Government Stories 2000

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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Several justifications are offered for the existence of export subsidies. ... These policies, however, bring with them some huge problems. Any company coddled by a subsidy has less incentive to improve its bottom line (and hence make the subsidy unnecessary). Tax revenues used for subsidies are distributed in a way that makes them regressive. And artificially low prices supported by subsidies may force more efficient producers in importing countries out of business. [The Economist, Dec 16] Sound like subsidies for R&D like SBIR?


Congress Renews SBIR
(Dec 18) In the final bill of the 106th Congress, SBIR got another eight years of life. But in a recognition that SBIR's claims of result have been vague, the bill adds several provisions for review. NRC will study it; the SBA will make a publicly available database (with value yet to be determined) not much different from what it already does, an internal government database of results for any agency who cares, and a requirement that the agency justify why it did not do a Phase 3 (easy to do with ritual words). To see that wealth gets spread in what is a political program, several provisions allow for 1) spending the grant money to get advice from other SBIR winners, 2) rural community outreach, and 3) a $10M per year program to to strengthen the technological competitiveness of small business concerns in the States which is Washington language for pork.
Politics wins again over business economics. With the huge VC money floating around, there is no obvious need for a government billion especially since government has never shown any competitive return after 15 years of investing. As Mark Heesen, president of NVCA, notes, there is about $100B in new money going into new companies this year, a 1000% increase in five years. But the same companies that want government out of their lives - repeal that awful death tax - want government in their lives when it is passing out free money. Consistency in politics? Daft! Don't worry, both the politicians and the beneficiaries will spew pontifical language to applaud each others' vision for another government handout. Maybe, just maybe - nah! - the law's provisions for evaluation and study will show the emperor's nakedness by 2008 or might even force federal agencies to treat SBIR as investment in disruptive innovation rather than incremental R&D.
If you are a small high-tech business with an appetitite for free money, you might as well get into the pool too. The big solicitation for proposals - DOD - closes Jan 10. The money is slow and limited but it's free. Grab a consultant, or better still, an experienced SBIR company as a partner, and dive in. Somebody is going to get that guaranteed $1B a year.

The future existence of a $1.2B small business high technology R & D program hangs by a thread, says the SBTC about Congress's failure to yet re-authorize SBIR. Well, that's a little overblown. History says that the agencies will deliver a lot of R&D business to the best small firms with or without SBIR. Since SBIR has made a hash of showing that it did much good except to the incomes of the winning firms, Congress doesn't feel any great pressure to exempt it from the normal course of politics. Stu Shelley, whose Cincinnati firm is actually doing what SBIR should have intended, urges everyone Please express your support of the program to your House and Senate representatives. Contact information can be found at the following web sites: and

Where's The SBIR Bill? In legislative limbo. [SBIR] had long been bipartisan - until now. With SBIR funding due to expire this fall, US Senator John F. Kerry and his Republican counterpart on the Senate Small Business Committee had worked out compromises on a number of dicey issues. Then the Republican leadership pulled the SBIR bill into the overall SBA reauthorization - and it has been downhill since. In the partisan environment that is Washington today, the SBA bill was sent to a conference committee, where the Republican leadership loaded it up like a Christmas tree with some of the most controversial issues before Congress: the Republican tax-cut plan, money for HMOs, and school vouchers.''When you think about it, it's ironic,'' says Kerry. ''Republicans claim to be the party of business. But it's the Republicans who - in the worst partisan way - took a small business bill and loaded it down with legislation that had nothing to do with small businesses.'' [Steve Bailey, Boston Globe, Nov 22] Ironically, the story was part of a piece that lauds an SBIR firm that has had $8M of SBIR that included the famous smoke-enders video.


SBIR Does Some Good(Nov 17) Some academic economists for the National Research Council studied DOD's SBIR and its Fast Track.
Findings for SBIR:
1. New Products to Meet DoD Missions: The SBIR program is contributing to DOD's overall research and development goals. A significant portion of the projects funded by SBIR would not have been undertaken without SBIR funding. [They spent a lot of money and got something. As long as the government was paying, the company would do work.]
2. Powerful Demonstration Effect: The SBIR program has a demonstration effect. In university settings, recipients of SBIR awards can inspire colleagues to apply for SBIR awards to commercialize their research, thus generating returns to American taxpayers on the nation's R&D investment. [a.k.a. the Porsche effect]
3. Lasting Knowledge Generation: Even when SBIR projects fail, the knowledge has lasting value to firms and individual researchers. [What else can we say?]
4. Positive Social Return: From an economic perspective, the SBIR program at Defense generates a positive social rate of return. The report's statistical analysis estimates that the rate of return to SBIR projects was 84% versus a return of 25% for non-SBIR projects studied. [Just don't ask us to define social rate of return to two significant figures.]
Findings for the Fast Track pilot:
1. Funds for Cutting Edge Research: The Fast Track program has attained its principal goal of reducing the gap between Phase I and Phase II funding. Over half of Fast Track firms experience no funding gap and, on average, Fast Track firms experience a funding gap that is half the duration of the gap for non-Fast Track firms. [Bureaucracy needn't take forever.]
2. Increases Commercialization: The Fast Track program has helped DoD meet its goal of increasing the commercialization of projects funded by the SBIR program.
3. Attracts Private Capital: The Fast Track program helps attract private capital through a "certification effect."
4. Brings New Firms to SBIR: Firms applying to the Fast Track program are more likely to be first-time applicants than other SBIR applicants. They are also younger and smaller.
5. Supports Quality Research: The quality of research carried out by Fast Track firms is equal to the quality of non-Fast Track SBIR firms.
6. Not For Everybody: The Fast Track program is not for every firm. For firms pursuing research far upstream from marketplace applications, the commercial orientation of the Fast Track program may not be suitable. [Or the contract R&D firms.]
NRC Recommendations
1.Keep and Expand Fast Track: but not for DoD's entire SBIR program.
2. More Discretion on Awards: greater spread in the size of awards, with larger awards reserved for commercially oriented projects. [bureaucrats can use judgment if they want, but few want]
3. Further Research Required: [all researchers end with that plea]


Yes, The Government Can Say No. A company won a Navy Phase 1 and Phase 2 SBIR, so far so good, to demonstrate a prototype after which the Navy said "that's enough, we don't need any more." Undeterred, the company protested on the basis that the product was better than the Navy thought and that the Navys' reasoning about its product was defective, and therefore the Navy owed it a $1.3M contract plus other costs the company had incurred. It basically sued the Navy for not liking the product enough. The Armed Services Board of Contract Appeals denied the whole claim saying not only was there no contract to enforce but that any risk the contractor took outside a contract was not the government's business. Since such stuff is well established in procurement law one wonders where the company got its legal advice that it had a claim worth pursuing at some cost. The rule is simple: you have a contract when both you and the Contracting Officer sign an agreement and the government's exposure is limited to that agreement.In rare cases a Contracting Officer will allow reimbursable work to start on only his oral word. Don't ever bet your company that your case qualifies unless you have a firm order from a Contracting Officer. And a friendly technical officer in the Navy or anywhere else in the government is NOT a Contracting Officer who can authorize you to do government work.[The case was reported by a senior partner in a New York law firm.] Even if government reasoning and decision making is just as defective as ballot counting machines, that's life. For redress, apply to the voters to throw the dumb rascals out. Massachusetts can't seem to stop producing optical networking start-ups that draw tens of millions of dollars in venture capital, for products that promise to revolutionize Internet growth. In the latest example, executives of PhotonEx, a 135-person firm based in Bedford, are announcing today that they have secured $80 million in new funding. The money will support their plans for products delivering super-high-capacity transcontinental optical networks. Founded 14 months ago by Kristin Rauschenbach, formerly of the Massachusetts Institute of Technologies' Lincoln Laboratory, and by two colleagues, PhotonEx is promising to unveil a device by next year that can transmit a 40-gigabit-per-second stream of data over thousands of miles. Generally speaking, big network operators, such as AT&T, Qwest, or Level 3, have had to make a tradeoff between speed and distance as they have added optical capacity to handle relentless growth in Net traffic. To carry traffic farther without needing expensive signal-regeneration devices every 40 to 70 miles, networks would have to accept transmitting at lower speeds. One of PhotonEx's claims is that it can vault networks past today's 2.5- and 10-gigabit standards while sending signals hundreds or thousands of miles between regeneration, by using intelligence about maximizing the flow of light over fiber strands. [Peter J. Howe, Boston Globe, 11/14/2000]

