mature Phase 2s. SBA, egged on by the producer's lobby of regular SBIR winners, wants BMDO to award SBIRs on scientific and technical merit alone (whatever that means). One could throw a dart in such a competition to pick winners (which is what many proposers think is happening anyway). Denying provable commercial potential (in favor of fantasy stories) is like a college football coach that doesn't want to stress the players. It would rather have the players write essays about winning the big game than to scout the opponent, train hard to the point of pain, get specialized coaches, and adopt new plays and strategies. Actually, the whole community would be better off if more agencies told their criteria publicly and held to them. Instead, the agencies publish mush and induce hopeless proposals from companies that have better things to do with their energies and money. But since SBA actually benefits from such hopeless activity, it has no incentive to help the companies. The more proposals that show up, the more SBA can claim that SBIR is highly competitive and therefore the more Congress needs to fund SBA to oversee it. SBA bureaucrats need $100K jobs too. Standard Washington game.


Love That Computer
(Dec 4) The Army list of 199 Phase 1 winners in 171 firms from August's solicitation shows that Army loves computers. The dominant theme is software and modeling - 40 projects. Old faces appear too, as usual for mission agencies who like predictability. POC (Torrance, CA) seven awards for a company that should by now be selling optical stuff by the shipload to the military after a full decade full of SBIR. Many projects that grind away at the company's decade-long dream and comfortable military service; Giner, American GNC, Intelligent Automation, Radiation Monitoring, Physitron, Cybernet, MetroLaser, MER, Foster-Miller, LNK, L'Garde, Hypres, EIC Labs, Daniel Wagner, Stotler-Henke, Creare. The oddest project: Model-Based Performance Assessment for the Jobs of the 21st Century. Army will need a lot of imagination to pretend to be commercialization-conscience. Not to worry, though, the beneficiaries will help concoct the anecdotes. (No data is not the plural of anecdote.) To see the past fantasies, read Army's Phase III Accomplishments where even the 16 best projects hardly had sales equal to the SBIR spending much less profits or any other demonstrable ROI. If sales back to the Army for items that the Army carried all the way to production were subtracted, the spillover would be minor at best. To its credit, the Army does not pretend its SBIR to be anything more than an Army tool to be used as it chooses. On SBIR the Army would feel right at home in 19th century Britain. Not to worry, either, the Army's thick hide will protect it from the barbs of any economic crusaders. 
DOD's Commercial Campaign
(Dec 4) Pick your metric! DOD will let you nominate the metric by which your commercialization will be measured. Each SBIR proposer will be asked to project the metrics it expects to report during and after phase II, says DOD's new policy. But then it will compare you with the average DOD proposer and tell the SBIR deciders where you stand. Whether the deciders take any notice will be out of your control. Unless SBIR decision-making changes dramatically among the folks who wear uniforms and stand in the way of bullets, your commercialization will have only a random effect. But DOD Headquarters, like NASA Headquarters, keeps inventing more measures to keep the heat on. Headquarters sees a strategic reason for commercialization of its SBIR and tries to convince the warriors. In another policy move, DOD says that Phase 2s can be expanded with matching funds from either private or public sources. But only real money need apply! While the policy isn't that new (SDIO started in 1991), the public stance is new. Credit Jon Baron, the DOD SBIR overseer, with the continuing pressure to get DOD's SBIR to do some good for DOD and everyone else after Phase 2 ends.

The Defense-first Republicans will have a slight problem in their 2000 campaign. They are outgunned 3-1 in candidates having military service. Gore-Kerry-Kerry v. McCain. One Medal of Honor Democrat, one POW Republican, and a guy named George Bush to complain about Saddam still in power. In typical American politics, Clinton will disarm the not-enough-Defense by proposing a DOD budget increase. Excuse me, sir, for what purpose?

REDUCING HEALTH CARE COSTS AND IMPROVING QUALITY OF CARE by OZTECH SYSTEMS INC, SAN BRUNO, CA. How's that for an SBIR title? Not even the US Congress can do that. NIH98 Winners


In the US, corporate research is done only by companies that have at least a 50% share in a multi-billion dollar market. However to be in that position, they have to have a business so good that it's usually dumb for them to go into a new one. The good idea will be a distraction. This is the silicon paradox: the companies best qualified to do research are the least qualified to take advantage of it. [David Little, CEO of Interval, Red Herring, Nov 98] In steps the government with a program like SBIR on the theory that if the government sponsors the research, the new technology will take on a life of its own. Nice politics, bad economics. SBIR will not put in enough money to create that independent life. Even if it did, as it appears to be trying with many multiple-awards winners the effort is doomed. First, government doesn't know which technologies and companies to invest a lot in. Second, the money will be self-defeating as too many companies get addicted to the SBIR money, always finding a great excuse not to cut to the private market.

Former Federal Reserve Governor Lawrence B. Lindsey says President Clinton's pledge to veto any tax cuts until Congress "saves Social Security" is a recipe for economic disaster. [Barron's, Nov 30] Tax cuts spur the same kind of debate as government direct subsidy to innovation.

Navy has listed its summer SBIR winners, company names and topic numbers only.

The US Patent and Trademark Office completes its inline database with 2M patents 1976-1999, says Wired Dec98.

If it looks and smells like hype, it probably is hype. Especially when someone claims to have found a better way for diabetics to track their blood sugar... At least two dozen companies are working on an alternative to finger-prick. ... Warning: The woods are full of startups proffering medical miracles. Be skeptical. [Forbes, Oct 19] SBIR proposers for sensors, particularly IR sensors, loved to offer non-invasive bio-med testing as a spin-off. Government can get a reality check on such a claim (and on most other wondrous claims) by looking for a private investor willing to supplement government financing. After all, SBIR was invented to supplement private R&D.

The politicians crave power: free flows are a discipline on crazed governments, so control freaks from both left and right try to stamp them out. The best regulated parts of Britain are its graveyards - nothing moves. [The Sunday Times, Oct 11] Capital controls in Malaysia and the Communications Decency Act at home.


SBIR Firms in D&T Technology Fast 500
28 SVS
125 ACX First Phase 2 1995
228 NZ Applied Technologies all SBIR growth
280 Qualcomm (Public) SBIR negligible
300 Embrex (Public)
313 HNC Software (Public) SBIR negligible
342 ATMI (Public) model SBIR story
357 ViaSat (Public) Navy seed; $15M DOD SBIR
412 AstroTerra One BMDO Phase 2

Qualcom had $1M from AF and Navy 1987-1989 as it grew from 100 to 300 employees. SBIR negligible. ACX first Phase 2 in 1995; one small Phase 2 in 1995. employment tripled 11 to33 1995 to1997. Several packaging Phase 1s. Navy was ViaSat's first customer in 1987; since then $14M has gone into what sounds like ordinary engineering. 90% of sales to DOD. #94 Cymer grew on a technology licensed from big SBIR user Science Research Lab. Ranking is by 5-year growth percent. Of the 500, 41% are software which helps explain the dearth of SBIR companies since government sponsored software is unlikely to grow fast enough to make such a list. Fast, imaginative, responsive, and economic do not drive government R&D funding. The whole Deloitte & Touche's Technology Fast 500 list


A government big enough to give you everything you want is a government big enough to take everything you have. [Ronald Reagan, 1984] Denying a willing buyer the right to purchase someone's medical records, or a telemarketer the right to invade your home during dinner, is seen as a crime against private enterprise. [Robert Kuttner, The American Prospect, J/F99]

for two decades has shown huge promise, soaked up billions in investment, and produced only a handful of winning products [RA Melcher, Business Week, Nov 30] Funny you should suspect it's about SBIR. No, it's about the medical biotech industry. Actually, if SBIR were more targeted to investment by valid criteria - not pretension and wooly "success stories" - it might even produce more than a handful of winning products and a ream of blather.

Why Government Neglect of basic research. Another classic market failure. Even the most optimistic venture capitalists won't back science that's unlikely to pay off for 30 or 50 years. Government will, at the Goddard Space Flight Center, the National Institutes of Health and so forth. Which MAY be a good argument for basic research funding despite exactly Kealy's counter-argument ("The Economic Laws of Scientific Research"), but not for a shorter range program like SBIR intended to help market agile small firms expolit the results of such research, not do the research. Today's arguments about U.S. government concern relatively small differences over weapons control, tariffs, welfare, corporate subsidies, labor laws, taxes and rights. They're about adjustments, about the shutters and paint on the government mansion. The piece asks and answers the question: What human problems has government mended? The answers: ignorance, chaos, insignificance, isolation, invasion, pollution. [Baltimore Sun, Nov 22]

All politicians say they put principle above polls. Yet when one of them actually does, most every politician is aghast. This explains the bipartisan horror at Henry Hyde's decision to proceed with impeachment hearings despite the GOP's Nov 3 election defeat. [Paul Gigot, WSJ, Nov 20]

The third annual Massachusetts SBIR awards, by the Massachusetts Technology Collaborative (MTC), honored four MA tech: Active Control eXperts, Cytel Software, Diversified Technologies, and Technology Integration. ACX received a series SBIRs to develop a vibration control system for the vertical tails of AF planes. ACX is #79 on Inc. Magazine's 500 fastest-growing U.S., companies. Cytel got NIH for statistical software now being in new drug trials for biomedical research. Diversified Technologies got DOE SBIR for solid-state switches and pulse modulators for high-voltage applications, such as semiconductor fabrication, food processing, radar systems and physics research Technology Integration got Navy, Army and NASA and developed a computer hardware and software diagnostic system that can determine the operating condition of mechanical components in helicopters and planes. [Boston Business Journal, Nov 16] The article didn't say whether any of the work would have happened without SBIR nor what the degree of innovation was. The mission agencies tend to use SBIR for low-risk things like software projects that could have easily been procured by their mainline R&D programs as predictable and useful minor advances. Nor did the article say what criteria the judges used.

[Futurist Watts] Wacker intends to get you writing a 500-year business plan. "Forget five-year plans, the companies that matter are in it for the long haul". [Upside, Dec 98]

Don't let the government lure you into self-deception. Just because the government appears to believe your commercialization story doesn't make it true. You'll regret it when the SBIR money ends and the government turns its back.

So the Republican Party is going to try pragmatism. Get ready for plenty more tears. The party surely will find a way to recapture its soul, but first its next generation of leaders is going to have to run off a generation of nuts and hustlers who attempted to hijack it. While they are at it, party leaders might take a lesson from Massachusetts, where the GOP just sold a governor and a lieutenant governor to the electorate in an overwhelmingly Democratic state. To what should we ascribe the local GOP's success? The taste for divided government is only part of the answer. Like any competitor, a political party must differentiate its product. Republicans historically have positioned themselves as being more market-oriented, more vigilant, and, well, more disinterested than the Democrats - the party of good housekeeping vs. the party of social progress. With Republicans, you're not supposed to have to count the spoons (so often). [David Warsh, Boston Globe, Nov 10] Bad news, Republican SBIR CEOs; you have a consistency problem. You're for the free market provided the government hands you free money. You don't show any troubled conscience in arguing for the handout in the most glowing terms about national benefits of such "investment". To be just a little consistent, you should be for a stiff commercialization standard for SBIR that you would be willing to abide by.


A Philadelphia Story
(Nov 10) The Science Center at University City will be the home of two $100 million venture funds looking to invest in companies that commercialize technology from the 31 colleges and universities that own the center. Science Center President and Chief Executive Officer Jill Felix said one fund will invest in biotechnology, health-care and medical-device companies. The other will put money into information-technology and telecommunications businesses, especially those involved in electronic commerce, distance learning and the Internet. Although the funds will be housed at the center, they will be for-profit entities run by professional management companies. They will get first crack at commercializing technologies from the schools that own the center, but may make other investments as well. The funds will concentrate on investments of from $500,000 to $2 million in companies at various stages of maturity. [
Peter Key, Philadelphia Business Journal, Nov 9]
Philadelphia thus is another region trying to force a geography on venture capital. That works in politics but not in boundless capitalism. The fund managers even have a fiduciary duty to their investors not to accept a lower Philadelphia return just because it's Philadelphia. Take, for example, the case where a similar Atlanta VC outfit (that also specializes in early-stage life sciences and information technology) start-up put $1.5M into a Duluth firm. Not much in common between Duluth (with Jesse "The Body" and icy Lake Superior's iron ore traffic and the conservative Lutherans of Lake Wobegone) and Atlanta (with Newt and the peanut subsidies and the bible-thumping right of Elmer Gantry). 

Mid-level research has customarily been performed, and should continue to be done, in the private sector. The fruits of this research are proprietary; the company is the primary or even sole beneficiary of any new technologies. At the same time, the company must also bear the risk that the research project will not yield any profitable results., says the House report Unlocking Our Future on federal science policy. Although it does not mention SBIR by name, it talks about small cokmpany capitalization as a job for the private sector: small "start-up" technology companies must be encouraged. These young companies often focus initially on a single, largely basic discovery as their ticket into a competitive market, frequently drawing directly from discoveries made in universities or national laboratories. While individually small, in the aggregate these companies provide one of the best hopes for bridging the research gap between the basic research funded by the government and the product development pursued by industry. A large reservoir of funds is available for investing in promising young technology ventures.. On balance, this Science Committee finding does not foretell any SBIR action. But then the Science Committee is sorta neutral on SBIR anyway, sticking mostly to pieties.

In technology markets, there's a tendency for customers to follow the crowd. They like standardization. It helps explain why Microsoft, Cisco and Dell find themselves where they do. At the same time, technology has deeply penetrated into both business and consumer markets, allowing large companies to grow at really high rates. But eventually, everyone will have purchased their first PCs and routers. As that happens, price competition increases. Margins come down. It's not abnormal. What was abnormal was the length of the up cycle. We'll have a pause here, and then we'll get right back to it. The tendency of people to use technology more strategically in their businesses and more comprehensively in their personal lives is unstoppable. The long-term outlook is fabulous. There's a 20-year cycle coming correlated to the Internet, and it's going to make the PC business look like a small-time operation. [Roger McNamee, Barron's, Nov 9] And those few true investment SBIR programs will neither fight this trend nor waste their investments in clueless ideas and companies. The rest will use some other selection criteria to satisfy some other goals than feeding new and useful technology to mainstream markets.

For me, it's difficult to believe that a company owned by the state for a long time can switch from today to tomorrow into an entrepreneurial one, sayd Carlo Garlant, a Swiss pension fund portfolio manager on the nature of Swisscom's IPO. [Wall Street Journal Europe, Oct 28] Could the same be true for companies picked for subsidy by the US government in technology programs?

As for drugs, if they didn't exist, our government would have to invent them, the better to enact laws aimed at keeping the citizenry sinless and obedient [Jay Nordlinger, Wall Street Journal, citing Gore Vidal] Sin has its place, too.

End R&D "Welfare", says GP Zachary (MIT Technology Review. Nov/Dec98). Zachary's prescriptions: keep national labs on their mission, kill NASA, streamline DOD (got any workable ideas?), prune the mega-projects, stop ATP, more R&D tax credit, a national network of citizens' councils, invest more in developing countries' R&D. for the past 25 years, special interests have wasted a big share of government monies for inovation. With the exception of biomed engineering, the government isn't a significant player in any critical field of technology. Good luck if you believe such housecleaning is good; the political system created the problems as solutions to some earlier problem, and is likely to continue the political benefits. A closely divided legislature surely could not make such moves.

the lesson for Corporate America may be that money spent on lobbying will soon exceed the return on money invested in, say research or new equipment. If it hasn't already. [Business Week, Nov 9]

The Navy SBIR wants the usual things for the usual reasons with the usual stuff about how valuable the military technology will be in the private markets. Penetrators; shape charges; an inexpensive generic, modular, heavy-lift, stable, reconfigurable, ergonomic omnidirectional electrically powered mobility platform; Master Training Plan Generator; Urban Warfare Simulation; stealth submarine coatings; etc, plus quite a few items that really would have market if the relatively mature technology had an economic advantage. Although you don't have to believe such better-mouse-trap fantasies to get a Navy SBIR, it will help if you can show that you did something with an earlier SBIR-funded project other than beg the Navy for more money. How much a real commercial prospect will help is hard to decipher from Navy words and deeds. Proposals due Jan 13.

An Open SBIR Call The Air Force space people have an SBIR topic AF99-062 that on its face asks for any new idea with dual-use potential. to Develop innovative methods for improving the performance, endurance and survivability of future space and missile systems. Future space systems require a variety of integrated technology developments in order to meet improved performance requirements. We are seeking innovative approaches and technology developments which will provide effective and affordable future space vehicles, launch vehicles and space concepts with improved space system performance, endurance and survivability. Proposed approaches shall emphasize dual use applications, i.e., those which clearly offer private sector as well as military applications. Proposals emphasizing technology transfer will receive additional consideration. That last bureaucratic sentence should be viewed with skepticism. Terms like "additional consideration", with no fixed meaning, tend to be ignored by the mission-driven people. To get any extra credit you have to pound into the decider how the dual-use will pour benefits on the mission. An unconnected downstream benefit to the company will have little influence.

Palmetto Technology - Me, Too A Silicon Valley in South Carolina? That's the plan of the new South Carolina Technology Alliance, a public-private group trying to lure high-tech business to the Palmetto State. Tom Persons, a retired AT&T Corp. general manager, has been tapped to lead the effort, combining financial incentives with educational reforms that would get South Carolina into shape to compete with other states for high-tech companies. "South Carolina is a technology state," says Persons, pointing to NCR, Intel and Solectron Corp. "We're open for business, and we're ready to do whatever it takes to satisfy needs from a technology standpoint." .. The group's budget of $350,000 has been cobbled together from state and federal grants, private technology investments and contributions from South Carolina's high-tech businesses [The Business Journal of Charlotte (NC), Oct 19] Youthful companies sought in a state whose junior Senator is 76.


NASA Phase 1 Winners
(Oct 20) NASA picked 345 Phase I SBIR winners for 1998 from 2,335 proposals. The press release gave no other useful statistics [such as number of companies or first time winners or multiple winners...] that would open a window into NASA-think. An experienced eye moving down the list would see many familiar names many times (numbers in parentheses are the easy-to-find previous Phase 1s, actual numbers may be higher). These 33 old multipliers consume a third of the winning projects on top of a previous 600+ awards. Note: these are only Phase 1s, the little money. Any analysis of what NASA is really doing should emphasize Phase 2s (which NASA does not yet allow the public to look into). Return to Index
Advanced Fuel Research 2 (9), American GNC 3 (17), Aspen Systems 3 (7), Charles River Analytics 2 (23), Composite Optics 3, Continuum Dynamics 2 (16), Creare 7 (53), EIC Labs 2(30), Electric Propulsion Lab 3 (5), Eltron Research 4 (11), Energy Science Labs 2 (13), Foster-Miller 5 (67), High Technology 3, Intelligent Automation 5 (15), ITN Energy 3 (5), Lynntech 3 (23), MER 3 (21), Metrica 3 (11), Nanomaterials Research 6 (21), Nielsen Engineering 2 (21), Opto-Knowledge 3 (7), Orbital Tech 5 (30), Physical Optics 4 (35), Physical Sciences 4 (60), Q-Peak 4 (4), Ceramic Composites 2 (6), SRL 2 (10), Scientific Systems 3, Spire 2 (41), SRS Tech 2 (14), TDA Research 3 (18), Umpqua Research 3 (25).

No SBIR Changes The SBIR advocates could not convince the Congress to change the SBIR law. No three wishes: no increase to 3.5%, no permanency, no admin costs for the agencies. My opinion: none of the wishes would have made a better SBIR.

Modern conservatives are right, says Galbraith, to credit the New Deal and the Great Society with the birth of the new conservative movement. But conservatism did not rise because the New Deal and Great Society failed - it rose, ironically, because they triumphed. The more liberal economic policies succeed, the less voters believe they're needed; the wealthier people are, the more conservative they become. [WR Mead, "Economist Emeritus", Worth, Oct98]

Today it's easy to raise money for good ideas. So as an entrepreneur you should be looking at venture capital the same way you do any other service business. If you don't think you can get the best service or the best value-added from Mayfield or an angel or whatever, then you should find someone else. If you're just finding someone who is willing to give money, and they'll never add anything else, you are making a big mistake. A VC is a key partner. If we're not a partner, we have no value. [K Fong (VC), Forbes ASAP, Oct 5] Which suggests that companies look deeper into how and when to use SBIR. The government will never be a partner because it's not allowed. The best government could ever be is a fickle partner.


A defense budget totaling $270.5B won final Senate approval and is expected to get Clinton's signature. But both the Pentagon and congressional leaders consider the funding barely sufficient. [WSJ, Oct 1] So, what's wrong with barely sufficient? Do they prefer excess? Have Republicans ever met a weapon they didn't like? Since no two people agree on what DOD's or America's world role should be, what is "barely sufficient"? Congress could at least own up to the self-inflicted inefficiencies of using the DOD budget as a pork barrel.
Take My Freebie, says TJ Rodgers, CEO of Cypress Semiconductor. He and the CEOs of Sun and AMD say that corporate welfare should stop pumping $65B a year into US industry. TJ would like lower general taxes instead. Not signing such a letter are IBM and Intel, notes Joe McCaffery in CFO July 95. What welfare? Research grants, exotic technology "investment", and export subsidies. Sound like SBIR is one of TJ's targets? His smallish company does not SBIR.

Some Uncertainty Removed. The DOD SBIR at least has a base number for its calculations and can allot SBIR money with certainty. Bureaucrats hate uncertainty and often hold back SBIR until the DOD Appropriations Act is signed into law. That seems about to happen for FY99 despite the Washington gridlock. If it doesn't happen, all that pork spending wouldn't be boastable in the coming election by small government Republicans. Meanwhile, the Joint Chiefs took advantage of the White House distractions to moan to the Senate about declining everything, especially total money and with that the number of general officer positions.


So Does SBIR Advertise. The CATO Institute derides a government program's advertising itself by spending some of its $85M budget to seek new grant requests for Uncle Sam's free money. Which got a political opponent, Charlie Shumer (D-NY) to ask "Is this a government program or a Publisher's Clearing House contest?" No, it wasn't SBIR; it was the marketing Assistance Program where the government helps big food companies pay for foreign advertising. Companies that need help: Campbell Soup, Welch Foods, Pepperidge Farm, Ocean Spray. [facts from S Moore, "Those Dancing Raisins", The Journal of Commerce, July 30] The allegedly free-market Republicans can find worthy exceptions for corporate donors and whatever sounds like nationalism. Congress at least has never found fault with SBIR's advertising its free money. As a practical matter, if an agency wants new ideas from new corners, it has to reach the people who don't know about the opportunity. It was my theory that the most efficient way to advertise SBIR was not big conferences with mumbling government reps at expensive hotels but wide-area leaflet drops in plain language. Environmental rules (and the horrified gasps from our PR-crats) kept me from eye-catching leaflet drops over southern California. Why So Popular? In the public mind, the president is held accountable for the economic health of the country. It does no good to point out that millions of private judgments -- by entrepreneurs, bankers, workers and families -- go into making the economy work better or worse. It is equally pointless to argue that the more national boundaries to trade disappear, the more our prosperity turns on events and decisions made far from our shores. The fact is that the president is not just the commander in chief, he is - and is judged as -- the economist in chief. And when the economy is performing this well, it is no surprise that people don't want to fire him. If you want to know what is sustaining Clinton in his hour of maximum peril, remember the slogan in the Little Rock "war room" during the 1992 campaign: "It's the economy, stupid." [David Broder, Washington Post, Sep 30]

Enough Science, Too Many Scientists. Even the NAS admits that the US is turning out PhDs faster than anyone can employ them. the annual output of PhDs in the "life sciences" has risen 42 percent since the late 1980s, to a total of 7,696, and that the current production is about 2 1/2 times the number needed to fill the jobs in universities -- traditionally the biggest employer of scientists; the numbers also exceed the needs of industry and government ... the PhD machine grinds on, sustained by government funds, the appeal of a scientific career and youthful hopes, mainly to the benefit of the sovereign professors who harness the enthusiasm of graduate students for the conduct of their own research projects. The report doesn't say what should be done about the government research money's continuing to fund research that produces the crowd of future jobless PhDs. Send 'em the SBIR companies?? Now if those PhDs would get politically organized -no chance - they could get some piece of a pie that Congress would invent for them. [Dan Greenberg, Washington Post, Sep 30]

With just more than a week until Congress adjourns, the high-tech industry seems poised to pluck most of the legislative plums it sought -- though lawmakers may force it to swallow a few lemons. But savvy lobbyists are predicting that next year, high tech may find itself on the legislative defensive. ... ``I think we're going to get four of our top-five issues,'' said American Electronics Association President Bill Archer.... number of H-1B visas, no stock-fraud lawsuits against high-tech execs in state courts, Internet Tax Freedom, and R&D tax credit ... High tech's only big loss was on a bid to give the president fast- track authority to negotiate trade treaties. [TOM ABATE, SF Chronicle, Sep 29]

Florida Incubator Seminole Community College is creating an incubation center for early stage technology ventures. The center is being designed to host between 20 to 30 start-ups concentrating on space technologies, software development, lasers/optics, semiconductors and biomedical technologies. The facility is set to open next spring at the Port of Sanford. ... The money is coming from the Titusville-based Technology Research and Development Authority and NASA. The TRDA is establishing five new high-tech incubation centers across Florida to supplement its existing one in Brevard County. [Orlando Business Journal, Sep 28]

Q: The great strength of the U.S. is that we've always managed to overcome all our politicians. Do Bill Clinton's follies really matter? Horne: Yes, in the sense that the politicians who now rule the roost aren't in the White House; they're in Congress, which seems to want to emasculate the IMF. In a sense, this is a protectionist backlash toward helping the rest of the world. The Treasury, which rescued Mexico in 1982 and again in 1995, can't control Congress either. [J. Paul Horne, London-based European equity market economist, Barron's, Sep 28] Many observers see a re-balancing of power between the Executive and Legislative Branches. Whether that's good or bad depends on your view of government. The Founders invented a legislative government because they feared the abusable power of a strong executive (then called a King). BUt in a complex world, legislators with short terms of office spend their energy looking inward. But legislative government fails at external affairs which cannot be handled by a committee of 535.

Our Subsidies Are Better Surprise! The Republicans hate subsidies except for business. In the name of national security they are moving to subsidize the US satellite launch industry with loan guarantees for a competitive, domestic launch industry. From 100% of launches down to 40% in a decade alarms the industry so much it will park its free-market principles at the legislative chamber door. A question: once you start subsidies, how do you end them? VCs always want an exit strategy; how about politicians? Ah, we'll worry about that later on someone else's watch. Since no money need be appropriated qand since the bankers will benefit, who will speak against it? [facts from Wall Street Journal, Sep 24]

AF Topics Published The Air Force has posted its probable SBIR topics for next January with the name/phone/fax/e-mail of the topic author You can chat with the author on what he/she really meant until Nov 30. These tentative topics will be released on the World Wide Web; the URL is. Pick a topic at random: 99VA-009 Aeromechanics for Future Aircraft Technology. See the AF fiction that good AF R&D leads to commercial products. The topics wants better computer models of planes - a good long term R&D goal for the main 97.5% of AF R&D. But just in unlikely case some small business can do modeling better than all the many universities, the AF will divert dual-use funds set-aside for small business into such research. (Actually, the internal forces are more complex and indecipherable by an outsider.) Remember, though, that the author may well lose the internal battle to fund your great proposal. Remember, also, that the make-or-break of SBIR is not the topics; it's the winning projects.

An example of what Roy Porter [New York Times, Sep 20] calls "the insatiable thirst for public funds" is the classic cry of a Presidential advisory commission in information technology. After careful review of the Federal programs, however, this Committee has concluded that Federal support for research in information technology is dangerously inadequate. Research programs intended to maintain the flow of new ideas in IT are turning away large numbers of excellent proposals. In addition, current support is taking a short-term focus, looking for immediate returns, rather than investigating high-risk long-term technologies. Significant new research on computers and communication systems serve our needs while protecting us from catastrophic failures of the complex systems that now underpin our transportation, defense, business, finance and healthcare infrastructure. The current Federal program is inadequate to start necessary new centers and research programs. If you ever meet a scientist who thinks his science (or a subsidy program like SBIR) is adequately funded, write the editor - any editor. (It doesn't count to say that somebody else's program is adequately funded.) But be ready for a harangue by the unlimited number of disappointed proposers. After all, the money comes free from the taxpayer (who's that?) with hardly a look back after the money is spent.

Colors, Breakfast, and Lecture
(Sep 21) Dr. Robert Dean will describe the history of the Creare family of companies that has grown since 1961 to 17 companies, the entrepreneurs and the role of Dartmouth, lessons in entrepreneurship and venture financing. Dr. Dean is the founder of seven companies: Creare (a giant of SBIR winning), Hypertherm Inc. (technology leader and world's largest manufacturer of plasma-arc metal cutting equipment), Creare Innovations Inc. (xerography and motion control; now Spectra Inc., four color, hot wax drop-on-demand printers) Verax (production mammalian-cell culture systems), Synosys (now PerSeptive Biosystems, Inc.), Synergy Research Corporation, Synergy Innovations, Inc. When and How: Wednesday, October 7; Radisson Inn, West Lebanon, NH, 7:30-10:00AM; $45 incl breakfast; info - Jim Myers (603) 643-1300 x2110. Fall dead-leaf colors guaranteed. Return to Index

And a DOD Dual-Use Breakfast
(Sep 21) A how-to intro at the DOD Investment Strategy Conferences, Oct 22 Crystal City VA (Washington) and Oct 29 LAX Hilton. Overview morning and "technical breakout sessions" afternoon. Money on offer is the Dual Use S&T Initiative solicitation. The usual happy words: dual-use, reduce costs, investment, the meaning of which is left as an exercise for the reader. Information, Diann Fahey, 703-519-2035 . The 1998 money went mostly to household names: Boeing, TRW, Northrop who had to contribute something as well. The cost sharing aspect that guarantees industrial interest is hated by the small businesses who don't have capital to invest and who must therefore appeal to set-asides like SBIR. Two commercializing SBIR firms won one award each - Cree and Emcore. Odds are that the military services who pick the winners have a quite restricted view of what dual-use means and how they could benefit from it. Many projects sound a lot like the usual R&D projects that have a purely military goal which arises naturally from DOD's internal politics.

There was plenty of incremental info from the semiconductor-equipment makers, most of it depressing. Joseph Bronson, chief financial officer at Applied Materials, said demand for chip-making gear continues to be hurt by a glut of memory chips, the popularity of ultracheap personal computers, and the Asian economic mess. ... he warned that chip demand might not ever return to its previous historical growth rate. [Eric Savitz, Barron's, Sep 21] Ss-sh-sh; don't worry. If you don't tell government the bad news, the SBIR decision makers will probably not work it out for themselves and you can peddle a commercial fantasy to most SBIR programs. Just emphasize your technical wizardry and wave your hands about growing technology markets for the 21st century. The more conventional blather, the better. Lots of government managers agree with the multi- SBIR winners that "scientific and technical merit" should dominate.