Grinding Out the Science Innovation, the Navy calls it; grinding science is more apt. The SBIR topic calling for innovation in the January cycle is N01-040 Modeling of Composite Solid Propellant Combustion. That's been going on for three decades since computers could do Fortran, It's mostly making assumptions that dumb down the problem enough to cope with the equations. Like all modeling. The list of references shows one the authors of the Beckstead-Derr-Price model that was the Navy standard for years still publishing in 1999 the same kind of research papers. The chemistry is probably still too tough for a priori modeling. The topic author dreams of applying the model to the design of composite propellants by rocket fuel makers. Hah! The money spent would go for more grinding unless some small company has suddenly revolutionized entropy. Chances of commercializing any advance that might come from more research? Think nickels and dimes and not ROI. At least DOD has never before funded an SBIR Phase 2 composite propellant model. Maybe it will see the futility when Phase 2 is proposed by whoever wins any Phase 1.


SBIR Technology of the Year Awards.
(Nov 9) Four companies got a blue ribbon for technology, which is of course far different from the ultimate award - making money. The awards, given at the Technology 2000 conference a claim to recognize important new commercial products and services developed through SBIR. The envelope. please, and thew winners are:
Triton Systems (Chelmsford, MA ( for SmartBond which uses a family of ferromagnetic particles known as "susceptors" that absorb RF radiation. When exposed to RF, the susceptors respond by generating heat until a preset maximum temperature, known as the Curie temperature, is reached. By manipulating the chemistry of these susceptors, the Curie temperature can be precisely established from 56 degrees C to 475 degrees C. Applications range from joining aerospace composite structures to sealing aseptic food packages to treatment of cancer cells. Sales are projected to reach $250M by 2005 and $1B by 2008. Some people in the government and the SBIR community believe such estimates. Triton also got a ribbon for its NanoTuf scratch-resistant coating for prescription and sports eyewear applications which claims up to four times the abrasion resistance of conventional coatings.
ARNAV Systems (Puyallup, WA ( for its Electronic Pilot Weather Reporting System, which brings real-time weather data into small airplane cockpit. No claims were made about sales or profits.
Applied Optoelectronics (Sugar Land, TX ( for a semiconductor laser that enables coherent light emission over a wide wavelength range in the mid-IR. The Interband Cascade Laser claims spectroscopic applications ranging from medical analysis of chemical compounds (such as instant assessment of cholesterol levels) to real-time detection of explosives and drugs. No profit or sales numbers.
QRDC (Chaska, MN ( for a smart structure with the capability of protecting the internal cargo and on-surface sensor arrays of a skin structure when subjected to vibratory, acoustic, and noise disturbances. BMDO sponsored two of the five technologies and claims an indirect boost for Triton.
Meanwhile, a McGraw-Hill newsletter Federal Technology Report which focuses on energy picked up the BMDO paper showing a hypothetical 46% IRR for the companies that went public after BMDO SBIR funding. What's the effect, do you think, on BMDO management of the findings. A big yawn, and "what have you done for me lately?" After all, why should an SES or general get excited about IRR to private firms no matter how healthy it is for the US economy that he claims to want to protect? Which is a prime reason that SBIR produces so little economic value. The SBIR advocates got the political system to sequester 2.5% of the federal R&D for them and as long as the money keeps flowing they ask no hard questions about whether it did any good. The federal agencies saw that Congress didn't care either and countered the stealing of their funds and management flexibility by using the money for their own purposes. BMDO has been an exception to that practice ever since it started giving Phase 2 SBIR awards in 1987. But such altruism, as the generals see it, cannot last forever. Someday, probably soon, the axe will fall on investment criteria and the SBIR manager will have to join his counterparts in all the the agencies in continuously answering "What have you done for me lately?" The SBIR advocates who should in principle be cheering any agency that actually produces measurable results will shed not a single tear for BMDO's conversion to ordinary bureau. They would instead more likely cheer the disappearance of a curve-breaker.

Politics and Technology. The Republcians in Congress, just before the election, published a report condemning the Energy Dept for wasting $3.4B on technology it never used to clean up the mess from atomic weapon making. It sounds like pure politics, much like the report on Chinese espionage, with little regard to the facts of nuclear clean up. Unlike a spill on the kitchen floor, radio-isotopes stay dangerous for millenia and cannot be chemically neutralized nor approached by humans. Maybe Republicans, who were so gung-ho for the bomb, can go clean the mess with their tough hides to protect them.

Grading post-SBIR Business. A panel of business and a few government people invited a number of SBIR winners to present their businesses. One private sector panelist gave the following grades:
Albert gets an A for presentation, but a D for business skills. Years later and still low revenues. Brad gets a D for presentation, an A for his opportunity value, and a B for business sense. A government guy loved this one and wants to help him.
Clyde gets a B for presentation, an A for his opportunity value, and an F for his business skills. A guy from a Fortune 500 and I loved this one...this may be a good one for us if he's correct about his technology. He's all over the map, but I'm going to focus him on one theme. This is exactly what I look for...strong techie with a good idea, a big market, early stage, and without a clue!
Dirkgets a B for presentation, a C for opportunity value, and a C for business skills. This looks like too small a market for any real sustained profit or growth. He needs to look for other applications.
Elvin gets an F for presentation, a ? for opportunity value, and a C for business skills. Since I couldn't understand what his competitive advantage is over other such producers, this is just a big question mark.
How would you do with selling your SBIR as a business and not just something that government would fund in a set-aside program. Of course, if your objective in SBIR is working for the governemnt, then your business skills are irrelevant. If, however, you dream of riches from an SBIR technology, that presumably needs SBIR because you cannot get real money to back it, you had better get going on making a competitive business in the real world.

Capital District Capital Calling FA Technology Ventures, a unit of First Albany Cos. Inc. and the first partner in New York state's venture capital program, has begun looking for high-tech companies to invest in. ...FA plans to look for investment opportunities in the information technology and energy industries. It expects to announce its first new investment in a few weeks and to give companies not just money, but also guidance to help them grow. It was the first private partner named for the $250 million New York State Venture Capital Investment Program, established late last year. The others are in Buffalo and Syracuse. The partner companies are required to add to the funds they manage more than enough to match the state's investment. In FA Technology's case, that meant at least $70M of its own and other private investors' money. [Capital District Business Review, Oct 30]

Double the Science Spending. Were I a politician, I would forcefully state that the vibrancy of the American economy for our children and grandchildren depends on our investment in basic science today. I would insist that the science budgets of the National Science Foundation, NASA, the Department of Energy and the Department of Defense be strengthened. The only budget keeping up with the opportunities is that of the National Institutes of Health, and I would pledge as Al Gore did for cancer research that the momentum would be continued. We spend less than half a percent of the gross domestic product on basic science. We should be able to afford to double that amount. Today, the federal government does not even finance the full cost of the research it supports at universities, as a recent RAND study noted, and this forces universities to use their endowment returns to subsidize the research. Although Baltimore has a vested interest in the debate, he's not necessarily wrong. How much science investment is enough. But more important, who should be supplying the money to keep the army of professors and PhDs gainfully employed?