French to mimic North Carolina. Governments cannot resist "investing" in stimulating entrepreneurial high-tech growth. The French have shifted policy to spend $160M for networks of laboratories, $17M for a seed money fund, $100M for venture capitalists to spend (uh, invest), and allow public researchers to hold financial links to research houses. [Photonics Spectra, Aug 98]

Rocketeers have always found ingenious ways to veil their requests for the cash they need to support their hobby. Scientific exploration is one. Military ambition, another. Commercial endeavor is always a good cover for spending lots of taxpayers' money. If all else fails, they can try appealing to national prestige. [The Economist, Aug 8]

Faster, Better, Cheaper? NASA prided itself on a new approach to missions - faster, better cheaper. A New York Times story (Sep 15) by Warren Leary says it ain't necessarily so. Reliability in space proved a little tougher than a profit-minded contractor could handle. If NASA's SBIR were to be harnessed to the strategy (which does not yet appear to be so), the commercialization as a source of mission hardware has to be carefully managed so that the minimum reliability isn't compromised. That's not an excuse to abandon dual-use, only a warning that unrestrained dual-use won't serve the government purpose. SBIR proposers to NASA should balance the reliability-commercialism dilemma intelligently and hope that the deciders are paying attention to the question

When an internal review of the Ben Franklin Technology Center of Western Pennsylvania wraps up later this month, the facility's board of directors will likely resign en masse. "The public and agencies with the state may perceive that having a clean slate would be beneficial and give the organization a fresh start," said board secretary Robert Unetich. "So that is probably what will happen." The board has been considering a variety of reorganization plans since June, when allegations of mismanagement, "malfeasance" and "nepotism" at the center surfaced. Dissolution of the board emerged as the most likely plan on Aug. 28, when members met to hear preliminary results of an internal investigation into these allegations. [Pittsburgh Business Journal, Sep 14]

Says Nobel laureate Gary Becker on SBIR: It is extremely hard politically to cut back government programs once they have begun or expanded, since subsidized groups fight tooth and nail to preserve their benefits. Actually he never mentioned SBIR by name in [Business Week, Sep 14]

Our coalition, which consists of 28 Chambers of Commerce from all parts of the US, believes that federal research funding should be increased. The most critical need is in defense basic research. Although it spurred the development of the transistor and the Internet, defense basic research is down by 30% in real dollars since its peak FY 93. Regaining this lost ground needs to be a top priority in federal budget deliberations. [J Klocke, Exec Dir, Nat Business Coalition for Federal Research, Business Week, Sep 21] What think you? Conventional wisdom from two decades ago? Did DOD basic research have anything to do with the Internet's success? What does the Coalition think basic research is anyway? Is there such a concept as "most critical"? Where does the coalition recommend the new taxes come from to pay for the new research? Why defense as the source of useful research?

The Bioscience Investment Fund, created by the North Carolina Biotechnology Center, closed on $16M from private investors and the state legislature. Its target is biotech and life science companies based in NC. Interstate competition will now induce Minnesota to do the same. Who's the beneficiary of such pseudo-capitalism? The politicians. The capitalists didn't need such a fund that restricts their search for profit to one ordinary state. Political boundaries serve no purpose for capital as the Asian countries will soon discover when they erect capital controls to "save" inefficient enterprises. Why then do the NC capitalists do it? Interesting question. Readying to re-start the Civil War? Under the table deals with those legislators for other favors?

"SBIR has always been a catalyst for the growth of small high-tech businesses," said Kesh Narayanan, director of industrial innovation. We found that the top 50 successful small business grantees (representing about 10% of all Phase II grantees) have accounted for $2.2B billion in direct sales and created 10,000 jobs. The pilot program will help give other small high-tech companies the opportunity to make this sort of impact." Kesh means that NSF will match private sector investment to extend Phase 2 beyond the usual cookie-cutter fixed amount. Read about Phase 2B of four companies. If enough companies take the bait, the weaker science companies will have to adapt or die (as will NSF's brave talk about commercialization.) It is now up to the companies to push NSF toward the swing-for-the-fences BMDO model of SBIR and out of a bunt-single offense. With any luck BMDO will have as many homers this year as Mark McGuire. NSF also now offers a push news service. Note that Kesh is also taking generous liberties with cause and effect in claiming 10,000 jobs created. An otherwise growing company that had an SBIR isn't in the same league with companies that needed SBIR to get a risky technology started. (BMDO has at least two companies in that class - Ortel and HNC Software. The number comes from an NSF-funded SBIR booster study that asked few serious questions. To take real inspiration from the number, NSF could shift its SBIR more dramatically than the Phase 2B little bite of the apple. Fat chance with the academics in charge and bureaucratic in-fighting for power.

Tibbetts Awards Each year since 1996 the SBIR community gives awards to a batch of the deserving (on rather vague criteria) companies, federal officials, state officials, etc, who have done good for (or with) SBIR. This years list of winners who get an attaboy. Who are the judges? This year: 1) Jon Baron, the DOD SBIR policy maven and aggressive champion of commercialization (more than talk); Terry Bibbens, the SBA "Entrepreneur in Residence", an opponent of co-investment for SBIR projects; and 3) Bob Pap whose company (Accurate Automation) has won lots of SBIRs and who spends endless time in SBIR politics. Tibbetts is Roland Tibbetts (retired from NSF) who more or less got SBIR started in the late 70s.

A Baltimore Incubator Everyone seems to have one. [Maryland's] Board of Public Works approved a $1M state grant yesterday to help develop an "emerging technology center" at the former American Can complex in Baltimore's Canton neighborhood. The state grant will help pay for improvements to 50,000 square feet of space in one of the complex's buildings. It will serve as a center for entrepreneurs developing new businesses in telecommunications and other high technology fields, officials said. The grant was made to the quasi-public Maryland Economic Development Corp. (MEDCO), which will lease space from the owners. MEDCO is receiving $2.25 million from federal, state and local grants and the Abell Foundation for the project.[Greg Garland, Baltimore Sun, Sep 3] As long as government and charity funds are used, no one will be upset that the economics won't work out. It is political, not economic.

Maryland Incubator
(Sep 3) The Usual Incubator Hype..two dozen budding entrepreneurs attended a ceremonial "topping off" yesterday of the $4.5M Maryland Technology Development Center. .. [Montgomery] county provided the land -- one of the last parcels in its 300-acre R&D village -- and about $250K annually for operating costs. The state is paying for construction. .. The nurturing pushes the success rate for high-tech start-ups to 80%, compared with 20% for non-incubator companies, the Maryland Department of Business and Economic Development says. [Baltimore Sun, Sep 2] I wonder how Maryland technocrats define success for the companies. Return to Index

Cal Poly Pomona has been chosen to run a business incubator to help small businesses find commercial applications for NASA technology. NASA will give the school $800K over two years to create a program to expose businesses to technologies developed at NASA's Jet Propulsion Laboratory and Dryden Flight Research Center. The program will also assist businesses with support services and offer advice on financing, marketing, sales, accounting, manufacturing and legal issues. Info (909) 869-2276. [LA Times, Aug 26] Although the odds are against any great results that wouldn't have happened anyway, at least NASA is trying something. It hopes to get as much publicity as the incubator in Sunnyvale which has had some success in attracting living breathing entrepreneurs to try to mine something of NASA's technology closet. DOD's only apparent move in that direction is the SBIR Fast Track that drags the reluctant Services into commercial technology (for their own good).

One state's SBIR help group says Everyone is encouraged to call upon their elected representatives in Washington to urge support of the SBIR renewal. Why? Other than the syntax error of giving everyone a plural verb, why does a state think there's a national need for such legislation? Or does this state believe that democracy works best as a competition of interests in which everyone grabs for what he/she can wangle from elected officials anxious for re-election. The joke, of course, is on all the states because they all have to pay the bills for the handouts and put up with the posturing politicians. Ever watch the small government Republicans boast how many federal dollars they have brought to their electorates? For the record, SBIR does NOT provide any money to the states that wouldn't have come anyway. It's not even clear that small business gets any more money. What is clear is that the companies plumping for more SBIR have got more and want to keep it that way.

(Aug 21) NASA picked 25 STTR Phase 1 winners in 23 firms. Double winners: Foster-Miller (Waltham, MA) and Makel Engineering (Chico, CA). Plenty of recognized names with no doubt more innovation in the NASA style: Barron Associates with another model, Energy Science Labs gadgetry, HYPRES superconductor stuff, MSNW, Physical Sciences with more good science, Techno-Sciences near Goddard. None has gone public despite the NASA and other government support for their R&D with "commercial potential". But neither NASA nor Congress is likely to mind as long as contracts flow to the districts and technology ownership flows to NASA.


Small is Beautiful, Not Profitable the latest research shows companies with fewer than 50 employees in the long run do not generate more jobs than large firms. That's the conclusion of a study by the Economic Policy Institute, which states that even though new businesses do create new jobs at a higher rate than the nation's top 1,000 firms, the problem is they also eliminate them at a higher rate. And another discouraging bit of news: "The quality of jobs created by small businesses is inferior to those created by large businesses.The report, Small Consolation: The dubious benefits of small business for job growth and wages, also finds: - Employees at large firms earn on average 39 percent more and that gap has been widening, not declining, over the past 20 years. - Health insurance is available to 69% of employees at large firms; only 30% at small firms. But don't give up on small firms: They're still the source of much of the energy, excitement and creativity in the U.S. economy. [Carol Kleiman, Chicago Tribune, Aug 20] And the politicians still love ya! But then politicians are always living the old paradigm (no votes in any new paradigms a la Richard Darman's put down of Jim Pinkerton's advanced thinking for the Bush White House. The one convincing statistic for innovation programs is that innovations per employee are much higher in companies under 20 employees. The rest of the small is beautiful myth is mostly myth. In a small firm you work harder for an owner who of a larger share of the business personally.


The Thermophotovoltaic Cheerleaders Thermophotovoltaics is about to reach the commercial marketplace. ... In practice, the systems have never performed as expected. ... Scientists are excited by laboratory modeling that suggests the promise of this technology. ... JX Crystals (Issaquah, WA) has created a product - primarily for use on sailboats. ($3000 per.) ... Though still in its infancy - actually just barely out of the research laboratory - thermophotovoltaics holds great promise for many niche markets. ... A technology that had its roots in the 1950s may finally get a chance to prove itself at the turn of the new millenium. Such cheerleading of a bright future in a technology that has been slogging for decades usually appears in SBIR proposals to a gullible government. Not just in Scientific American articles (Coutts & Fitzgerald, Sept 98). DOD has given three Phase 2 SBIRs (two by BMDO): QUANTUM GROUP (San Diego, CA), Essential Research (Cleveland, OH), and Structured Materials Industries (Piscataway, NJ). Neither author of the article lives in a company trying to bring the product to a profitable market but then that's not who typically publishes in SA. And whether government should be using SBIR for long term incrementally improving technology gets right to the heart of what SBIR is for. But since Congress left SBIR in the hands of the R&D people in the agencies, we are most likely to get what the agencies understand - incremental research. Of course government can take a practical approach and not just rely on the happy words of scientists (who actually have little interest in anything but getting money for their hobby): demand the contribution and participation from a market-driven third party which would have an interest in success. It would be fair to ask Quantum Group how its 1997 SBIR is doing toward marketing its compact, lightweight, quiet, efficient TPV power generator in the 100 to 500 Watt range.

NASA's Jet Propulsion Laboratory will work with Pasadena-based Jacobs Engineering Group to commercialize cutting-edge technologies in its latest attempt to give space technology down-to-Earth value. No specific deals were mentioned. Jacobs specializes in building industrial plants and cleaning up chemical contamination. Jacobs will look at such things as infrared imaging to detect pollutants, advanced mapping to choose plant sites, ground-penetrating radar and fuel-cell-powered generators. [LA Times, Aug 12] Hope springs eternal in tech-transfer of government stuff to commerce. It actually happens, but there seems to be little evidence that a company/government partnership makes any difference. Hungry entrepreneurs will find the good stuff and exploit it in ways that the government never thought of.

....start-up costs for biotech ventures are high--an estimated $300 million to $500 million per drug--and profits can take a decade or more to materialize. Even with its success in bringing Thalomid to market, "we are going to need a lot of money before we turn profitable," says Celgene's CEO, John Jackson. Some have suggested that the public sector step in and help, following the model of Germany, where the federal government gives private firms more than $2 billion a year in research-and-development subsidies. But such a policy would invariably politicize research. The leaders of biotech companies should spend their time and effort on lab work, not lobbying. And bureaucrats shouldn't be making decisions about which approaches are likely to bear fruit. [CB Whelan, "Creating Jobs Doesn't Require Giveaways", Wall Street Journal, Aug 10] She goes on to describe a New Jersey scheme for tax incentives for small R&D companies with losses. It is an interesting private sector alternative to programs like SBIR that do not achieve their rationalizations for political handouts.

Let's BMDO. The conservative Republicans - the business types, not the social hard-heads - have re-discovered national missile defense as both Forbes and the Wall Street Journal are beating the drum again. Why? All signs are that there is nothing to develop that would work very well; we would return to the debate about leak rates (is 10% leak acceptable?); and the cost would be enormous (never believe a government developer's cost estimate for something new). Well, think who would benefit from such a program. Big business with some trickle down to small high-tech business. It's a political cover for government benefits. Small business attitude? For a large sector, especially SBIR winners, trickle down government beats zero commercial.


It Sounded Great for the Politicians at the Time. CellSource, a San Diego biotechnology firm that relocated to Pittsburgh last year with great fanfare, has quietly shut its doors here. The company, which received a $100,000 state grant last year during a personal visit from Gov. Tom Ridge, was touted as a shining example of this region's efforts to make itself the world's capital for biotechnology and tissue engineering start-up companies. But instead of lauding the Golden Triangle's attractions, CellSource is claiming it was a victim of conspiracy and fraud by its Pittsburgh financial adviser ...CellSource brought six executives with it when it moved here and had plans to hire at least 43 locally. {Pittsburgh Business Times, Aug 3] .. an age of science and abounding accumulation of material things. These did not create our Declaration. Our Declaration created them. The things of the spirit come first. Unless we cling to that, all material prosperity, overwhelming though it may appear, will turn to a barren scepter in our grasp. [Cal Coolidge, ca 1926] .. By the time he took office in 1923, millions of Americans resented Washington for meddling in their lives, squandering their wartime sacrifice and saddling them with a costly and intrusive government. Between 1916 and 1920, tax revenues had multiplied sixfold. During the same period the national debt ballooned to nearly $26 billion from $1 billion, even as wartime inflation sent the cost of living skyrocketing. [RN Smith, The Underestimated President, Wall Street Journal, Aug 3]

Any proposed special subsidy or tax break flowing to an industry or a business must pass a four part test. The proposer must show (1) the extent to which the public stands to benefit from the private activity; (2) how much of that alleged benefit depends on the incentive (it may be that businesses would do much of it anyway); (3) that this net benefit exceeds the cost to the public of the proposed subsidy or tax expenditure; and (4) that there are no less costly means of eliciting the same amount of public benefit. [R Reich, The Rhetoric of Corporate Welfare, The American Prospect, S/O98] How would SBIR's defenders fare in such a test? They would probably claim that R&D is good, that it funds valuable R&D that the companies would not do otherwise, that the cost to the public is negligible since no new funds were appropriated, and that there is essentially no other means to the same end. The opponents would argue that the public does not seem to have gained anything measurable that wouldn't have happened anyway, that the cost to the public is hard to measure since the agencies can't or won't announce (for political reasons) the net loss from the diversion of R&D to SBIR. The politics of SBIR re-authorization will revolve around the burden of proof because whoever has the burden will lose the debate. Neither side can "prove" its case because the advocates have so little useful results and the opponents have no direct economic incentive and thus little data either. Thus the Republican free-marketers will have to once more swallow their free-market, small government rhetoric and re-authorize SBIR with some conscience-easing pork-barrel measures to pass out the freebies more equally.

South Dakota Best, California 42d. Ranking first on the list was South Dakota. Last was the District of Columbia. California, long a competitor with Arizona for business, ranked No. 42. Ranking highest from the western region was Nevada, at No. 3. The worst western state was Oregon, at No. 48...... The index is based on tax rates, workers' compensation costs and crime rates. Not taken into account is each state's regulatory environment. . The Small Business Survival Index was published by the Small Business Survival Foundation, the research arm of the Small Business Survival Committee. The committee is a nonprofit, nonpartisan small-business advocacy organization based in Washington. [Phoenix Business Journal, July 27]

"People said, 'The Department of Defense is cutting back. What are you going to do?' " says Nancy Archuleta, chief executive of Mevatec Corp., a software and engineering-services firm that moved its offices here [Huntsville, AL] from New Mexico in 1991 to pursue Pentagon business. "My answer was, 'I'm just going to become a better defense contractor, so I don't lose out.' " .... "Without government contracts, we wouldn't be where we are now," says Laura A. Lopez, who runs Ublige Software & Robotics Corp. with her scientist-husband, Luis Lopez, from their house. More than 60% of the company's revenue comes from government contracts, but the Lopezes see commercial customers as the way to future profit growth. Two of their products: software to turn computer code into logical flow charts, and advanced-warning tornado sensors they hope will someday be in every home. "This is a spin-off town," says Niles Schoening, an economist at the University of Alabama here. [Wall Street Journal, Jul 27] Lopez should know; he used to review and manage SBIR proposals and awards for the Army in Huntsville as a government tech manager. The idea, though, that spinoffs will make anyone rich makes one of the more pleasant fictions about SBIR as managed by real-life government agencies.

Incubating Optimism
(Jul 27) An $800K grant from the Goddard Space Flight Center will help companies in the Baltimore area access space-age technology and give them assistance in manufacturing and marketing new uses for it. ... "Companies will get below-market rates for the space, business mentoring, links to technical support and expertise, and help finding financial support and management assistance," said Kathleen Weiss, the center's director. .. The center has formed partnerships with Johns Hopkins University, Morgan State University and the University of Maryland, Baltimore County, to provide faculty and student support for companies that need assistance with everything from building a prototype to figuring out how to market new technology. .. NASA and MEDCO have yet to determine specific criteria for allowing a company to jointhe center, how many companies will be allowed to sign up or even what technology will be developed. The center, which had been planned long before the NASA got involved, can accommodate about 40 companies. Center organizers expect about half of the occupants to work on NASA-related projects. [Baltimore Sun, July 25] Such projects proceed from the same assumptions as SBIR - that government can pick and directly help specific companies. A nice warm theory but with little economic evidence to support it. NASA pretends that such centers will return licensing fees. Tell 'em to buy Treasury bonds as a much better investment.

Silicon Valley execs, GOP building a friendship. After years of mutual neglect, Silicon Valley executives and leaders of the Republican Party are finally paying attention to each other. Dozens of Republicans, including House Speaker Newt Gingrich, Senate Majority Leader Trent Lott and the party's national chairman have come here this year to learn what issues concern the valley.... High-tech leaders are not only giving time and ideas, but also tens of thousands of dollars in campaign contributions. [JAMES J. MITCHELL, San Jose Mercury News, July 26] Wanna get politics in service to high-tech? Pay up! Politicians respond to whatever serves their first law: re-election. Join (pay) high-stakes groups like the Technology Network or the low-stakes like the Small Business Technology Coalition.

Latest Fast Track Numbers. Of 84 DOD SBIR Fast Track proposals, 76 (90%) got Phase 2. Almost all got an interim funding of about $30K (a distracting focus on small money but popular anyway). Most (75%) were SBIR rookies (the 4:1 match rate is inviting). In all, DOD put up $57M for $25M of private matching funds. DOD now wants to raise the Fast Track numbers in its drive to get more private sector money into SBIR so that more new products will appear in the marketplace for later DOD procurement. But it's a tough internal struggle against the R&D spenders who still live in the old paradigm of direct funding of development. If you got a great idea with a future, you have two Phase 2 SBIR routes: 1) Fast Track (90% chance) with a third party angel, or 2) compete with the other dreamers (40% chance) for ordinary R&D funding. Remember, all serious proposers have good science with some calculable benefit . And they are so alike that the DOD can choose whichever ones suit its mission purpose with no opportunity cost remorse.


DARPA Phase 2 SBIR Message. Since the Navy funds only conservative incremental R&D with its SBIR, what does DARPA do? Who will carry the innovation mission for DOD if not DARPA? Of its 56 Phase 2 projects funded in 1997, 37 were first-time DARPA of which 22 were first-time DOD. (Only Phase 2 matters; Phase 1 is just subsistence farming.) Goodies were spread round; only one double winner - CFD Research. Only three hardened (more than $10M each from DOD) veterans won: CFD Research, Irvine Sensors, and Physical Optics who among them have over $60M in Phase 2 awards from DOD. Blathers a too typical abstract, The accessibility of information in cyberspace could be dramatically increased by providing users with meaningful semantically rich visualizations of relationships among diverse information sources and data. What's DARPA's SBIR approach? Who knows? Its SBIR shows no pattern as each office does its own thing; no single adventuresome mind seems to be in charge. The projects are a mix of 1) more beavering on SBIR veteran technologies (fuel cell, solid state driver, modeling, GMR) with ritual assertions of a bright future, 2) info tech and software that the private market would do faster and better whenever a market opportunity arises, 3) some new hardware gizmos with interesting market possibilities, 4) a lot of ordinary analysis. Unlike the Services' SBIR, DARPA does not buy mere services. And the abstracts are the usual bureauspeak. With such an approach, the supposedly most daring part of DOD will ensure that the DOD a decade from now can explain better how it fought the last war and will still be bleating to (Republican, it hopes) Congress a lack of "essential funding" for the same old methods. If DARPA is ever to adopt a dual-use approach to SBIR ( or anything else) it will have to bring back Craig Fields. So, unfortunately, if you want to win with DARPA, you will have to parse your particular technology office manager.

LARTA Hands Out $1.8M
(Jul 20) The LA area got $1.8M in state grants for nine small high-tech companies. Said the program director, These awards are a shot in the arm for small companies often just below venture capitalists' radar screens, and are developing products showcasing the region's technological muscle. Which is a necessary fantasy for his office. Especially fantastic is including Irvine Sensors (Costa Mesa, CA) which has had $11M of SBIR in just the past five years and has been NASDAQ-traded for years. (But since whoever robs Peter to pay Paul can depend on the support of Paul, Irvine no doubt thinks highly of the office's vision.) Five of the other eight also have had SBIR in the last five years, two of them over $2M each. Now, the federal response should be watched. If such grants in rich states help companies get more federal money, there arises a fairness question in federalism. Students of such federalism questions could read Peterson, The Price of Federalism, Brookings Institution. And in further example of regional competition, LARTA is producing a study of venture capital in the region, examining why the region boasts more than 16,000 ``gazelles'' -- fast-growing firms -- yet draws just one-sixth of the venture capital deals that are made in Silicon Valley.


Think of the irony: Bureaucrats spend their careers interfering with the free market and then retire as stock-market millionaires. Tom Donlan's Barron's (July 20) editorial explains how the civil servants deciding your SBIR proposals want to drain the Treasury for their stock-market enriched pensions. Actually, if you are an SBIR commercializer, you should be for civil servants' knowing the risks and rewards of investing. If you are an R&D service house, you want the classic civil drone. nationalistic obsession with relative wealth, both economic and scientific, ensures that all economic and science activists, the world over, are continually dissatisfied and paranoid. Nationalism turns one country's success into everyone else's failure. It is a recipe for misery. ...YET.. ... for the first time in human history, the lead countries no longer need to distort their economies to develop military technology - they can easily sustain, at relatively little cost, a superiority in military technology over their poorer potential aggressors. That is the true peace dividend of the fall of the Soviet bloc. [T Kealey, The Economic Laws of Scientific Research, 1996]

What European country subsidizes industry the most? Germany pays an average of $18B a year to prop up unprofitable manufacturers. France, tied for second-largest with the UK, doles out only $4B. [Business Week, July 27] One German plant took $600K per worker to keep open. The US? Each year, the US government gives away nearly $65B in corporate subsidies - handouts that arrive in the form of tax breaks, export incentives, and pork-barrel contracts. [subsudiphobe TJ Rodgers, Wired, Aug 98] How much does SBIR pay per researcher to keep unprofitable companies going, do you suppose? Or hadn't you thought of it that way? You believe instead the hype about government funding of small company science and technology as a prelude to a bright future without much evidence after 15 years?


Technologists Rejoice! The NASDAQ Composite Index topped 2000 for the first time in early trading on Thursday. The index has doubled in just three years, lifted by the explosive gains of its dominant technology sector. [Wall Street Journal, Jul 16] There is investment money afloat everywhere from the tech market profits. Will that money show up as R&D investment? It has already been happening. Kealey notes that between 1980 and 1994, the share of government funding of academic science dropped from 67% to 55% while science budgets grew 1% a year (real). That translates into a doubling of industry's share of science. Meanwhile, an earthquake in science shocked academia when a respected scientist teamed with Perkin-Elmer in speed warp of Human Genome science (with the private sector keeping whatever discoveries it chooses and cutting the cost by 90%). [Biophotonics International, J/A98] Speed and cost cutting hits hard at academics who never had any need for a science project to end or to produce economically useful results as long as government was paying the bill by the hour. The religious 20th century axiom that government must support science could be fading. Stand by for pieties.

Since Kealey says that the continued profitability of any technology depends on a myriad of small, incremental improvements, which, over a number of years, may yield much more, economically, than any particular imported 'breakthrough', isn't it right that SBIR fund incremental improvements? Absobloodylutely NOT. Government R&D programs should do what private companies cannot do for themselves but must still be done in the national interest. Incremental improvements driven by economics do not qualify; what's more, they can only be efficiently done by a laissez-faire market. If SBIR has any value besides a payoff to a political constituency, it is in high-risk infant technology. (Although it could reasonably do societally valued development such as clean air, that is not its declared purpose.) [T Kealey, The Economic Laws of Scientific Research, 1996]

Navy Phase 2 Message If you're thinking about a SBIR to the Navy, what might you learn from the Navy's Phase 2s for 1997? Of the 164 awards to 155 companies, 85 were to first time companies and 56 of those first time in DOD. (DOD-only because SBA has never Internetted a government-wide database of all winners.) So many rookies and so few multiple awards could mean either a love of new ideas or a continuous shift in particular wants. Such numbers also say nothing about the Navy's attitude toward commercialization (pay no attention to words from headquarters of any decentralized agency on commercialization).
That's quantity; what about quality? Although quality is a much more subjective judgment, the Navy loves gizmos and projects that directly and narrowly help the Navy. A random walk through the abstracts shows little (if any) innovation although high-power innovation could be disguised by the vague abstracts of what companies think bureaucrats want to hear. One SBIR veteran, for example, says, "The Phase II proposed program, which consists of experimental, demonstration and design tasks, is aimed at resolving the fouling issue and quantifying the parameters affecting cost optimization." On balance, Navy funds incremental stuff that needs no special program like SBIR; the Navy would do such stuff anyway. And any innovation is unlikely to go beyond the Navy despite the required blather about commercial potential. Having a proven technology apparently helps; Hayes & Assoc which had its endothermic technology at least by 1985 and has sold the idea to PizzaHut for keeping traveling pizza warm, nevertheless won a Phase 2 for applying the idea to firefighting clothing. Innovative it was; now it's merely useful. For the Navy, then, something safe that the Navy will use soon, and your making money on it will have small influence.


An all-star lineup of Atlantans have invested in a $70 million venture capital fund aimed at health-care and technology companies. Investors in the first fund of Live Oak Equity Partners include Charles McCall, chairman, president and CEO of HBO; H T Green Jr., chairman and CEO of WestPoint Stevens; and the Georgia Tech Foundation. The fund will focus on companies located in the Southeast. [Atlanta Business Journal, Jul 13] Angels recycling profits - the life blood of start-up companies - but you will have to take advice with their money. You should also decide whether you are hiring them or they you. Asia's economic woes are hitting some of the Delaware Valley's technology companies hard, forcing them to shutter operations, cut staffs and wages and lower earnings expectations. In one of the more dramatic moves, Kulicke & Soffa Industries Inc., the world's largest supplier of semiconductor assembly equipment, has begun shutting its domestic operations on Fridays. [Philadelphia Business Journal, Jul 13] SBIR companies hoping to sell new tech to the semiconductor industry will have to seek continued help from the government until Asia warms up again. Don't worry, most of the SBIR agencies have little taste for ending the support. The agencies prefer to believe your and their propaganda about a bright commercial future. The hardest part is getting into the agency's good graces.

Economists work on a very narrow model of humanity; they suppose that people are only motivated by immediate economic self-interest. .. Rich people will always support art and science unless they perceive that the State has already fulfilled the national need. [T Kealey, The Economic Laws of Scientific Research, 1996] Kealey's iconclastic book attacks the underlying premises of government's funding of science.

neither Gladstone nor any other British politician supported science to any significant extent in the 19th century - yet that did not prevent Britain from growing into the richest and most industrialized country in the world, nor from producing scientists such as Davy, Kelvin, Maxwell, Lyell, and Darwin. Curiously, 19th century France and Germany, whose governments did fund science expansively, trailed behind. Can the government funding of science be so important?[T Kealey, The Economic Laws of Scientific Research, 1996]

Dollar for dollar America spends three times as much on each person [ for health care] as Britain. In general, it is hard to discern any link between a country's health spending and how long its people survive. ... Though survey evidence shows that the British are less satisfied with their health service than other nations are with theirs, and want more money spent on it, come election time they vote with their wallets and choose governments that promise not to put taxes up. [The Economist, July 4] Like Americans, the British want more government than they are willing to pay for. One price the British pay for spending less per head is a queue of 1.5M people (of 58M population) waiting for hospital treatment.

Three Views of SBIR
(Jul 8) SBIR got a short article in The Red Herring (Aug 98) that vented three views. Author Brian Taptich struck about the right balance and noted that although no Microsoft nor Cisco nor Intel had emerged, "To be fair, the SBIR has funded a handful of marginal public market successes". To show that at least someone is trying to get commercial success, Taptich quotes DOD's Jon Baron "We're trying to loosen the structure because we benefit when companies are successful commercially. The more products a company sells, the lower our cost." On Fast Track, Jon notes that "VC approval is better than anything the company could write in a proposal." Finally the view that serves the bureaus and the contract R&D companies comes from SBA's Dan Hill, "The bottom line is whether the work helped an agency met the needs of its mission."
In the friendliest interpretation of SBIR's aims, Taptich credits SBIR with the means to invest $1.1B "in seed and first-round venture capital for technology start-ups". Which is both true and false. Some of the money will actually be used for that purpose; most will merely incrementally serve the federal agency R&D program from which most agencies see SBIR as robbery or political meddling. With no economic measures for discipline, only the occasional bureaucrat sees any need to take risks for the benefit of private companies nor the private sector. Baron and BMDO seem the only bureaucrats taking a public stance for using SBIR to serve the government's own interest by seeking private sector gain. It is a tricky concept for a free market government.Return to Index

Another State Fund
(Jul 6) More claimants for the California budget surplus. Even the richest VC place in the nation is moving a bill through the legislature to start a state VC fund for "little companies" How touching, how political. The rationale: the little companies cannot get VC attention for small amounts, $250K-$5000K. If California does it in the face of Iowa's sad experience, and the have-not states see unfair competition, will not the pressure rise on the Congress to divert more SBIR where it least likely to have any economic impact beyond the immediate jobs paid for (a sufficient reason for most politicians)?

Market cap of the top ten US info tech companies is up 298% since 1990; top ten Japanese firms is down 13%. Japanese VCR production, the favorite example for US declinists, is down 66% since 1989. [Wall St Journal, Jul 2] Do we need a national subsidy policy for high-tech firms? Or are we now in thrall to beneficiaries as in almost any political handout? Never mind, the bleating will continue by the touching (and economically dead) little companies in the districts of the Congressional committee members. Motherhood and the flag will be praised and the inefficiencies in government R&D spending will be neither noticed nor measured. If you're a small company, you might as well belly up and get your share. The money's free.

Conservatives may reply that they favor defense spending; they are merely opposed to civilian industrial policy (except taxes expenditures and subsidies) . Right answer, wrong century. The pro-defense, anti-industrial policy conservatives are two or three hundred years out of date. Before the industrial revolution, it was possible for the military sector of a country's economy - its shipyards and arms factories - to exist more or less in isolation from the agricultural economy in which the people worked (and from which men were hijacked (pressed) for sea service in the Navy). In a modern, high-tech economy, however, it is not as easy as the conservatives imagine to distinguish "military" from "civilian" technology. The contemporary description of some technologies, like computer technology, as "dual-use" technologies represents a recognition of how difficult it is to separate the gun economy from the butter economy. (Michael Lind, Up From Conservatism, 1996) Thus DOD fights business over export controls, politicians natter over loss of technology to an enemy, and DOD has trouble making the link in its SBIR.