Incubator for Worcester. Offering an alternative to the high price of Cambridge real estate, Worcester wants to become the state's biomedical incubator capital, catering to biotechnology, medical device, and bioinformatics companies. Last week, a public-private organization announced plans to start an industrial incubator in the Rose Building, a former research center at the shuttered St. Vincent Hospital. Initial plans call for outfitting two of the five vacant floors, each 10,000 square feet, with a series of laboratories, conference rooms and offices that would be shared by a few dozen start-ups. Entrepreneurs would pay between $25 and $35 per square foot of space. Comparable space in Cambridge, if available, costs more than $55 per square foot. [Boston Globe 10/25/2000]

Let's Pretend We're Commercializing NASA's Bob Norwood tried to put the best face on NASA's shift away from commercialization in its SBIR with bureauspeak: The primary focus of SBIR/STTR is to develop innovative (but not too innovative, please) technologies for enhancing NASA missions with a strong secondary purpose to assist small business in commercializing that technology. Nice talk, and NASA has a reputation for commercializing technology. Think Tang. From the tone, either Bob is just another bureaucrat or he has to speak such pap to avoid upsetting his apple cart within NASA headquarters. But Norwood's bureauspeak fuzzes the ugly fact that even though Bob might like to have SBIR do some serious dual use investment, the NASA Centers have won the internal battle for control, and thus they do the science and engineering they want for NASA missions, period. National economics is not their mission as they see it. The SBIR advocates will sit quietly by and let, even encourage, NASA in its focus because most of the companies who do the advocacy just want government contracts anyway. If NASA cared about dual use, it could take lessons from BMDO (which federal agencies don't normally do).

Meanwhile, in an orgy of conventionalism, NIST SBIR is passing out about $3M in SBIRs for 2000 that give a lot of usual suspects another dose of plodding money. The good news and the bad news about the Phase 2s is that they are all $300K for pedestrian sounding stuff. The Phase 1s focus on nice safe modeling and analysis including three Phase 1s out of 28 to Navy favorite Stottler-Hanke. At least none of the eight Phase 2 winners got a new Phase 1 to continue plodding on the same course. If BMDO were worried about competition for IRR, it needn't worry about NIST. If you have a real innovation, matbe NIST isn't the place to float it. You will probably get nothing and even if you got a Phhase 2, it is unlikley to be enough money to do any serious innovating.

What the Prepared Mind Can Do Without Government Funding From Car Exhaust to Diamonds in the Rough. If life hands you a lemon, try making lemonade. This old saw could be the motto for Elias Siores, head of the Industrial Research Institute at Swinburne University of Technology in Melbourne, Australia. Stuck in traffic one day, he took in a snootful of car exhaust, and he ended up making diamonds. Siores, together with Carlos A. Destefani, a research engineer at IRIS, reasoned that he could clean up car emissions by superheating them with microwaves and letting them cool down into relatively harmless compounds. It turns out that a wine-bottle-size converter of this sort, fitted onto a vehicle's exhaust system, can yield a 70% reduction in carbon dioxide, carbon monoxide, and hydrocarbons. What's more, he says, ''this process is applicable to large-scale emissions like those coming out of power and chemical plants.'' But when Siores tested the idea, there was a problem--and a surprising solution. The converter caused cars to belch unsightly black particulates. So the inventor went one innovation further: He attached to the exhaust pipe an electrostatic filter that collects the particulates. When a car is in the shop, this dust can be collected and mixed with superheated ionized argon or helium. The resulting soup is sprayed onto a glass surface, where it crystallizes into industrial-grade diamonds that can be used as a protective coating for CDs, optical lenses, artificial hip joints, and other devices. [PETTI FONG, Business Week, Oct 30]


Stock Slump Not Scaring VC Firms. The stock market is swooning, but that is not slowing the flow of venture capital to high-tech startups. In the past year, no fewer than 14 venture firms have raised $1 billion or more from pension funds, college endowments and other institutional investors. The latest is Lightspeed Venture Partners, which said yesterday that it has raised $1 billion to invest in ``early stage'' communications and Internet/software companies. Venture capital investors still see plenty of potential in new technologies and long-term payoffs. ... So far this year, 356 U.S. companies have gone public, according to IPO Monitor, and the average price gain from their offering price is just 14.2 percent. [Peter Sinton, SF Chronicle, October 12,00] As the Nasdaq lowers its guillotine closer to the necks of investors, many mega tech bulls are being reduced to shivering, sniveling sheep. The true believers, however, don't flinch. They feverishly hurl insults at the guillotine, challenging it to drop further.If you were a tech believer but have thrown in the towel, shame on you. You probably were never a true believer in the first place, just an opportunist who couldn't stand watching other people get rich on tech stocks while you didn't. The pain and envy may have been too hard to handle, causing you to decide that it is better to have a shot at quick wealth and be wrong than to have no shot at quick wealth but remain unscathed. [Greg Bartalos, Individual Investor, Friday the 13th]

The University of Dayton Research Institute has hired a U.S. Air Force research veteran to help push the institution's inventions in commercial markets. John Leland, 38, was named UDRI's director for partnerships Oct. 2, replacing Lloyd Huff, who retired in March. Leland's appointment comes just months after UDRI landed three multimillion-dollar contracts to help improve and maintain aging military aircraft. His job will be to step up efforts to find commercial uses for the technology UDRI researchers develop for the military and other government sectors. Leland says UDRI -- one of the largest government contractors in the Dayton area, with more than $40 million a year in sponsored research -- is positioned well between public and private markets. [Patrick L. Thimangu, Dayton Business Journal, Oct 10] Leland was also an SBIR reviewer and contract monitor at Wright-Patterson. Although WP never cared about commercialization in its SBIR, Leland at least can help UDRI get more study contracts.

Montgomery County plans to ask the state legislature next year to approve a program allowing money-losing tech firms to sell tax credits for their losses to profitable companies, which can use the credits to offset their state taxes. The money-losing companies would receive a onetime windfall, and the state would make up the lost revenue if the company makes a profit in the future. [Steven Dennis, WashTech, Oct 9] Startup A loses $10M while big Company B has a $10M profit. B buys the loss from A at whatever price is negotiated and B reports the loss for its taxes. A gets cash, B gets a tax write-off; who loses? The state that didn't get B's taxes. In theory, the satartup A is saved from failure and recovers to repay the state many times in future economic activity. Nice theory. I bet the state loses a bundle because it has a soft-headed political approach to small business.

Corporate Welfare and SBIR Add-Ons The ATP 2000 awards went to a variety of companies two kinds of which were large corporations and BMDO SBIR winners (not the same companies). Direct awards went to Caterpiller (2), Honeywell,Siemens, KLA Tencor, Motorola, Ford, Praxair, and TriQuint. Secondary awards to team members went to Delphi, Ingersoll Rand, Dow, United Technologies, GE, and Chevron. Former BMDO SBIR Phase 2 winners were PolyStor, NP Photonics, Genex, Conductus, and T/J Technologies. How did capital become so scarce that the US government, scourge of automotive companies with regulation, get to contribute to the commercial R&D investment of Ford? Would TJ Rodgers approve of competitor TriQuint bellying up to the government trough? Any wonder that the welfare state is alive and well? One test the government might apply is that any company that pays dividends doesn't need government investment support.

Big Money Only Sounds Good Never happen, says Rep Sensenbrenner as he ditches a phantom doubling of science spending. For the third year in a row, the U.S. Senate has endorsed the idea of doubling federal spending on civilian R&D. But opposition from Representative James Sensenbrenner (R-WI), head of the House Science Committee, will likely doom the bill --along with killing his own bid to boost information technology (IT) research. The Federal Research Investment Act (S. 2046) passed easily last week. It calls for doubling nondefense R&D spending to more than $70 billion over the next decade. But Sensenbrenner has opposed the bill because it won't force Congress to spend the money. It allows lawmakers "to champion science once, then forget about it for the next 10 years," [Science, Sep 29]

New NIH Policy Includes SBIR From Pat Dillon of Minnesota Project Innovation: NEWS FLASH: REQUIRED EDUCATION IN THE PROTECTION OF HUMAN RESEARCH PARTICIPANTS--Beginning on October 1, 2000, the NIH will require education on the protection of human research participants for all investigators submitting NIH applications for grants or proposals for contracts or receiving new or non-competing awards for research involving human subjects. Information about this policy may be found at: FAQs ( regarding this policy are also included in this Guide Announcement.

What does Silicon Valley want from Washington, DC? [asks Jim Glassman] T.J. Rodgers, CEO of Cypress Semiconductor, says that he and most of his peers just want to be left alone. ... Glassman: What are the most important issues to executives in Silicon Valley? Rodgers: Real simple. We want a free market. Beyond that, we will compete, we will invent technology, we will create wealth the way we’ve done it. We simply want to exist in an environment where we can be capitalists and run our businesses. ... Rodgers: Let’s see if I can force my Congressmen with the appropriate donations and lobbying to give money to my company to do research and development. -- as soon as you have done that, you’re playing their game and under their rules and you stop being an entrepreneur and a capitalist in the free market and you start being in a state of socialism, which is a known failure in the economic system.


Dr. Folkman first suggested as much [blood supply to tumors] in a 1971 article in the New England Journal of Medicine. He was ridiculed and ostracized. Now, after his results have been confirmed by other labs, he's on the short list for the Nobel Prize. "He turned oncology on its head and single-handedly ignited a scientific inquiry that now involves more than 1,000 laboratories around the world," says William Li, president and medical director of the Angiogenesis Foundation in Cambridge, Mass. [Michael Fumento, Forbes, Oct 16] So, you have an innovation and you don't understand why SBIR won't pay attention? Most of the government hates innovation; their R&D programs are a model of incrementalism. The SBIR topics are widely limited to what the government already knows. If you have a real paradigm shift, not just happy talk, take it to BMDO where a hail of bullets from reviewers will get the attention of the decider IF at least one reviewer sees what you are saying. Do not expect a panel of experts to fund a project that undermines their whole set of programs.

Incubator nurtures crop. As director of the Hamilton County Business Center, Patrick Longo helps fine-tune the business plans of more than 45 firms, two-thirds of which focus on technology. And he is getting results. During the Norwood-based incubator's recently ended fiscal year, its tenants generated close to $22M in revenue and attracted more than $10M in venture and angel capital. Four out of 15 firms that applied for federal Small-Business Innovation Research Grants got them. Another four received patents, with a half-dozen more pending. That wasn't all. Nine companies graduated from the incubator and struck out on their own. ... For example, Sheet Dynamics develops sensors that can be used to set instruments accurately down to the micron level. It is creating a product for focusing the Hubble Telescope in space, thanks to a government partnership grant, that could also be used for precision cutting tools in the steel industry. [Rachel Melcer, Cincinnati Business Journal, Sep 25] Sheet Dynamics got its BMDO SBIR by getting some benefitting customers to co-invest.


Incubator Not So Hot Says an amateur trader of CMGI, Once a darling on Wall Street, CMGI posted record loses after the bell. The numbers are beyond disheartening. CMGI reported a fourth quarter net loss of $633.7 million. CMGI recently announced it was 'restructuring' it's business model. I doubt investors will have the patience to wait for results. The numbers were horrific and investors will react accordingly. I can think of 600 million reasons why I'd invest my money elsewhere. Sponsoring Internet stocks isn't all glory. Undeterred by such nightmares, New York State will plunge in with its pension money by investing $100M in three VC funds in Albany, Buffalo, and Syracuse (hopeful hotbeds of start-ups). Joshua Prager (Wall St Journal, Sep 25) notes that Kansas lost a bundle trying to inject capital into economically hurting areas. State funds have a big political problem: they want job growth and they don't have a clear view of how their investments will be anything but a jobs program. If they want capital return, they should invest in hot spots, not cold spots. Hot spots are hot for a reason. The future pensioners should sue the trustees for squandering their fund in waht could hardly be termed prudent ventures for political purposes. At the federal level, the politicians have the same blind-spot with SBIR.

No New SBIR Yet The Congress hasn't passed the SBIR bill because a key House Small Business member wants a provision that affects 8(a) (for disadvantaged companies). In a questionable move, an SBA official asked the SBIR managers in the Executive Branch to prompt the potential SBIR winners to contact their Congressional members with the usual political pleading. What the SBA guy forgets is that the federal agencies would just as soon see SBIR disappear and shouldn't lift a phone to advance its cause even if doing so weren't highly improper anyway.


[Economist Paul] Romerargues that the economic incentives for innovation have strengthened in recent years. raising finance for innovation has become easier, and a bigger global market has increased the likely return. Global R&D as a share of GDP has increased. It is claimed, srikingly, that about 90% of all the scienitsts who have ever lived are alive today. The pace of innovation does not just seem to be faster; it really has increased. [The Economist, Sep 23,00] Still, R&D subsidy programs like SBIR and ATP plod on with an underlying assumption that Romer has it wrong and that R&D has to be saved by government intervention. No surprise, the mohair subsidy that actually made some sense in the 1940s is still on life support.

Wanna make stuff for DOD? It can be complicated because DOD wants quality for which fortunately it is willing to pay well. To learn more you might go to the Defense Manufacturing Conference in Tampa 27-30 Nov.

The SBA says the AF is killing small business by bundling contracts into bigger packages for more efficient management. the SBA says it doesn't believe key Air Force promises on the issue, in what has become an acrimonious rift within the administration over affirmative action and small-business policies. The contract, called the Flexible Acquisition and Sustainment Tool (FAST), covers an estimated $7.4 billion in purchases over the next seven years at the three major Air Force logistic bases: Warner Robins, Ga.; Ogden, Utah; and Oklahoma City. [Washington Post, Sep 22]

Government Brain Drain - Boon or Bust? Senior scientists making $90,000 at a government laboratory can go to private companies and increase their salaries by 50 percent. Add a lucrative stock-option package and the appeal can be irresistible. ... "I used to wake up and think I had the best job in the world," said Pete Beckman, a 36-year-old computer scientist who spent nearly four years at Los Alamos before leaving in April. "It was so much fun, and I was working with absolutely the smartest people in the world. I didn't mind making 30 percent less than if I were at a private company. But you can only put up with so much." He took a job in the Santa Fe, N.M., area with TurboLinux, a software company, for a salary that he said was much higher than the $100,000 he made at Los Alamos, and stock options. Four others from Los Alamos left at the same time to join him. ... Over all, the annual attrition rate at leading research centers like Los Alamos, Lawrence Livermore and Sandia National Laboratories, which has headquarters in Albuquerque, traditionally around 4 percent, has recently been in double-digit percentages, especially in the growing fields of advanced computation (the application of sophisticated hardware and software to complex problems) and biotechnology, in which expertise is in high demand. That is still less than the turnover in private industry, typically close to 25 percent, but that is of little comfort to the government. [KATIE HAFNER, New York Times, Sep 19] Is it better then the best and brightest be in government or in the private sector in a free-market economy? Will government sponsored science by private firms do better than government-performed science and engineering? For the individual, what is the government job security worth over a work lifetime?