Innovation, Genius, and the Like. In 1950, at the age of 22, John Forbes Nash Jr created modern game theory with two brilliant papers. In 1959, shortly after being granted tenure in the math at MIT, he was involuntarily committed to hospital with a diagnosis of paranoid schizophrenia. He left MIT, driven by voices and visions, and for the next 30 years languished in obscurity. In 1994, Nash was awarded the Nobel Prize in Economics as a result of his youthful work on game theory. [Business Week review of Nash's biography, Jun 22]. If Nash had applied for SBIR in 1950 (if it had existed) would he have won? Does government recognize and support a whole new paradigm or does it prefer incremental controlled advance? Does it wait for the Nobel committee before recognizing genius? If you were Nash's consultant, how would you have framed an SBIR proposal? Would you have attached the paper to a one-page application form or would you feel compelled to spell out the future in detail and conventional language? If you were the government, how would you have received a one-page form with paper attached? Would you be more afraid to accept it or to reject it for administrative inadequacy?

Army SBIR The Army has its annual Phase 1 SBIR call, proposals due Aug 19. What's the Army looking for? Perhaps, the reason it is hard to figure that out can be seen in the first two listed topics. Topic 001 wants an acoustic mine detector - a relatively open call for the best innovation with the best performance on a measurable scale. Topic 002 wants research service in the rheology of propellants - research for hire with a literature study, a specified instrument, specified parameters to be varied, etc.

Iowa Calls It Quits
(Jun 30) Iowa gave up as a venture capitalist. After a decade of government-backed ventures of $14M in 72 companies, Iowa Seed Capital Corp was ended by the legislature. Said the inevitable legislator "We're not in the business of losing money." [Wall Street Journal, Jun 30] Any lessons for the federal government in Iowa's experience? Certainly, Iowa's net loss for a decade is far from the average private VC fund that has gains in the 30-40% per annum range. The federal program, SBIR, has avoided ever getting itself measured that way and can thus be driven solely by politics.

Is SBIR creating jobs? Sure, say the advocates. Faster and better than any other use of the SBIR money diverted from the agency R&D pool? Yes, a dollar spent on SBIR funded work will pay for a dollar's worth of job. But that money was diverted from somewhere that lost the same dollar's worth of work. The politicians and advocates ignore that part of the equation. If the argument is that the gain comes from small business doing R&D cheaper, isn't that just a way to cut wages in industry? If you substituted "immigrant" for "small business" in the sentence, what would the politicians say? If their answer is different, then their arguments for SBIR are political and not economic. But then they are politicians and not economists. And not many political programs can stand the heat of economic analysis. Fortunately for SBIR, no one seems inclined to subject SBIR to economic analysis. Not even GAO.

Despite a demand for the product and cash investment, foreign investors who were rejected. "We were very much interested in it, but the power bureau said they could get a World Bank loan, they'd prefer that," said a potential investor. That wasn't an isolated event. Although the World Bank is supposed to lend to projects that can't attract private capital, the development agency increasingly competes with private investors. Flush with cash from the world's richest nations, including the US, the bank easily wins by offering below-market rates. Government failure by intrusion into a private capital market? So? No enterprise's intellectual scruples would preclude exploiting a misguided governments cheaper money. Although the Wall Street Journal [June 10, "World Bank's Easy Lending Irks Investors"] story was about Chinese enterprises, the principle applies to SBIR. The government undermines the private capital market by handing free capital to companies who decline private investment. The politicians don't care because he who robs Peter to pay Paul can depend on the support of Paul. No single actor in the private market is likely to complain that SBIR deprived it of a profitable investment. And without loud complaints by specific and voting and contributing losers, handouts to beneficiaries win every time. Only the federal SBIR decision makers, who get no payoff from defending an undistorted capital market, stand in the way of market distortion. Thus, good news for most (except at BMDO): you can thumb your nose at private investment and take SBIR with little fear that the agency will even notice.

Where you stand depends on where you sit. In a poll of readers of Laser Focus World (June 98) 76% agreed that expanding funding of science deserves the priority that the White House was giving it, while 80% felt that any surplus should be used to pay down the national debt. Any wonder why politicians pay little heed to the pleadings of scientists? If PhDs cannot be economically consistent, who should expect Joe Sixpack to be so?

It's going to be tougher. Most business people agree that doing business today is harder than it was in the past. Competition is keener, margins tighter, employees harder to get and customer expectations higher than ever. What can we expect in the future? Probably a greater intensity of these issues and more. Volumes can be written on the subject of what business will be like in the 21st century. Future business will be quite different than what we have been used to, but companies that plan their futures correctly will enjoy a long and successful reign. A successful 21st-century firm will determine where and how its industry will be in several years and drive its company to be there first. [Terry Anderson, Milwaukee Journal Sentinel, Jun 8] If you are an SBIR company hoping to convince the government, particularly those few agencies that care about commercialization for whatever reason, you have to sound as strategic as you do scientific. Vague hopes that your scientific success will be irresistible to the marketplace is just dreamy talk. Every one of your competitors can babble the same claim. While the Army, for example, seems likely to accept your babble if they like the technology, others, particularly BMDO, will reject it and your proposal. Go prepared for the battle. (Terry Anderson is the founder, president and chief executive officer of Omni Tech Pewaukee.)


Two Companies Testify. Drawn from the states of the committee members, two SBIR companies spoke at a Senate hearing. They illustrate why SBIR isn't having much visible impact and why taxpayers should not expect any reform from Congress. On the other hand, SBIR beneficiaries can sleep well at night.
A Missouri company with one Phase 2 SBIR and still working on commercialization that "takes a long time" drew some superficial conclusions from a few SBIR data. He inferred "obviously" that the the rise in acceptance rate by DOD from 11% in 1992 to 16% in 1997 followed from the increase in SBIR's total money. Oh, really? He liked that 40% of Phase IIs go to commercialization. Which is nice political number but economically irrelevant. He wants greater absolute funding above the 2.5% cap which is, in law, a floor. Any agency can up its SBIR. He wants more money per award (don't they all) although he didn't mention the resulting fewer awards. And he wants less paperwork for accounting (just hand me that public money). Talk about $800 hammers! Well, at least the committee chair got press at home. A Michigan company with lots of SBIR told a heart-warming tale of growing a company to 60 people. A word not used - commercialization. A concept not used - economic ROI. We do good work; just hear these testimonials from our government overseers. Not mentioned was the at least $18M of SBIR awards, mostly DOD, over the eight years which paid for the entire company growth at what the CEO claims is hourly rates one-third to one-half the price of larger firms. On balance, nature prevailed: a life form arose and another life form arose to feed on it. Now the company has 60 mouths to feed which will require about $4-5M of SBIR a year (will DOD provide it?). It better hope that DOD does not changes its rules or its criteria as it is thinking about doing despite complaints from SBA that SBIR should reward companies like the Michigan company. Thank you, Senators, for your kind attention.
Why SBIR is Safe. Even the allegedly economic conservatives cannot resist the lure of satisfied constituents. So, they invite nice stories by beneficiaries and ask no hard questions. Just like the highway transportation bonanza on which Republicans run for re-election. Yet here in the nation's heartland, many of the local officials, planners, businessmen and residents who will benefit from the spending perceive the "pork" as vital to their interests and the key to enhanced traffic flow, improved highway safety, new jobs, economic expansion and, yes, indoor plumbing. "We don't se it as pork, we see it as a necessity, said Lynn Jones of Cambridge (OH), a Republican member of the Guernsey County Board of Commissioners. [Washington Post, Jun 7] Since there are many, many identifiable beneficiaries of the handout and no identifiable beneficiaries of simply reducing government intrusion, Republicans and Democrats vote for more handout. Maybe the constituents won't notice any inconsistency of complaining about high taxes for their consituents to pay for spreading the largesse around to all districts. There is, after all, no free lunch from government.

What Next, BMDO Winner? One BMDO STTR Phase 1 winner (of the 22) will need a great story to get a Phase 2 by BMDO's standards. NZ Applied Technologies (Woburn, MA) specializes in III-V materials, particularly GaN and it also specializes in SBIR. Since the two founders escaped from Emcore, which later went public, their company has had enough SBIR to cover all employees. $10M of SBIR for an average employment of about 12 employees (according to DOD published data from company self-reported employment).

NZ Applied Technologies 1993 1994 1995 1996 1997
SBIR Dollars $M 0.2 0.9 1.2 2.4 5.8
Employees 5 5 10 19 28

NZ's problem? BMDO raises the Phase 2 barrier proportional to the cumulative SBIR dollars in the company. First-timers get the benefit of the doubt (not a free ride, though). Companies with $10M of SBIR get a lot of questions and a heavy burden of proof that the past SBIR investment has yielded commercial fruit (numbers, please, no handwaving nor flagwaving). ATMI, for example, showed the growth from SBIR that justified continuing awards. Such makes a quite different standard from that applied other places even within Defense. In most places the company spins a commercial yarn that the agency believes as far as it likes the technology for mission purposes. Policy observers, not political advocates, can watch the scoreboard (slowly) for how BMDO's policy works out in Phase 2 awards to NZ Applied and its like. Conversely, some advocates would like an opposite policy that rewards commercial failure. That is, the commercializing companies are deemed to not need SBIR and the non-commercializers are deemed to need it to help them achieve the commercialization goal. SBA, for one, advocates such a policy (presumably wittingly) by objecting to co-investment as a sine qua non of commercial potential. But since SBA will never have to account for its investments and BMDO will (someday), SBA can only be a kibitzer.

A British Free-Market Government Solution VC funds worth $400M, backed by the European Investment Bank (EIB), to help British high-technology start-up firms. The British financial sector has faced criticism about its failure to provide backing to start-ups and high-tech firms. This is denied by the British Venture Capital Association (BVCA), which claims that more than 60% of firms backed received sums of less than £1m last year. One fund of $200M is for England and one of $160M for healthcare and information technology (IT). Additional funds of £20m are being raised by Midland Bank and the EIB to support a network of Midland enterprise funds. Note the difference from SBIR's $1.2B: the private sector will decide who get the backing. Britain' SBIR-like program SMART which has done little with a little money spread too thin. In principle, the same class of entrepreneurs will be targeted for government aid but government scientists will not be the deciding vote. On the other hand, the money isn't coming directly from the spending departments' budgets except in the sense that if the total government budget is fixed, every plus results in a minus somewhere. [facts from The Sunday Times, June 7]


Senate SBIR Love-In
(Jun 5) The Chair (Bond-MO) started with the usual SB-is-good-for-everything speech and the other Senators from both parties (Kerry-MA, Levin-MI, Enzi-WY, and Burns-MT) sang in harmony. So sweet. Six witnesses said the right things. GAO, NRC which is still studying public-private partnerships, SBTC which wants more and more, two companies, and an empty-quarter consultant. (Empty quarter, the intermountain west was invented by Joel Garreau in his "Nine Nations of North America".) Josh Lerner contributed a paper for the record without testifying. The whole SB Committee hearing was broadcast on Internet. For details and other SB happenings, especially everything the Chair does or says, tune in. Return to Index
We Want More. The Small Business Technology Coalition told the Senate that it wanted more SBIR. The 200 member association wants Congress to "expand, improve, and make permanent" SBIR. Why? Same arguments as 1982 for inventing the program: small business gets too small a share of federal R&D despite being better at innovations per employee. Besides universities rose from 13% to 18% of federal R&D. Economic proof of the assertions? None offered. Very competitive, merit based program, it says. So? "many SBIR proposals are rejected today due to insufficient funds and are not due to the quality of the science or the proposal". AAAS uses the same argument for unlimited university science funding. On balance, it was the kind of message you send when you have a lock on the result you want. The Senators never peeped an objection. They may wish they had when the SBIR re-authorization gets to the committees out of whose pie the SBIR is taken.

My goal as Chairman is to build the Small Business Committee into a credible, leading advocate for small business through tax and regulatory reform initiatives and oversight of government agencies. Small Businesses are what fuel the economy of our nation. The role of Congress should be to support and encourage entrepreneurship, not impose regulatory and tax burdens that make it impossible for the men and women who own businesses to hire new employees and generate wealth for themselves, their families and their employees. We will work together in a bipartisan way to be a voice for small business in the 105th Congress. Chairman's message, House SB Committee] With that strategy, one need not worry about unfriendly testimony or legislation on SBIR. Today's love-in at the Senate SB Committee should re-inforce the message.

Vogel's new book truly treads on dangerous academic ground... Biologists like Vogel are not supposed to trespass over into history and the practice of engineering but he is not an intruder. He is a trained observer with the rare ability to bring both professional knowledge and innocent-eyed enthusiasm to the task. That is all to the good, otherwise we would be looking at book called "Feline Pedal Extremities and Tension Operated Armaments: A Case Study in Convergent Evolution. ... Vogel's message: Knowledge couched in professional jargon is elitism disguised as learning. [MR Montgomery, New York Times, May 31, reviewing Steven Vogel's "Cat's Paws and Catapults] Get the idea? If you want to convince even a government reviewer (yes, they read English) that you have a real innovation, you should talk like you understand the world in which it will work. Science-mumble isn't the way.

Risky High-TechWhen backward-looking religion mixes with forward-looking high-tech, logic often fails. A German court convicted the former head of CompuServe's German unit of helping distribute pornography by not blocking access to explicit pictures available on-line. The court's decision came after even prosecutors had asked for the official's acquittal. [Wall Street Journal, May 28] And this in the land that invented printing and Protestantism. The dreamers who think Europe is headed for a bright business future have to overlook the viscous drag on progress caused by morals-at-any-price.

, our government bean counters are simply indifferent. The gruesome fact is that the output of the health-care sector isn't tracked according to results, but mainly reflects the cost of the inputs. After all, what numerical value can you put on not dying from AIDS? [Gene Epstein, Barrons, May 25] Do R&D people succumb to the same easy-out of measuring only input while they engage in theological debate over where to "invest" government R&D funds?

A Tale of Two Companies Jerome Duluk got an SBIR and is now turning away investment capital. Success story for SBIR? Not quite. The company that got a NASA SBIR in 1988 for a supercomputer to search for extra-terrestial life folded in 1993 when NASA's funding stopped for such searches. The company, Silicon Engines, delivered one computer to a site in Puerto Rico. Think NASA shed a tear for Silicon Engines or looked to Duluk's commercialization as a source for the "innovative technology"? Duluk's next company, Raycer Graphics started in 1996, is awash in offers from the competitive VC industry whose investments doubled to $11B from 1993 to 1997. No need for SBIR this time for a 3-D technology. Michael Selz's story "Anyone Need Cash", Wall Street Journal, May 21, didn't say whether Duluk sought SBIR for Raycer. If you're gonna travel in the fast lane to market and profit, SBIR isn't the preferred vehicle. Indeed, the SBA, protector of small business, even dislikes DOD's Fast Track with its mandatory matching funding. SBIR friends and foes can each find support in this story.

What do scientists say about second-hand -- or passive -- hypocrisy produced by the cigarette debate in Congress? I am talking about the possible toxic effects -- corrosive to the soul, dampening to the spirit, numbing to the intellect -- of being downwind from some of the things being said by defenders of the foul weed. .. in one pro-smoking television spot, a waitress is the one complaining about the coming tax increase. Waitresses, as we all know, don't make much. Critics of the current bill are worried sick about this poor woman -- although, for some reason, they don't seem to care that she lacks health insurance or child care. [R Cohen, Washington Post, May 21]


Have We Got a Job For You!
(May 21) It's got everything Silicon Valley high-tech workers want: good schools, affordable housing, short commutes, family life. Except it's in ...Minnesota. Okay. So the winters aren't perfect, and even the mosquitoes wilt during summer. ... Dozens of cities, states and even countries have tried to poach from Silicon Valley over the years, but Minnesota's bid stands out in that it is trying to lure individuals, not companies and jobs. It's also unusual among recruitment campaigns because it is backed by a consortium of companies, bringing greater ad-buying strength than employers would have on their own. [San Jose mercury news, May 20] Silicon Valley notices Minnesota's new campaign to attract smart workers to the North. But as MPI's Brian Shiffman notes "we just want to get our Minnesotans back".
Meanwhile, in nearby Illinois Illinois' unemployment rate, reaching a 24-year low, has manufacturers bemoaning the low quality of applicants and offering generous raises to keep highly skilled workers on the job. [Chicago Tribune, May 20] Anyone remember when Pennsylvania to Illinois was the Rust Belt? And farther West Colorado added 30,285 high-tech jobs between 1990 and 1996, making it the third-fastest-growing state in that category, according to a study released Tuesday by the American Electronics Association. [Denver Post, May 20] Return to Index

Counter-Evidence: 200K Jobs
(May 20) While the advocates and beneficiaries of subsidies like SBIR and ATP are rehearsing their arguments for the next Congressional debate, the evidence mounts against them. Whatever they cite as the problem that needs fixing (other than mediocrity), news stories regularly rebut. High Tech Firms Added 200,000 Jobs Last Year [WSJ, May 19]; the Senate votes to let in tens of thousands more immigrants for high-tech jobs going begging; venture capital near record high again in first quarter; Corporate Buyers pay more for venture-backed firms[WSJ, May 19]; Candescent Technologies announced that it has raised $125M from the sale of convertible bonds ... the developer of flat-panel displays for computers has yet to hold its IPO. [San Francisco Chronicle, May 19]; and an economist answers Yes to the question "Does Government R&D Policy Mainly Benefit Scientists and Engineers?". If supply exceeds profitable opportunities among venture capital for the good investments and more jobs exist than can be filled with Americans, where is the federal government interest in subsidizing R&D? Or do you believe that everything bad should be illegal and everything good should be funded by the government?