Government Cuts a Deal. Pressing its efforts to commercialize space technology, NASA will announce Thursday its first major contract with the private sector to develop commercial and medical biotechnology products.The five-year agreement gives StelSys LLC the rights to 13 patents for NASA's Bioreactor technology -- which the agency plans to use in the space station -- for use in researching infectious disease and developing a liver-assist device for patients who need transplant surgery.StelSys would pay NASA a $100,000 licensing fee and a royalty of 5% of the company's profits, capped at $2 million. NASA hopes to sign up more companies so that they can use space-station technology in a way that benefits both the companies and the space program. [LAURA HEINAUER, WALL STREET JOURNAL, Sep 14,00] Nice idea, Dan, but. The reality of government says that Goldin is kidding himself if he thinks he will gain budget money from any profits. Traditionally, any income goes straight into the Treasury, which is a disincentive for any agency to cut such deals. But, whenever an agency gets a windfall, Congress tands to cut the budget by the saem amount leaving the agency with no gain and no incentive. In a larger view, each agency works for the Congress and is paid by the Congress which would not like to have any agency with too much independence derived from independent income.

Minnesota lawmakers propose spending $225M, not small change for such a state, to boost the state's high-tech secotr. reveal plan to boost high-tech sector, says Susan Feyder in the Star Tribune Friday, September 15,00. More and better education (somehow) and tax incentives (which are relatively low motivators anyway). To bolster what they said is a dearth of funding for start-up companies, Cohen and Kelley are seeking $25 million for a seed fund to provide young businesses with investments in the $50,000 to $2 million range. Cohen said the seed fund is not an effort to set up a state venture capital fund. The fund would be managed by private venture capital firms picked by the Department of Trade and Economic Development. The state money would be matched two-for-one by funds from private investors. The seed fund would be supplemented with a $2 million state investment in Minnesota Investment Network Corp., a nonprofit investment firm. Another $1 million would go to the creation of a fund to promote industry clusters in outstate Minnesota, and $100,000 would be used to add another staff person to the Minnesota State Board of Investment.An unspecified amount of money would be used to establish refundable tax credits for young companies that don't have tax liabilities and allow a 50 percent capital gains exclusion on state taxes for investing in Minnesota companies and Minnesota technology funds.

3M operates on the philosophy that if you throw enough money at enough scientists they will come up with something interesting. They have--the $1.2 billion annual research budget has yielded such innovations as a drug to treat genital warts, transparent tape and skin patches to deliver drug therapy--but the strategy is something of a dud on the bottom line. Over the past decade earnings per share have inched ahead 5% a year, barely keeping up with inflation. [Mark Tatge, Minnesota Mining & Catchall, Forbes, Sep 4.00] SBIR operates on the philosophy that if you throw $1.2B a year at scientists, they will hand the government knowledge. Whether the government or the scientists profit from the investment is at the heart of the evaluation debate on SBIR.

New York Tech Transfer. New York state Office of Science, Technology and Academic Research will place a modest bet on inventions now taking form in academic laboratories. NYSTAR's Technology Transfer Incentive Program will provide $5M to NY universities to help move new technologies toward the marketplace. The funds will be spent along with $95 million for fundamental pieces of the technology development puzzle: research facilities; $20 million for the Centers for Advanced Technology program; and $7.5 million for faculty development. Those investments, university leaders predict, will further current research projects and help attract top-notch faculty and new research funds from government and industry sources, all of which will spell more inventions and more technology transfer. NYSTAR's $5 million will be distributed to university technology-transfer programs that need cash to propel a new technology to the next stage of development, said executive director Russell Bessette. It will provide rapid support in relatively small quantities--$100,000 to $500,000--to build a late-stage prototype or generate test data, for example, to help sell an interested company on licensing a patent for a new technology. [Albany Business Journal, Aug 28]


DOD Fast Track Update As of July 00, DOD has awarded 158 Fast Track contracted out of 166 qualified applicants. That's 95%; in other words, you get a third party cash investor you got a deal almost always. Of those, 70% got their first Phase 2 (only Phase 2 matters),thanks to the 4:1 match. Fast Track is doing what we intended; getting third party buy-in of innovative technology. Unfortunately, the creator of Fast Track is leaving SBIR and the government and taking with him probably the only aggressive advocacy of making SBIR do something more than just good DOD R&D. Government as VC. It's not as crazy as it sounds, says Peter Loftus (Wall Street Journal, Aug 25). Although SBIR gets no mention (wonder why?) and government cannot directly measure economic return to investment, many government entities have lots of money invested. Pseudo-government entities like pension funds for gov't drones, New York City's EDC, smallish Connecticut Innovations Inc which no longer needs state appropriations, CIA. Several states have tried VC funds but the legislatures wanted results the following year (by the next re-election).


Meetings on science and technology (S&T) policy or innovation in Washington, D.C., or elsewhere around the country usually find at least one speaker lamenting that industry has abandoned longer-term high-risk research. Nothing could be further from the truth. Industry is doing more long-range, high-risk, discovery-type research than ever before. ... Forty years ago, the federal government funded 65 percent of U.S. R&D. Now industry funds 70 percent, about the same percentage that industry funds in Japan. .. Although ranked only number three in the Council on Competitiveness' most recent Innovation Index, the United States has been the most competitive--and innovative--nation on Earth for the past seven years. This vitality is reflected by the recent dramatic growth in venture capital, which rose to $48.3 billion in 1999, up 150 percent over the $19.2 billion invested in 1998 and an order of magnitude higher than just four years earlier. Entrepreneurial activity stimulated by venture capital as well as R&D has helped the United States create five times as many fast-growing companies and generate four times as many initial public offerings as has Europe in recent years. The bottom line of innovation is job creation, productivity, and profitability. No other country comes close to the United States in these areas, nor in its current record-breaking economic expansion. [Charles Larson, The Boom in Industry Research, Issues in S&T, Summer 00] Such reports cut the whole basis for subsidies like SBIR, especially given SBIR's dismal record of economically defensible results. Never mind, it's re-election year and the politicians will pass out the goodies anyway. In a companion piece, DAVID GUSTON, Retiring the Social Contract for Science, argues a new politico-science deal Based on a misapprehension of the recent history of science policy and on a failed model of the interaction between politics and science, such evocations insist on a pious rededication of the polity to science, a numbing rearticulation of the rationale for the public support of research, or an obscurantist resystemization of research nomenclature. Their effect is to distract from a new science policy, what I call "collaborative assurance," that has been implemented for 20 years, albeit in a haphazard way. ... regardless of the mechanism for choice, the funding of research always confronts moral hazards that implicate the integrity and productivity of research. The asymmetry of information makes it difficult for the principal to ensure and for the agent to demonstrate that research is conducted with integrity and productivity. In Steelman's words: "The inevitable conclusion is that a great reliance must be placed upon the intelligence, initiative, and integrity of the scientific worker." ... Unlike health or fire insurance providers, the federal government did not monitor or deploy expensive incentives to assure itself of the success of the delegation. Rather, it conceived a marketlike model of science in which important outcomes were assumed to be automatic. In short, it trusted science to have integrity and be productive.

USAF's Idea of Innovative Technology The main objective of this project is to develop a formally specified architecture of a common scheduler product line for the Air Force Electronic Systems Command (ESC). The architecture will be based on the C2IPS system being developed by UNISYS. The architecture will serve as a formal documentation of the structure and functionality of C2IPS, and to serve as a reference for future Air Force scheduling systems. The architecture will prescribe the interfaces to components and the interconnection of components, as well as common components in future scheduling systems. This architecture opens the door to a competitive market for component developers and system constructors. By requiring that future systems adhere to the product line architecture, the Air Force will realize cost savings through reuse of common components and structure. Hear the market-driven innovation straining to get released in this Phase 1 from the latest AF award list? If nothing else, the lack of action shos in the bureaucratic language. Unfortunately for the AF, most of the rest of the Phase 1 awards do likewise - good steady R&D by companies who well know how to offer safe baby steps that won't frighten the pilots nor the generals. The company name? Who cares? The rest of the list is a long recitation of the safe firms who have learned to play the AF game.

7M Millionaires. Need investment for a bright idea? The world now has 7M people with investable assets, up 18% since 1998 and a projected 12% more annually for a few years. [says Merrill Lynch] About 40% of them are in North America. How does SBIR take advantage of such investment power? Insist that the best of the Phase 2 competitors attract some of that loose capital as evidence of market power. Otherwise, SBIR will continue as a science hobby.


Rating the presidential candidates on tech issues ...there's no obvious high-tech choice .. Both tickets support an increase in the number of H-1B visas... The current administration has been by far the best at reducing export controls. ...Bush is sensitive to privacy concerns, but many of his Republican colleagues want to allow business to regulate itself -- which hasn't worked. Democrats are more concerned about the rights of individuals. ... All four candidates talk a strong free trade game. ...Taxation on the Net: Members of both parties want to extend the moratorium, ...The Democrats are beholden to tort lawyers, who oppose tort reform. ...Permanent R&D tax credit: Supported strongly by the GOP and by New Democrats ... Education: By far the most important issue facing high-tech over the long run. All politicians agree we need to do a much better job; the question is, how? [JAMES J. MITCHELL, San Jose Mercury News, Aug 20] Note that the question of government subsidy of R&D, including SBIR's pseudo-investment, is not rated as a factor. The Demo ardor for ATP has waned as the stock market and VC investment boom say there is no pressing need for such coprorate welfare. Presumably, high-tech America sees no competition from SBIR that would distort market choices of technology investment. SBIR is simply putting little money into market-competitive companies and technologies.

$3M SBIR Award
(Aug 4) NIH handed OraVax (Cambridge, MA) a $3M Fast Track SBIR award to work on accelerated development of a West Nile virus vaccine including the clinical trials. Innovative? Not according to the company which says it has already used its approach to develop vaccines against dengue fever (in pre-clinical development) and Japanese encephalitis (due to commence Phase I trials shortly). Is there an urgent public health problem to be attacked? Yes. Is SBIR the way to do it? Depends on what you think SBIR is for. Surely the NIH could cover a relatively routine $3M vaccine development from its gazillions of research dollars as soon as a Senator from the Northeast demands action. Or does NIH leave only routine jobs to small business? Is $3M too much for an SBIR award. NO! If the circumstances are right, but this case does not sound like the nursery technology that SBIR was intended for. This is ordinary vaccine development by an established method. There does seem to be a bit of a legal problem, though. OraVax is a subsidiary of a British company Peptide Therapeutics listed on the London Stock Exchange and therefore ineligible for SBIR. OrtaVax has had three other Phase 2s 1995-1997.

David Freeman in Forbes ASAP (Aug 11) wrote a friendly piece on Stars Wars spinoff success with a feature on BMDO's SBIR. Freeman introduces SBIR as the government's VC arm but then drops the VC idea. He does offer quotes from Jeff Bond, BMDO SBIR overlord on the BMDO philosophy of investing in far reaching innovation (even if Bond is the only staffer to hold those ideas): Let's get the technology started. Companies cited: E-Tek Dynamics and CoreTek (both acquired by big photonics companies), New Dimension Instruments & Research, SVS Technologies, old standby story Silicon Designs.

If [entrepreneurs] are not in a hurry for the money and don't mind a load of paperwork or tailoring their technology for a government application, they might win millions of dollars in federal and state grants. ... Businesses can often leverage those [SBIR] grants to get additional funds from other governmental sources. For example, the California Technology Investment Partnership (CalTIP) provides more than $6 million a year to about 30 California companies to help them commercialize their technology and hire local employees. ... The downside is that ``it takes a while.'' Applicants for the California grants must submit proposals by May, and the winners (about 1 out of 3 or 4) aren't announced until this month. They don't get any money until October or November. Federal contracts can take even longer. Peter Sinton's piece in today's SF Chronicle cites four companies who tapped CalTIP for matching funds: PowerLight, Integrated Magnetoelectronics, Acellent Technologies, and Sensant. For those agencies who believe in commercialization and who believe that state money is a good market indicator (it's highly suspect), SBIR proposers can both get more money and raise their prospects of winning the Phase 2. A few other states have smaller such programs to help companies get their noses into the federal trough. State legislatures are too eager for short-term (the next election) payback to appropriate patient money for high-tech investment. Some federal agencies have the same short focus: a small gain now rather than a huge gain later.

Draft Tentative Topics. The USAF published it maybe-we-will-and-maybe-we-won't list of SBIR topics for next winter's solicitation. You can talk to the author until Nov 30. They are a mix of broad calls for something new and military specific R&D jobs. What is the basic AF attitude toward SBIR? Well, if you judge by what it publishes as its Impact Stories, it wants direct contribution to its problems by relatively incremental technology improvements with little concern also for commercial impact. If the best stories have little commercial impact, what do the rest have? Or maybe they really are howling economic success about which the AF is painfully shy.

Walter Bagehot, founder of The Economist, besides writing a neat little 1860 volume on The English Constitution (contrasting it with the American Constitution), said that The two million, or whatever number of copies it may be, they publish, are not purchased becasue the buyers wished to know the new truth. The purchaser desires an article which he can appreciate at first sight; which he can lay down and say: 'An excellent article ... exactly my own sentiments'.

Dust off those oscilloscopes, the politicians want to rain more money on science. Not wanting to be seen as behind the curve, 13 senators want to double NSF's budget by 2006. That would mean doubling of NSF's SBIR pot as well.

Moving Phase 2 The government, at least parts of it, now allow a company to bring a Phase 1 from one agency for funding by another agency. An NSF Phase 1 could be funded in Phase 2 by, say, DOE. Such a policy, which was for many years officially blocked by SBA, at least makes the government look like on government instead of several. Which seems right since the whole government acquires the rights to use the technology. If you think that you can sell the Agency B what Agency A doesn't want, you're welcome to try. But don't spend a lot of hope and energy unless you know that you have absolutely the best solution for Agency B's problem. Oh sure, you love your technology, but you were warned when Agency A declined. Competitors are everywhere; if you are allowed to approach Agency B, so is everyone else. To see more discussion of the switching, read the Discussion Forum on Phase II "shopping" rule change? at Inknowvation.