What's the result of government R&D spending? Oh sure, more and better technology, snorts the S&T world from the federal trough. Not so, says Chicago economist Austan Goolsbee. R&D spending increases wages and not effort and ... government spending is likely to have significantly smaller effects on the quantity of inventive activity than is implied by looking at R&D spending alone. [The American Economic Review, May 1998]. He never mentioned that a continuing subsidy actually discourages anything like final and definitive success. Among Goolsbee's evidence is a correlation between federal R&D spending and salaries for those S&T fields servicing Defense and space - aero engineers and physicists. Whereas civil and chemical and mining engineers see no significant effect. Goolsbee does confess that the result isn't all bad even if scientific pleaders are exposed as self-serving because one effect is to reduce the number of people becoming lawyers. [Where's that righteous (ex) General Counsel who fumed and fulminated when I speared lawyers in the Weekly Report? Actually, he pushed a new client toward me recently.] In fact, Goolsbee was partly funded by the ABA.

Swearing OffSubsidy. Top-level Silicon Valley executives have signed a "Declaration of Independence from Corporate Welfare." It's quite significant, because the main force behind the movement, T.J. Rodgers, chief executive of Cypress Semiconductor, admits he faces a dilemma: He has made seven trips to Congress to blast corporate subsidies, but he owes it to his stockholders to pursue them. .. In a briefing paper published by the conservative Cato Institute in Washington, D.C., Rodgers says that "corporate welfare now amounts to an estimated $65 billion a year in direct federal outlays." If you add in state and local government-financed corporate welfare, such as stadiums for professional sports teams and financial incentives for companies to relocate facilities, the figure would be far, far higher. Some scholars say corporate welfare spending tops social welfare by 2 to 1, but that's a stretch.. In classic TJ-speak Projects going by the buzzwords "government-industry partnership" represent a slow-motion version of socialism, the mandated movement of money from individuals and companies to central government control. [Don Bauder, San Diego Union-Tribune, May 16] Would Spire or Foster-Miller agree? Would the Small Business Technology Coalition agree? Hah! How many beneficiaries cannot argue themselves out of a "corporate welfare" label?

The best way to educate the Beltway is for a diverse group of business interests to throw some money into the loop and, like preachers at a soup kitchen, force the people with their hands out to listen to a little sermon. [R Brant, Upside, June 98]

GAO Report Says Little
(May 1) General Accounting Office reported to Congress on SBIR in a justifiably thin volume. In the three subjects that would affect recipients, GAO avoided any hard questions. 1) Extent of Commercialization. GAO doesn't seem bothered by a 50% post-investment activity rate in a program whose underlying premise was to supplement private investment. It poses no standard and ignores the findings by Lerner and others. (A sign that Congress does not want close scrutiny.) It surely didn't look at SBIR as an investment program, only as a participation program, typical of political handouts. 2) Foreign Benefit. In a dilemma over economic nationalism, Congress seems to want firms to export products without any foreign firms' getting any benefit. Only in politics! The nationalists got their wish: only a few firms reported any foreign benefit. 3) Process Delays. The companies who complain about slow service on their free lunch were answered by the agency bureaucrats who said that delays didn't hurt the companies. They deserve each other. The non-beneficiaries, the losing proposers and the companies getting "unfair" competition from the subsidized firms, got no voice. But with such little commercialization, the unsubsidized firms don't have much to worry about since little subsidy goes to market competitors anyway. With this kind of GAO "critique", SBIR could muddle on forever. Read the report:"Federal Research: Observations on the Small Business Innovation Research Program," GAO/RCED-98-132, 17 Apr 98. and get a hard copy on line.

Time for Immigration Battle [Seattle] area software and biotechnology companies are facing an increasingly severe labor shortage now that a visa program for foreign professionals appears to have reached its annual limit. Barring new legislation, high-tech companies will have to wait five months before they can again hire workers under the H1-B program, which issues visas for hard-to-fill jobs. The nativists and the labor unions will combine to say that immigration is not the answer to job vacancies, that training is (although most of the nativists are against the funding to do that and surely don't know how to accelerate education). The companies say "Are you crazy? We can make gobs of money from which we would pay gobs of taxes (and political contributions) if we had the high-tech workers." Part of that promise rings false though when politicians look at how few contributions come from high-tech industry.

Make Your Pitch, Now In 1965, government investment in R&D was equal to roughly 2.2 percent of gross domestic product (GDP). Thirty-two years later, that figure has dropped to just 0.8 percent. Current projections indicate that the federal R&D budget will continue to decline as a fraction of GDP...The next few months will be a crucial time for building support for R&D investments. Both political parties have largely cleared the decks with respect to the agendas they have been pursuing for the past several years, and recent improvements in the projected five-year revenue outlook give both parties more room to maneuver within the confines of the federal balanced budget agreement. The federal budget pie is now being sliced for the next half-decade. [Sens Gramm, Lieberman, Domenici, Bingaman, "The Long Road to Increased Science Funding", Issues in Science & Technology, Spr 98]

The SBIR advocates are already talking up the many merits of SBIR. They cite statistics that sound good while avoiding statistics that ask the core question "does it do enough good to justify government meddling in R&D?". Unquestionably, if you spend $7B, you will have some good happen. On that basis, though, the government should run the entire economy.

From the former chief defender: defense can no longer support a defense sector that is isolated from the commercial industry. It must abandon military specifications and idiosyncratic buying practices and conform to industry standards. [Bill Perry, The Red Herring, June 98] Dorothy Robyn from the National Economic Council made the same speech in 1994 when the Clinton administration was still fresh. Sound like commercializing SBIR would work just right? Try convincing the generals and the SESs who issue the dicta to the people who pick SBIR winners that the Cold War is over and that their practices are becoming increasingly irrelevant. The more they insist on relevance in Cold War terms, the less they will get for each SBIR dollar they invest. One of the few in DOD who understand Bill Perry's plea is the DOD SBIR policy czar, Jon Baron. But, alas, Jon makes no funding decisions and spends a good part of each week listening to the SBIR people whine why they cannot do what Perry suggests (mainly because they never did it before). Business models, once learned, die hard in large entities. Small business, though, cannot afford to cling to old models. Note, though, if you are going to propose SBIR to DOD you have a problem. You have to know whether the decider of your proposal believes Perry or the dinosaurs. Good luck trying to figure that out.

For judging between competing claims of "commercial potential", agencies might use some sort of an expected value function . On that scale, an innovation with a 10% chance of creating a billion dollar market has an expected value of $100M and an innovation with a 90% chance of creating a $10M market has only a $9M expected value. If you're a bureaucrat or a politician, though, you would favor the $9M project because you can report a high percentage of projects with "commercial success" in syrupy reports to Congress.

NSF Steps Forward
(May 5) Kesh Narayanan's testimony on Apr 22 showed two advances in NSF's SBIR: business reviewers for Phase 2s and a cost-sharing add-on for Phase 2. Unsurprisingly, the business reviewers have found the commercialization plans wanting which should mend itself quickly when the word gets around that NSF is serious about commercialization and will escape from relying almost exclusively on "scientific merit" (as SBA's entrepreneur-in-residence strangely advocates). The even better move is to allow expansion of Phase 2 (called Phase IIB) with co-funding by a private partner with few restrictions on what the co-funding can do. Prospects are good for the co-funding's bringing in real commercialization; it worked for BMDO since 1991 to concentrate the SBIR funding in companies and projects most likely to have a real life after SBIR. Which is why BMDO's public speeches today talk about a high co-funding ratio (1:1 average) while SBA whines that only quality proposals should be funded. (Thank goodness that the SBA kibitzers don't have to make and defend competitive judgments every month.)


SBA SBIR Syrup The SBA dripped syrup all over a Congressional committee about SBIR. Dan Hill's testimony gives no hint of any questions or controversy as it extracted only the good news from the several reports over the years and told a few great anecdotes as though the rest of SBIR was alike. Not an ounce of recognition of ideas like MIT's Richard Lester: Today some of America's greatest economic assets are its nurseries of innovation - its deep, sophisticated venture-capital markets; its system of industrially connected, high-quality research universities; and an entrepreneurial culture that encourages risk-takers and rewards them handsomely when they succeed. [The Productive Edge, 1998] Not a word about $12.7B of VC in 1997; not a word about the vibrant private sector. A reader from Mars would think that government caused innovation and that SBIR was the small business version of doing everything. If you believe that government agencies should evaluate programs against some recognizable standards and should present balanced arguments when reviewing them, you would flunk SBA. Oh, of course, you expect SBA bureaucrats to try to preserve their own jobs; but shouldn't there be a limit on government professionals acting like advertising shills? Even the leading winner of SBIR money, Foster-Miller (Waltham, MA), made a much more balanced case for slanting SBIR in its direction.

New California Public Fund
(May 4) Faced with an opportunity, what do politicians do? What they understand - spend money. California, the envy of every other state in venture capital financing, wants to create a publicly funded venture fund to help those poor fast-growing firms find the capital they need to develop and succeed. ... a multimillion-dollar office--the California Seed Capital & Early Stage Corp.--to help start-ups acquire financing in the early stages of operation. The bill comes in the wake of a study by the California Research Bureau released earlier this month that found a $5.4B funding shortfall for fast-growth firms in Los Angeles and Orange counties alone. [Los Angeles Times, May 1] Of course, there's a "funding shortfall" if you ask the company dreamers. It's the SBIR story writ small. Ask those companies, though, how much capital they turned down because the price was too high. Why shouldn't they turn down expensive money (priced nevertheless to the market) and plead for political rescue.

A cut in patent fees is in prospect for British inventors, according to Ian McCartney, the minister for competitiveness at the Department of Trade and Industry. "I am actively considering across the board reduction in patent Office fees, for trademarks as well as patents" [New Scientist, 25 Apr] Imagine a minister for competitiveness in our Commerce Department! No, the magic of American competitiveness is to let well enough alone (except for the calls for protection by naturally fading industries). Two staunch British defenders of the American way are The Economist magazine and historian Paul Johnson (A History of the American People, 1997). Imagine, too, the mess if programs like SBIR catered to economic nationalism instead of just temporarily fostering innovations by entrepreneurs. (Not that the DOD doesn't occasionally fall for backing new "American" sources of existing extra-American technology.)

(Apr 28) General Accounting Office (GAO) released a report on the SBIR. "Federal Research: Observations on the Small Business Innovation Research Program," GAO/RCED-98-132, 17 Apr 98.. Hard copies of the report can be ordered on line. Commentary after I read it. 

Return on Investment
The strong growth of the American economy in recent years was largely driven by significant public and private investment in research, development, and innovation throughout the preceding decade, concludes the European Union's second Report on Science and Technology Indicators. The study shows how an 80% increase in spending by the US government on research between 1980 and 1987 led to an upsurge in the number of patents awarded, which in turn resulted in higher profits for the pharmaceuticals, chemicals and other high-tech industries in the 1990s. The report points out that compared with the US and Japan, the EU devotes a smaller proportion of GD to research.
[New Scientist, Apr 25] A grand conclusion from ambivalent data. Maybe the EU people who write such reports have a vested interest in more government R&D spending. Eurocrats teem in Brussels with a morbid fear that Europe might see private investment as the generator of wealth.

allowing the ship of state to float downstream under the impulse of a mighty current of innovation and improvement, the government merely having to stretch out an occasional oar to prevent it drifting into the bank. {Paul Johnson, A History of the American People, 1997] Johnson glories the American free-market approach that carried it to the top of the world heap. The Republicans want to continue that approach but have problems selling restricting what is seen as free handouts. As hard-right columnist Novak points out (Washington Post, Apr 20) the Republicans won't object to more educational loans from government for fear of being 'school-lunched'. SBIR is likely to benefit from the same lack of courage of Republican convictions, letting the government rob Peter to pay Paul. Nor is the Clinton White House likely to encourage the agencies who don't like SBIR to testify against it.

$57M Fast Track
(Apr13) DOD claims $57M in Fast Track funding of Phase 2 SBIR for the speedy and investable. Private matching was $25M. That delicious 4:1 really sucks in the money and gets a lot of first-time Phase 2 companies more chance than they would have had in the naked open competition even within their already restricted class. Grumbling are occasionally heard from the agency managers who live in and for the old paradigms. The change agent causing all the redirection? Jon Baron, former House staffer now heading the policy arm of DOD's SBIR.

Propelled by a confidence that politicians could solve problems, government spending has soared in the US and other Western countries since 1960. Has wise "government planning" improved economic performance? Quite the contrary. ... In the world's fastest growing economies, the size of government is small, and there is no trend toward bigger government. [James Gwartney, Wall Street Journal, Apr 10] But as long as politicians see a re-election advantage to passing out goodies, government has little incentive to shrink. US government is shrinking as a percent of GDP because GDP is rising faster than the politicians can tax it for spending projects like concrete. And as Paul Gigot points out [WSJ, Apr 10] the politicians and the tobacco companies deserve each other's greed.


Effective technology policy recognizes the complimentary roles played by the private sector, government organizations, and universities in creating a robust technological infrastructure that supports the development, diffusion, and implementation of technology. These organizations have widely varied objectives and incentives; still they must interact and collaborate to support the optimum level and pace of technology development and implementation. Wanna job writing blather for government reports? Nothing controversial and hard to get it wrong - "the sun rises in the east" sort of stuff. Join Beltway bandit TASC and write for the Commerce Department. This passage is paragraph two in the 21-page Executive Summary of "Planning Report The Economics of a Technology-Based Service Sector", Jan 98. It could take up to seven years to find out that the product is a bomb. Why would anyone want to merge with a company in that situation. [Connie Loizos, The Red Herring, May 98] Therein lies the core of the argument for government support of "slow" technologies. And government has to decide, if it has a commercialization urge, whether the technology is slow or the company is using that as a cover story for living at home as an adult. Loizos's story was about biotech, but the same lessons apply to many "slow" technologies, like materials.

Underinvestment in High Tech Really? By anyone other than a potential beneficiary? Nah! NIST has another study to justify a government program, The Economics of a Technology-based Service Sector (NIST Planning Report 98-2). To read your own inspiring copy, e-mail NIST. If you'd like to pay $19 to find the same answer for space activities, try the report by National Academy Press (800-624-6242) of a committee chaired by MIT professor Daniel Hastings. The arguments in either report could be the platitudes you could use for SBIR proposing. Both exemplify the idea of infinite demand for a zero-price good.

Old Bureaucrats... Dayton (OH) has hired an old SBIR bureaucrat to help Dayton area companies get into the banquet. Gerry Cassidy ran part of Wright-Patterson's SBIR for years. [Dayton Business Journal, Apr 6]

For the last 15 years, The Enterprise Corp. of Pittsburgh has sustained itself on a healthy diet of foundation funding. But the nonprofit, which helps entrepreneurs and startup firms, will have to find new sustenance if it hopes to survive into 1999. The foundations that fund Enterprise have pulled their support, leaving it just enough cash to survive until the end of the year. Who may fund Enterprise after that is unclear. Even more murky is whether the organization, in its present form, is worthy of funding. [Pittsburgh Business Journal, Mar 30] Someone in the sponsor world realized that happy words about entrepreneurs isn't a valuable service. The story didn't say how Mellon evaluated the organization.

GaAs Employment. How did the rest of DOD compare with American Xtal in exploiting investment by SBIR in GaAs for employment gains? Xtal had one Phase 2 SBIR to get from 15 to 250 employees, admittedly an outsize number to be expected in only a few SBIR stars. According to DOD's SBIR data DOD funded 21 firms for more than one Phase 2 SBIR 1984-1996 in GaAs a total of $37M (only Phase 2s should be used for growth analysis since Phase 1 should be just a sanity check) and the firms added a net total of 290 employees by their most recent GaAs Phase 2. The firms had about 1500 employees total which does suggest that GaAs was a prominent part of their business. So, DOD used $37M to add about as many as Xtal did with less than $1M. No, of course, it's not that simple. Many of the multiple SBIR firms also had multiple awards in other technologies. How much would it take to support 290 employees for five years? About $120M which means that the GaAs Phase 2 money alone can account for about a fourth of the employment growth in those firms over the decade of SBIR Phase 2s.

Down the long millenia of material scarcity, the customer's time was what economists call an externality, like air or water. It was an economic asset so readily available that it escaped economic accounting. In the old economy and all too often surviving in the new, a key rule of commerce thus became: Waste the customer's time. [G Gilder, Forbes ASAP, Apr 6] Think that government's procurement has the same attitude? Why not? Government still lives in the paradigm of material scarcity. For an enlightening experience sometime, ask any government person connected to SBIR: Who's the customer?

Who Needs Government?, says the graph title. The Economist (Feb 14) extracted data from the Economic Report of the President to show that the percent of real GDP growth attributed to government spending had dropped to 2%, down from 15% in the 60s. And the change attributed to private fixed investment rose from 15% in the 60s to 30% 1991-1996. Even the Reagan era of the 80s, government spending still accounted for 15%. What is a big factor in private investment? Interest rates. Lower interest rates means a higher present worth of a future profit stream. That also means a lower barrier to trying new technologies and a decreased need for government to fill an investment gap with subsidy programs like ATP and SBIR. Not to worry, though; politics isn't likely to notice the falling return on its "investment" for a long time.


In the end, as Keynes told us, economic growth depends on the animal spirits of capitalism. [C Farrell, Business Week, Mar 23] My experience in government is that when things are non-controversial, beautifully coordinated and all the rest, it must be that there is not much going on. [JFK]
If government wants economic growth from SBIR, it would do well to focus more on animal spirits and controversial enterprises than on scientific credentials.

Ultralife Battery. Business Week (Mar 30) tells of a startup with a new type of lithium battery made from flexible sheets of plastic. How much DOD SBIR did it take to create this innovation? None. Ultralife Batteries Inc (Newark, NY) and competitor Valence Technology Inc (Henderson, NV) (also no DOD SBIR) still have bugs and Compaq Computer thinks it has few advantages over the lithium ion battery in your laptop. Don't all vested interests say that? Both companies are public and you can check their pedigrees at Wall Street Journal whose Internet motto is "Waiting for reply". Investment? Ultralife, with its $100M market cap, has lost $18M in the last five years; Valence with the same $100M cap, has lost $100M in the five years. Both need a winner. Does DOD's zero investment suggest an SBIR problem? Not necessarily. After all, DOD can only fund what is proposed; it cannot force feed companies. Ultralife got its revenues from Navy procurement. Valence has got its revenues, which fell to nothing in the last two years, from GM Delphi as a contract R&D house. Both have few enough employees to at least qualify for SBIR. Maybe DOD could ask itself why these companies develop batteries on private funds and the DOD battery SBIR development stable uses government money to develop few items of commercial appeal.

Templex Another Phase 2
(Mar 24) Templex Technology got its second Fast Track Phase 2 SBIR from BMDO ($983K) for its optical data handling technology. Where did Templex find the matching money? Cascadia Pacific Management and the Oregon Technology Development Fund and a round of VC financing that brings the total up to $5M so far. Now, what was that wail about VC money not being available for new technology and therefore government should hand 20 Phase 2s to a company technology that just never seems to get anywhere serious in a decade? Ask CEO Larry Brice or VC Wayne Embree. Vision Systems Design (Nov 97) describes the competition as Holoplex (Pasadena, CA, also funded by BMDO), Optitek, Call/Recall, and IBM. Note: Cascadia also backed 3C Semiconductor (Portland, OR) as a prelude to a BMDO Phase2 before Fast Track.

To Mr [ex SECDEF Bill] Perry] probably the most important lesson is that America's innovation was "bottom up", while Japan's heavy government hand placed its technology bets. And, he said, America's growth was fueled by a large amount of risk capital, which is almost unknown in Japan. But what the 1990s show is that all the government funding in the world can't match the innovative power of a class of entrepreneurs who are dominating their markets but still running a little bit scared." [B Wysocki, Wall Street Journal, Mar 23] What, heavy-handed government bets on technology? Consider, for example, NSF's recent Phase 2 award to Advanced Fuel Research for an FT-IR instrument - a technology for which AFR has already received at least 20 Phase 2 awards over 12 years. That's well over $10M. (Since some agencies subtly don't publish their awards where a policy wonk can find them, 19 may well be a substantial undercount.) Who at NSF has used any realistic economics as a basis for decision? Has NSF recent research found a way to cancel the Law of Diminishing Returns?

Ktech Big Contract
(Mar 11) Ah, well, at least it's money. After four Phase 2 SBIRs since 1985 and an annual Phase 1 from tiny DSWA (nee DNA), Ktech (Albuquerque, NM) made the big time - a $41M contract. "Hoorah", shout the SBIR advocates, "commercialization. What a great ROI. All those jobs." The 26-year-old engineering and technology company, beat out a host of competitors to win the five-year, $41.8M contract to provide extensive support for Sandia's pulsed power technology experiments. Ktech has been working with Sandia on pulsed power experiments for nearly 20 years. ... Ktech President Don Keller said, "We are excited by the technical challenges and opportunities presented by supporting this very important national program." [Albuquerque Journal, Mar 10]A 26-year old services firm getting years of SBIR support and still a service company. Know any more such companies tapping SBIR's entrepreneurial support money? How about the big champ, a 40-year engineering service firm - Foster-Miller. Said the Sandia services manager "The small New Mexico business community is doing bang-up contractor work." And if you want a parallel to the Albuquerque hive of service contractor ants, look at Huntsville or Dayton.

....Monkey Do The battle by local governments to capitalize on the region's booming technology industry has spurred two area counties to take a harder look at what they can offer. For the first time ever, Montgomery County Executive Doug Duncan has proposed a one-year, $500,000 technology growth fund in his fiscal 1999 budget... Technology growth is the direction I would like to take this county." Maryland, a competitor for title of richest county in the nation, not satisfied with luxury homes paid for with lobbying. The geographic heart of the region's technology industry, Fairfax County. The 80s dream of a I-270 corridor happened; but it happened elsewhere The geographic heart of the region's technology industry, [adjacent] Fairfax County [VA}..... Even though it would offer low interest rates, Montgomery County officials hope to realize a 10 percent to 22 percent return over the life of the investments. The county expects to receive annual "success" fees based on the revenue of the businesses financed. Good luck, county government, at choosing investment winners. Look at the sparking thud of SBIR's financial return. BTW, where will you find the workers for the high-tech enterprises? [Washington Business Journal, Mar 23]

More VC Money
(Mar 23)CalPERS, the nation's largest public pension plan, said yesterday it will increase the amount it places in venture capital investments by up to 61 percent. CalPERS, which already has $573 million in venture capital investments, said it would set aside up to $350 million more for such investments. The California Public Employees' Retirement System said much of the new capital would be deployed in California. [San Diego Union Tribune, Mar 20] With $50B from angels and $10B+ from VCs, why does the government need to pour another $1B of direct subsidies into high-tech firms? Because when it comes to money, there is no such thing as enough. But neither the politicians nor the beneficiaries care that the marginal return keeps dropping (the law of diminishing returns).

Orincon got a $15M Navy contract, says the San Diego Union Tribune Mar 18. Who is Orincon with its $12M of DOD SBIR (and a few million non-DOD)? Says Orincon, We have had [SBIR] contracts with the (DOE), the DOT, the NIHs, NSF, and NASA. All of these projects draw heavily on previous research sponsored by DOD through the SBIR and other programs. ... founded in 1973 by three professors at University of California campuses. In our 22-year history, we have grown from three employees to 150, and have developed a strong and varied experience base in signal, image, and information processing, neural nets, multi-hypothesis tracking, data fusion, and guidance and control. Traditionally, our business base has consisted almost entirely of either direct government contracts or subcontracts with major primes The Website sounds like a service-for-hire company - bring us your problem, we got all the platitudes you'll ever need. With $2.5M or so of SBIR a year recently, the pain of cutting employees from 175 to 140 was somewhat softened and now SBIR must be about 20% of Orincon's business.

The federal government's top antitrust enforcer outlined yesterday the lofty goals of his case against Microsoft: He wants to create a world in which "everyone in America has a chance to be the next Microsoft." [Seattle Times, Mar 21] Now if only the agencies would think that way in SBIR.

Commercialization NASA Administrator Dan Goldin says his definition of commercialization of space DOES NOT include private firms' using NASA technology to sell things solely to NASA. DOD's definition of SBIR commercialization DOES allow such monopsony. DOD's definition came from a compromise in the 1992 re-authorization debate over DOD's image of a poor record of commercialization.

Venture on Hold, Too Much Success The BMDO Technology Report on BioMedicine says this venture is on hold because of SPARTA's transformation from small business to large, which makes it ineligible for NIH Phase II SBIR funding. What's the problem here? The prosthetic device made from the advanced materials that the government has funded SPARTA for over the years has had plenty of Attaboys for its manager, Moreno White: 1989 SDIO/ADPA Technology transfer Award, 1993 DuPont/ASM Composite Systems Award for a composite leg brace, and the 1996 Composites Institute's Award of Excellence. Yet here it is stymied because SPARTA outgrew SBIR, in part because of its success with such spinoffs. The NIH message, and indeed the message from the larger economy, is that small companies are only worth SBIR. All those Attaboys cut no economic mustard, that Tech Transfer is a talking game - the least useful version of what Jim Ball calls 'T2 is a contact sport". The general problem is not, of course, limited to SPARTA. The agencies all too often have relegated small business to the SBIR pool. If the project is worth an SBIR, why isn't it also worth mainline support? Has the NIH been encouraging the company's self-deception? It makes a dirty game: NIH funds SBIR awards and takes credit for spinoff potential of what it deems second-rate technology. The company then foolishly believes NIH's words and invests its own capital in an economic loser.

It is not the business of government to bail out troubled firms. Who said it? Not the BMDO SBIR overseer, not the House Republican majority leader, not the Cato Institute, not the American Enterprise Institute. No, the finance minister of Malaysia. Yet SBIR firms still argue that without the proposed subsidy (project), they will have to fold. Or lose control of their business. What should government do in such cases? Subsidize, bail, ignore? Before you make such an argument for your SBIR, think about the picture you present of a weak company in which any investment might be wasted. If you're nearly dead now, the government has good reason to suspect that you will be dead when the SBIR money runs out next time.

Speaking of incremental technology...Want a short list of who gets and gets SBIR? Look at the Navy's Phase 2 STTR list. Advanced Device Technologies, Accurate Automation, Advanced Device Technology,. Matsys, Advanced Fuel Research, Nanochem Research, APA Optics, Nanopowder Enterprises, Digital System Resources, NZ Applied Technologies, Advanced Cerametrics, Sensors Unlimited, MetroLaser , Advanced Technology Materials, Crystal Associates, APA Optics, TRS Ceramics. Why does the Navy do this? Same reason your wear old shoes -comfort. Read the abstracts and see the incremental advances in companies who have been pounding away on their technology for years and still rely almost exclusively on government R&D contracts. If that's what you want, dive in and compete with something you're comfortable with and has no other decent prospects. The Navy will even help you rationalize doing it.

It was like watching a Macy's parade but you're ten rows back and you hear the noise and you think it is all very exciting. Then somebody lifts you up and shows you what's going on. I realized I could probably double my income just doing what I was doing only doing it for the private sector. An SBIR company getting commercial fever? Could be. But this quote in Barrons (Mar 9) was a mutual fund manger who had worked for the government.

LA County lost 120K defense jobs 1990-1994 but created 100K new jobs in high-tech and multi-media. Now Business Week (Mar9) projects 17% job growth for the next seven years. You believe in seven year crystal balls? Why? Government programs? Nah (although SBIR poured enough money into Physical Optics to raise the county employment noticeably). Entrepreneurs.

What's A Southern Conservative? A man who fulminates against big government and federal spending while relishing a seat on the Appropriations Committee from which he can funnel federal money into his electoral base. Today's Wall Street Journal front page feature Mississippi as the happy gatherer of federal pork. Had they thought that Mississippi's problem is relying on other people's handouts than building a capitalist society? But then where would Alabama be in the state rankings? Q. After such great success why did you decide to move to the non-profit world? A. Mostly because I didn't want to be involved in technology ever again. I've never considered technology to be a solution for anything. ... the technology guy who believes that wiring every school in the country is what's going to solve our educational problems is out to lunch. Answer by Mario Morino, founder of Legent, The Red Herring, April 98] If you're writing an SBIR proposal in which you claim great things for your technology, think again. Actually, it's OK if the government believes your tale, but have a clear vision of your own about how your technology will play in the real world. In education, for example, to have enough productivity to lead the world by far, only about a fourth of the students have to graduate literate and numerate (says Robert Kuttner, Washington Post, Mar 4). Technology will not reach the bottom 75% in any way that will help society.

Now maybe Bill Gates knows how Michael Milken felt. The world's richest man sat through a Senate hearing yesterday in which pols who've never created a job in their lives treated him like the world's richest piñata. The event was ostensibly to investigate "competition in the computer industry, "which is like calling a demolition derby a Sunday drive. The real goal was to give Senators and Microsoft's competitors a chance to portray Mr. Gates as a modern-day robber baron. [ Wall Street Journal, Mar 4] In criminal law, it's called extortion when a group threatens your business with harm unless you pay them dues. Politicians think themselves subtler than the classic mobster; the difference lies mostly in the style of suit and the nature of the weapon. Ah well, when you own the world, you can afford the dues. And the rule still applies that if you cannot win in the marketplace, try the legislature. We hold no special brief for Microsoft, or Mr. Gates, who frankly struck us as too timid in his own defense. Our concern is that the wealth creation and ingenuity of Microsoft and Silicon Valley are about to be diverted into the redistribution mills of politics.

Many outside observers will have been shocked by President Clinton's announcement that "The era of big government is over." Shocked because by the standards of most advanced economies, the US has never had a big government. [M Keen, "Peculiar Institutions: A British Perspective on Tax Policy in the US", National Tax Journal, Dec 97] Nevertheless, the small business community loves and hates government. It loves handouts like SBIR but hates the regulations that go with dipping into the public purse.

An SBIR Opportunity. Much of the QDR is devoted to paying lip service to the need to exploit rapidly advancing technologies that are stimulating a revolution in military affairs. But when it comes time to put its money where its mouth is, DOD opts to transform the U.S. military by following an in-kind replacement modernization strategy dominated by Cold War-era legacy weapon systems that crowd out investment in innovative equipment that could help our military meet tomorrow¹s challenges. ... The NDP report argues that meeting tomorrow¹s challenges will require forces that, among other things, place far greater emphasis on stealth, mobility, and electronic defenses than on physical protection such as armor plating. [Andrew Krepinevich, Issues in Science & Technology, Winter 97-98] When it comes inventing new technologies for Defense (or anything else), small business could be the premier engine with SBIR as the premier vehicle for getting the new ideas introduced. Fat chance of that happening until the Cold Warriors retire (or a new war against a new enemy forces the old ideas out painfully). The DOD attitude toward SBIR serves the generals and admirals who learned their trade in the last war(s). They have not yet opened their minds to what small business could do for them if they told their R&D establishment to stop trying to steer every R&D development within a tight control system. Nor does the SBIR establishment, especially SBA, offer any constructive help. Instead SBA merely offers platitudes about small business and without any credible supporting evidence. But DOD shouldn't need any help from SBA except to get out of the way.