"If you look today at the IT environment, where is most of the innovation coming from? Smaller companies," Smith says. "What happens today in the commercial marketplace, like the Ciscos and the Lucents, is they buy small companies and bring them in for innovation. It's hard for the government to do that. And a lot of these small companies don't understand how you work with the government." The VC firm isn't without its doubters. Ivan Eland, an analyst with public policy think tank Cato Institute in Washington D.C., says In-Q-Tel is the federal government's way of obtaining technologies in the marketplace without having to restructure its traditional bureaucracy, which often requires added specifications and complex processes. "The reason they're taking this approach is because adopting commercial products would change the fundamental way bureaucracy does business," he says. "Despite their unique function, they're still bureaucrats and make decisions according to bureaucratic processes. What they should be doing is adopting commercial technologies and products. The problem is, some commercial companies don't want to deal with the government because of their specifications." [Austin Business Journal, Jul 24,00]

Politics - You Cannot Avoid It.High tech companies are flexing their muscles. They want a business-friendly environment, and they're moving to cultivate politicians who can make that happen. "If you're not on the radar, somebody can fly right into you," says California Democrat Ellen Tauscher. "They're spending more time here because they understand the best way to affect what is going on is to have a relationship with members of Congress -- on the policy side and politically." Tauscher represents a high-tech corridor just outside San Francisco where techies live and work, and where voters increasingly identify themselves as independents. "They check out people they vote for like they check out stocks in a portfolio," says Tauscher. [Eleanor Clift, Washington Techway, Jul24]

Dayton's Incubator Plunge. The first official meeting of Dayton's i-Zone initiative since its June 27 launch attracted the largest crowd of local entrepreneurs to date, continuing the early interest generated in the i-Zone. While the first i-Zone networking event attracted a record number of local entrepreneurs, the i-Zone also has been flooded with calls and e-mails from interested entrepreneurs in the weeks since the announcement. The i-Zone initiative is a coalition of nine local entities that include the Greater Dayton IT Alliance, Downtown Dayton Partnership and the Miami Valley Economic Development Coalition. The group's mission is to help create an environment conducive to helping dot-coms thrive. [Don Baker, Dayton Business Journal, Jul 24,00] Good luck, Dayton, but do you have an operative theory as to why your venture will make any difference? You cannot make a Silicon Vally in a desert. Have you read any of the cluster ideas of Michael Porter?


SBIR Bill Passes
(Jul 24)Congress finished wrangling and agreed on an eight year extension of SBIR at the same 2.5% tax on federal R&D programs. Although the Act starts with blather about how wonderful SBIR has been (with no reference to any standard for such findings), the Act requires SBA to collect and maintain data on output (not just input) and the National Research Council to study the program and a requirement that the agency report every time it declines to follow-on after a Phase 2. Thus the forces in the House Science Committee (which pays the R&D bills) that want accountability now have a tool to get numbers instead of blather. The problem of collecting post Phase 2 data from private companies was finessed by requiring full commercialization reports for any company that comes back to the well for more Phase 2s. Still, the agencies will have little trouble concocting a ritualized excuse for not awarding Phase 3 just as we did for justifying larger awards than the target amount.
What's not in the new law are the pet projects of various advocates: administrative funding, geographical distribution of awards, more money, riddance of the pesky commercialization purpose, ... Companies will also be subject to exposure of their commercialization data which is not exactly unfair for a public accountability for public funds spent. Heretofore, the federal agencies were the only one who could ask for such data and it had never been much of their interest to analyze nor especially embarrass themselves by publishing it. Now, more external people can examine the data and judge the government's performance. Note that it is NOT the companies to be evaluated; it is the government, although the agencies will try to blame the companies for poor results.

It's Never Enough. The science people moan that they aren't getting their share of the federal surplus. "many science program are feeling parched" says Science News of the Week July 7 on the basis that while health and defense are going up, NSF, DOE, NASA, and NIST are "facing a fiscal drought compared to their requests". NSF had asked for a 17% raise. It's an old AAAS cry: we turn out PhDs on government research money and the government then has an obligation to support the new hopeful researchers while we turn out even more PhDs who need future support. In an analogy to Norm Augustine's forecasts on fighter airplanes (Augustine's Laws), eventually the entire federal budget would be needed to support the science establishment.

Does the government have to support science for fear that not doing so will kill science? Not if you notice that the genome map came from private funding. As did the laser and the transistor.

No, It's Never the Company's Fault. Last month I speared the AF for babbling about tech transfer and for funding with SBIR a systemization of FTIR technology by Foster-Miller, king of SBIR. FMI justifiably fears that the story could be misread as criticizing the company. No way; no company ever selected itself for an SBIR award. SBIR companies merely propose; the government disposes. The companies from Foster-Miller to the tiniest company merely do what the government is willing to pay for. The blame for SBIR's lack of demonstrable commercialization or of reaching for disruptive innovation falls solely on the government's head.The new SBIR law recognizes the problem and with the prodding of the House Science Committee has set in motion some measures to study the problem of SBIR's making no difference. Maybe by the next re-authorization in 2008....

Good news for DOD SBIR fans: more money. Not only does the Congress want to pour money into R&D in their districts, the Navy's entry in the anti-missile races flunked a flight test. Procurement will not soon replace R&D in the anti-missile business. The added 14% for military R&D goes straight to the SBIR line in a 2.5% tax. How will DOD will use that SBIR money? The way it has since SBIR's start, as a supplement to what it would do anyway? Or it to start really innovative technology on a road to market success? The odds of sponsoring disruptive innovation with real commercial potential (as opposed to government blather) is falling fast as Jon Baron exits the DOD SBIR policy job.

SMALL BUSINESS SCIENCE FORUM IN CALIFORNIA - JPL will host another Science Forum for Small Business in Pasadena August 30 to let high-tech small businesses show off their stuff to JPL, NASA, and primecontractors. Submit your story by August 2. Info from GovCon

Anti-Government Stuff Book Selection -- Mom & Pop vs. the Dreambusters Authors: Reiland, Ralph, McCarthy, Sarah This book is a collection of essays by the authors, plus selections from contributors such as Thomas Sowell, Walter Williams,Cathy Young,John Leo, and Camille Paglia. The book demonstrates how overly intrusive government can turn the American dream of owning a small business into a nightmare.Our Price: $15.40! You Save: $2.73 (15%)

Who Needs SBIR?. Bandwidth9 is creating leading edge active components and subsystems for the Wavelength Division Multiplexing (WDM) marketplace. We are a Silicon Valley start-up with majority funding from Accel Partners, Institutional Venture Partners (IVP), Lucent Venture Partners, and Oak Investment Partners. .. Bandwidth9 was founded by Connie Chang-Hasnain, Gabriel Li and Wupen Yuen in November 1997. Connie Chang-Hasnain is a professor of Electrical Engineering and Computer Sciences at the University of California, Berkeley. Chang-Hasnain has 18 years of research experience in semiconductor lasers and opto-electronics. Li and Yuen, two of her former doctoral students, joined Chang-Hasnain to found the company with the goal of bringing enabling optoelectronic technology to life to improve global communications. A professor and two of her former PhD students got a gaggle of VCs to sponsor a technology that the government is also sponsoring at a lot of small businesses. According to Laser Focus World, Bandwidth9 has developed the first monolithic long wave VCSEL. The founder, though, gave way as CEO to a business guy with 20 years of financial, technical and managerial experience in the public and private high tech industry. How much SBIR did Bandwidth9 need to get such a firm base? None, according to DOD and SBA public records.


Stiff Competition and A Philosophy of Government An SBIR firm asked BMDO to extend its successful Phase 2 to exploit the technical success of a project that had already attracted some in-kind support from a major player in the field. The company proposed to further develop the technology with a growing private contribution from both an angel investor in the company and a small amount from the major player. The company showed market analysis and predicted a good profit and growth scenario. BMDO's answer: not good enough for the competition: SBIR has done its part in providing the initial funding to develop the innovative concept and your effort is now mature enough to compete for private capital or mainline government R&D funding. Not only is such a debrief not the usual bafflegab that ducks responsibility, it shows a clear philosophy of a free-market government. We'll give you hand getting started but we will raise the bar as you succeed. BMDO does expand Phase 2s, as the company asked, but the competition for those funds has gotten stiffer and stiffer as more and more new ideas get into Phase 2. BMDO would rather spend its money in the early transition to market visibility than nurse marginal projects far down the market road. BMDO has picked its range to have the greatest impact on the most new technologies. If you want to play in BMDO's Phase 2 game, you have to have a market story of growing self-sufficiency. Tough news? As one BMDO proposer says, Market realities are more cruel than any reviewer comment I have ever seen.