It was all very jolly in Philadelphia last month at the 150th annual meeting of the American Association for the Advancement of Science. Federal science budgets are rising again - for the third year in a row. This time President Clinton himself turned up at the meetings. [David Warsh, Boston Globe, Mar 1]. An equally admiring story in Amsterdam's (Feb 21) de Volkskrant of science on the march technically and politically. The legislators write a law that pushes policy lever A and opens spending valve B, and they may indeed produce a measurable behavioral output. But it usually has no relationship to the intended output - or worse, the exact opposite. [Charles Murray, Wall Street Journal, Feb 27] Sound like what has happened in SBIR? Although Murray's subject was tax credits for stay-at-home moms, the principles fit SBIR.


Some DOD SBIR Results
(Feb 20) Jon Baron showed some results of DOD's SBIR at the NRC Workshop. Phase 2 projects 1984-1992 averaged $760K of post-SBIR (Phase 3) sales and 1.5% of the projects had half the sales. The most efficient awardees are those with 5-9 awards. They averaged $1250K per Phase 2. The fewer winners averaged $750K, and the mills averaged only $300K. Those averages are heavily influenced by a handful of big winners like Savi Technology. Nothing wrong with that, but it fails as a policy guide on whom to fund next. Interesting numbers that satisfy neither the internal critics who do not value mere sales nor any other external benefit; they want a measure of benefit to the agency while they systematically avoid studying the question in any way to collect such data themselves. The external critics say that sales is an inadequate measure; they want profits and return on investment.
If A Little Is Good
(Feb19) Josh Lerner (HBS) started his lecture with the claim that SBIR is good for stimulating young firms and then proceeded to show a correlation between employment growth and SBIR awards to firms in areas already active in private venture investing. Enough to justify SBIR? Not so fast! For one, employment growth was NOT correlated with more awards to a firm - a whole lot is not better. In other words, if you politically require a subsidy program to create jobs, fund only start-up companies early. Such a policy would also pass a smell test about government intervention in the marketplace. Otherwise, the subsidy program gets captured by beneficiary politics and the money does no more good than a mere direct job subsidy. Josh (reinforced by several other speakers) also noted that correlation does not imply causation which has to be proved separately, a point often lost on busy politicians. Lerner spoke at a National Research Council workshop on SBIR

Policy Wonks Picnic All the major players assembled for a National Research Council Workshop on SBIR - Congressional committee staffers, one Member of Congress, SBA, VCs, success companies, program managers, federal agencies, economists, White House, SBTC, and consultants. With observers, about 115 people. Panel after panel, 36 speakers, talked about different aspects. Congress staffers predicted easy re-authorization with only a few "possible improvements", White House said it liked SBIR, Lerner talked about evaluation, the SBA cooed about how wonderful small business programs are, outsiders recommended policy perspectives, and the agencies mumbled (although this wasn't their meeting). NRC provided three meals to keep the energy alive. In a heated exchange, one SBA-crat challenged the idea of cost-sharing as unfair; the consultant argued it was not only fair and legal but also right. Everyone realized that the main question for SBIR was commercialization - what did it mean, how was it to be measured, how was it to be achieved, etc. Further debate to follow until about October 2000 about what SBIR is and is supposed to be.

NASA's 335 Phase 1s
(Feb 13)On the other hand, NASA's Phase 1 award list for 1997 reads like a history of SBIR. Of the 335 awards (of 2665 proposals), 111 went to multiple winners, and almost all the companies are the usual suspects who do great R&D just like NASA likes its R&D. After all, that is the heart of customer service. The four-award winners are SBIR household names: Charles River Analytics, Foster-Miller, High Technology, POC, Physical Sciences, SSG, SPEC, and TDA Research. And the threes: CFD Research, EMF Industries, IAI, Nanomaterials, Ultramet. The top SBIR winners in the past keep on winning the most awards. Unfortunately, one way to infer the proper customer relationship in SBIR is just the reverse - that the agency is supposed to serve the high-tech small business community. Else, why would there be an SBIR law?


Another Dream In Extremis. Six months into its fiscal year, MCNC has lost $2.6M and executives say they're looking at cost-cutting measures to return the research consortium to profitability. That may include layoffs at the 250-employee center... ...a series of delayed contracts could reverse the situation quickly... becoming more important as July 1, 1999 approaches. That's when MCNC's grant money from the state officially ends. Grant funds from the N.C. Department of Commerce have declined from more than $20M in fiscal 1996 to $4.5M this fiscal year. Founded in 1980, MCNC is one of the nation's leading non-profit research and development consortiums, particularly in information technology and microelectronics. Because of its central role as a supercomputing and telecommunications hub, it's widely considered one of the key entities in Research Triangle Park. MCNC's budget called for it to be $309K in the black by Dec. 31. It earned a profit of $1977 for the [last] year. The deficit is one of many challenges that MCNC faces over the next 18 months as North Carolina grant dollars, its primary source of revenue since 1980, slowly disappear. As it shifts to the private sector while retaining non-profit status, MCNC is employing a two-fold strategy: the commercialization of advanced technologies it's developed over the past two decades; and the creation of spin-offs that provide MCNC with equity stakes and potential support contracts. ... Success in the private sector will be crucial for MCNC. {Director] Hart notes that several consortiums similar to MCNC have gone through such transitions nationally. Those that didn't penetrate private markets didn't survive. "Our strategy is highly dependent on being successful in commercial activity," Hart said. Over the first six months of its fiscal year, that strategy hasn't produced hoped-for results. Contracts from the private sector and the federal government resulted in $5.5M in revenue, $2.5 M below projections. Service fees, mostly reflecting private sector contracts, were $1M below target. [Triangle Business Journal, Feb 9] Politicians start these enterprises with great speeches loaded with "future", "prosperity", and "jobs" in the hope that can repeal the laws of economics. Eventually the failure is recognized by the next generation of politicians who cut it off as quietly as possible when they see endless appropriations from state coffers. Meanwhile in next-door Colorado, Some are so small they're still in someone's garage or basement. For some, they're first attempts, for others, second chances. They are tiny tech companies sprouting up in Colorado. An intriguing idea, a plan put into action - even without an office. Look at Pangea Visions Inc. The Web development company, which started taking off barely six months ago. ... They meet clients in coffee shops and restaurants. Small beginnings. But the growing number of such companies form the mosaic of Colorado's burgeoning high-tech industry. It's the industry experts say increasingly drives the state's economy. Large and visible high-technology moves like the highly successful initial public offering last year of J.D. Edwards and Co. - the largest software IPO in the country in 1997 - and Sun Microsystems Inc.'s decision to build a campus in Broomfield have brought increased attention and credibility to Colorado's high-tech industry. Getting an accurate count of all of the state's small high-tech businesses is a tough task. "It's impossible to track the number of start-ups because a start-up company can be one individual," Keller said. "If you're a person with a PC you can generally start slinging some code and writing some software, and it's not particularly capital-intensive." However, John Dill, director of economic development for the state of Colorado, estimated that there are a total of 1,800 high-tech companies in the state, mainly concentrated along the Front Range. ... In 1995, Colorado software and information companies received $34M in venture funding. In 1996, that amount rose to $95M. And last year, Keller estimated that venture funding for software and information companies was about $70 million. Although the dollar amount went down in 1997, Keller said it was more significant that in both 1996 and 1997, the total amount of venture funding Colorado high-tech companies have received is at least double the amount of 1995. Another measure of the strength of Colorado's high-tech firms is the increase in technology IPOs over the past few years, Keller said. In 1995, there were 11 IPOs in Colorado, four of them were technology companies. 1996 saw 25 IPOs in the state, and 14, or 56 percent, were high-tech companies. And last year, although there were only 12 IPOs, nine of them were tech companies. [Leyla Kokmen, Denver Post, Feb 9] Why so different next door? Could it be a business culture no history of living off giant government labs that rely on political protection instead of a free market? [Leyla Kokmen, Denver Post, Feb 9]

Who Evaluates SBIRs? Paul McManamon, for one, for electro-optic sensors. Multiple committee member for SPIE, youth soccer coach, PhD Ohio State, sees (wants) 3D fiber nets and no moving parts inside his employer's airplanes, nine refereed papers published. Profile in OE Reports Feb 98. Does he like blather in SBIR proposals? Do you accept blather from people selling you products?

SBIR Policy Wonk Meeting. The various views of SBIR will clash in a Feb 17 NRC Workshop - The SBIR Program: Challenges and Opportunities . The arguers include Rolnd Tibbetts (former NSF grandaddy of SBIR and now advocate), Josh Lerner (Harvard), Ken Flamm (Brookings), Zoltan Acs (economics of innovation guru), John Preston (capitalist and formerly MIT Licensing Chief), CEOs of several small firms, Patty Forbes (Senate SB Committee staff), Dorothy Robyn (White House), Dan Hill (SBA overseer of SBIR) and others known for speaking opinions. The main battle should be between those who like it as is and those who want SBIR to act like an investment program. The second group will ask questions like: What problem is SBIR solving, where's the evidence that it is working, and would doing nothing produce the same result? Jon Baron (DOD) and the NRC have assembled what could be a momentous debate (that may well be ignored when politics drives the 2000 reauthorization debate in a Presidential election year).

Name the City Contest Should the lower left coast be the TechCoast? LA wants a name to suggest its self-image as a high tech place. HollyWeb, The Wired West, Silicon Sprawl, VirtualDigicyberwood? . Says one local, We're finding more and more that LA is being regarded as the place where things are really happening. .[story from LA Times (front page), Feb 3] I wonder if that fellow studied Sinclair Lewis's Babbitt.

Gore for Goodies. Al Gore told the employees of a Silicon Valley R&D house that he's for an R&D tax credit. Must be election time again. The SF Chronicle story didn't say that Gore explained the intellectually defensible rationale for such subsidy, just that he's for it because it will translate into a better life for all Americans. Like most political programs, the reasoning is best left unspoken.

The 70s are back - solar power tax credit. Gore also is for another solar subsidy, this time $2000 tax credit as part of the $6B "incentive" package of credit and spending for R&D. You like subsidies - The government deciding what you ought to invest in? Then you would love Critical Technology Lists. There is a cost for politicians deciding what makes business sense. They don't want ROI, they want re-election. They don't invest (spend) their money; they spend yours. Even the anti-subsidy Republicans are put in a quandary by such propositions; they want to be for free markets in principle but hand out tax breaks to their natural constituencies

ATP Spring Competitions
(Jan 20) ATP General Competition proposals due March 18. ATP promises $82 million in first year funding for new awards for all of the 8-10 fiscal year 1998 ATP competitions. Road show of government blather now underway with shows : Wednesday, Jan21 at the Crowne Plaza Hotel, Seattle, at the Austin Chariot Resort Inn, and at the Adam's Mark Orlando; Friday, Jan 23 at The Quality Hotel LAX, at the Holiday Inn O'Hare, and at the Sheraton Hotel, Windsor Locks: and Wednesday, Jan 28 and Thursday Jan 29, at the Gaithersburg Holiday Inn, MD. These conferences will also address the other competitions closing in the spring on Photonics Manufacturing, Premium Power; Digital Video in Information Networks; Catalysis and Biocatalysis Technology; Microelectronics Manufacturing Infrastructure ; Selective-Membrane Platforms; and Tools for DNA Diagnostics. What did Commerce pick these particular technologies? Better not to ask; just take the money if you can if that's what you want. If you are a technology policy wonk, time has never been better for discussing the role of government in technology.

INCUBATOR WARMS UP: Startech, the technology incubator program sponsored by the Telecom Corridor Technology Business Council, has picked its first beneficiary company, Sentient Communications of Plano, which expects to go to market this year with a product that squeezes additional bandwidth out of the Internet. The company said it will receive help with advisory services, relationships and contacts in the Telecom Corridor. [Dallas Morning News, Jan 19]

What did the USAF fund in its 219 Phase 2 SBIRs in 1996? Read the abstracts and categorize, recognizing that abstracts have warts as a source: many are vague and/or bureaucratic and thus make it tough to judge degree of innovation. An old SBIR decider, though, as seen much of this work in other proposals. Here's his distribution of those projects with a readable abstract (28 had no abstract or a wrong abstract)
1. Good projects, sounds innovative and may well be commercial - 21%
2. Some innovation, low technical risk - 21%
3. Little or no innovation, slogging - 14%
4. Modeling and/or analysis - 18%
5. Disguised procurement for an AF job - 17%
6. Other - 16%
Read the abstracts and decide for yourself before writing another AF proposal.

Said the draft proposal: "look at me; I made a private investment in my company; I'm cost sharing." Said the consultant: "Correction: You're NOT cost sharing; you are doing what SBIR intended - using SBIR to supplement private investment. Cost sharing is a term invented by the beneficiaries who don't want a supplement, they want a full free lunch (and then complain about slow room service). They portray the evil government inducing private firms to pay for government research. The SBA fosters that image. (Note: SBA is also a program beneficiary; the bureaucrats there get jobs which is why SBA does not do realistic program evaluations.)
You, too, have bought into the beneficiaries' image. You portray your capital investment in a business as something worthy and unusual. No, in a capitalistic economy, real businesses first establish a business, and then seek SBIR as a supplement for their R&D. Business first, SBIR second. You imply the reverse. The more you do so, the more you invite comparison with the SBIR mills along Route 128."

Only 12 of the top 500 growth technology companies 1992-1996 got DOD SBIR Phase 2 awards, says Deloitte & Touche's study of the fastest growing tech companies, public or private. The best story - Vixel (ne Photonics Research) - grew to 3794% with - you guessed it :VCSELs - and six Phase 2s. List printed in The Red Herring, Feb 98, on the newstand. Now, what was that cry about SBIR needed for high-growth technology companies? Vixel makes an exemplar case for what SBIR can do. Vixel's three BMDO awards ratcheted up the matching capital requirement: free first award, 1:1 for second award; 2:1 for third award. Total DOD to the 12 companies: $40M out of about $4B spent on SBIR. One Percent. A question: If the high growth companies don't use it and the users don't grow, what good does it do? (One of the 12 settled Justice Department allegations of a fraudulent SBIR case by paying $3M.)

Asian Contagion for You? What does Asian financial troubles mean? Especially to your hopes for an innovative product? What did happen? Don't governments invest in silly things all the time, with the necessarily accompanying corruption (if market economics doesn't allocate capital, then corruption has a field day when government does so)? Would SBIR bring down the US financial system? For an interesting theory (the usual ones don't work, says The Economist Jan 10), read MIT's Paul Krugman (who always has interesting theories to poke in the eye of his fellow economists) and his Pangloss theory.

R&D funding available for woman-owned businesses says the OE Reports headline (Jan 98). True enough, but SBIR is equally available for all other kinds of human owners. Robot owners need not apply. (OE Reports is the monthly of SPIE)

How to tell it's technology-push blather rather than market-pull economics? Look for "unique advantage". OK, name one advantage that is unique. Or look for a spin-off rationale that is simultaneously for 1) lower health costs, 2) better health technology, and 3) making money selling health technology. Yes, such inconsistency happens every day when government demands that SBIR proposers cite societal reasons for funding their R&D, and the government accepts economic nonsense. Fat chance while the law permits agencies to pretty much do with SBIR whatever they like. Laws with wide acceptance also have wide avenues for interpretation.

Missouri and New York, too. Now New York and Missouri are joining Louisiana in another state-backed financing scheme to bribe small companies to stay in the state. Tax credits to insurance companies who invest in local start-ups. Said a Missouri VC, venture capitalists have been unenthusiastic about investing in the Midwest. [WSJ, Jan 13] Wonder why? Could it be that states willing to intervene on the spend side might be inclined to intervene in other ways not in the economic interests of the enterprises?

Prepared by Carl Nelson Consulting Inc,;

helping small high-tech companies get from idea to market