One strong and realistic advocate of SBIR will leave the advocacy. Chris Busch worked nominally for Wyoming but he helped the empty states get an SBIR attitude. I hope he shows up in another high-tech small business that means business.

Purely Political Programs Political economy columnist Robert Samuelson today slammed programs that work for the politicians but provide no benefit to the apparent beneficiaries. He cited the COPS (100,000 more police), minimum wage, and farm subsidies as examples of programs that solve no problem any better than doing nothing would have done while they hand out benefits and let the politicians claim credit. Samuelson didn't cite SBIR, though, probably because it is too minor an example. But SBIR fits the mold. It has done little that wouldn't have happened anyway. Few agencies have done anything different with SBIR. NSF and NIH fund small business they would not have funded anyway, and BMDO funds an entirely different class of R&D. The rest of the agencies fund what their mainline R&D funds. Although the beneficiaries like to claim value, each individual story is offset by a story that did not happen when the money was diverted to SBIR, But no accounting of SBIR ever recognizes that diversion nor asks the question of what value has been added. [Samuelson, "The New Pork Barrel", Washington Post, Jun 28]

NASA Seeks Small Businesses. NASA’s Goddard Space Flight Center is seeking small businesses to participate in their annual Semi-Annual Science Forum for Small Businesses to be held Tuesday, July 25, in Greenbelt, MD. This forum is a rare high level marketing opportunity that allows 4-5 small firms to present their technical capabilities before the GSFC technical, management, and procurement community. [GovCon, Jun 21]


TR: Should Internet transactions be taxed?
DUKE: Who talks about new taxes during a campaign? Serious candidates only talk about tax cuts free money. And I’ve already said I’ll double whatever anybody else offers. I’m not a fringe player on this issue.
TR: What do you think about the digital revolution? DUKE: I’m for it. I can lay out my agenda, spam voters and sell junk from my Web site all without leaving my campaign headquarters at the Coon Rapids E-Z-Rest Motor Court. And I’ll be selling all my ambassadorships on eBay. [MIT Technology Review, July 00] Duke is the shady Doonesbury character.

Business Emphasized. Chris Busch, the SBIR advocate for the empty states, advises his readers to think business, The purpose of the SBIR Program is to build businesses based on innovative research that can be commercialized. More and more emphasis is being placed on the commercial aspects of SBIR proposals in evaluation and selection processes. This priority is emphasized at all SBIR agencies, and is especially true in Phase 2 competition. Although Chris is right in theory, despite the recent protestations of SBA that SBIR is for government research, I don't see the business focus by the agency that he sees. The recent list of awards from the Energy Department, for example, gives little hint that DOE is focusing on business (even if it knew how to evaluate business prospects). It has many awards to the usual suspects, except the notable absence of Advanced Fuel Research, Companies like Lynntech, Spire, HYPRES have had tons of chances over many years to graduate from government contract research by taking any of the funded technologies to big-time markets. Their long repeated proposing and awards testify that either the company doesn't know how or want to or that the government doesn't pick projects that have the potential for market win. Any blame for muddling SBIR, of course, goes to the government which does ALL the deciding. A tough government would have told those companies to get a life somewhere else after years of failing to commercialize into self-sufficiency, much less return on investment to SBIR.

There are two free ScienceWise funding opportunity alert services available from One service delivers funding opportunities for which only small businesses can apply. The other delivers funding opportunities for which all researchers and educators can apply. Or, you can just check out our web site at


A Real Government Investor. Gilman Louie had $57M plus any annual Congressional appropriation plus whatever profit he can make from royalties to invest for the CIA in commercially promising tools that work for spying and counter-spying (two sides of a coin). One of the first investments was Net Eraser for $3M to get R&D, testing rights, and royalties. CIA says it expects a 25% home run average (talk is cheap). Louie when asked why not just mine the commercial market with smart procurement instead of doing R&D said, First, with other people investing, the company might not get the product to quite the level the agency needs. Second, we want this technology to be a core part of the business, not just a source of ancillary income. We believe that something we're investing in has real value, and we want it to be a billion-dollar business. If it does, we know that it won't go out of business and it will stimulate the marketplace. That will allow us to buy the stuff off the shelf. [facts from Eileen Gunn, Upside, July 2000] Now that's a winning approach that any mission government agency could well adopt. So far, though, only BMDO seems to get it. The big non-mission agencies aren't in as good a position to judge what's good technology for government because they don't use the technology. On the other hand, why would Congress trust a mission agency to invest in any interest but its own? Well, who's more introverted than CIA? No, copying the CIA model would take a management miracle, like CIA's. The agency would have to let go of control of every aspect of its R&D and let commercially-driven innovation dominate its SBIR investment.

Read Air Force R&D spin-off propaganda. Technology Horizons spins stories of AF R&D that could have commercial appeal although the AF denies any endorsement. It is the usual tech transfer fluff glorifying AF research. Although it is all perfectly good conventional government R&D, what's missing, as is missing in all government tech transfer propaganda, is the idea that commercial and government technology are interlinked. AF seeks R&D performers with the most capability but makes no mention of integrating commerce and government. Even the mention of SBIR, as an appropriately small piece of AF-wide R&D, is a mere engineering systemization of existing technology in an oil monitoring system by who else Foster-Miller, the king of military SBIR contract research.

The Military Cutting Edge is Commercial. The future can't wait. Because so much cutting-edge technology is now being developed commercially, a "revolution in military affairs" will be readily available to other countries for the right price. While the military services award SBIRs mainly for contract R&D, the world is plotting their irrelevance, implies Adm (ret, only retired admirals write such critiques) Bill Owens in his book "Lifting the Fog of War". Still, the services disdain commercialism in their SBIR and other R&D programs. Part of the problem is that SBIR commercialism is viewed as a one-way street where only the company benefits and never the funding agency. Which is almost a self-fulfilling view if the agencies cannot see the feedback to their own R&D of large-scale commercial adoption.

Maybe a little less corporate welfare? Maybe. By the narrowest of margins, the House voted to cut $126M out of a research subsidy for auto companies in what the budget knives call corporate welfare (which is always in someone else's district). Said Republican John Sununu (the son) "The federal government should not be subsidizing profitable industries with taxpayer dollars, Since 1997, the program has given $19.7 million to DaimlerChrysler, $11 million to the Ford Motor Co., and $8.7 million to the General Motors Corp., plus millions more to more than 100 other private contractors. So, should SBIR get the same treatment by the conservatives? Limit it to new and not yet profitable companies who can attract the kind of co-investment that gives hope of future profitability from volume products? Don't count on that improvement either. If ever it were to be seriously considered, SBIR should be cut dramatically and the excess returned to the agencies for open R&D competition for whatever the agencies want to do in R&D. We can then stop pretending that small companies have any advantage in regular R&D over any other type of R&D performer. And the SBA now says that SBIR is for regular R&D anyway.

NFIB Wants More
(Jun 14)Small Biz Owners Issue a Call to Action . The National Federation of Independent Businesses says the U.S. government doesn't do enough to support entrepreneurial companies. Will politicians do anything to ease the pain? Repeal the death tax. Make health care affordable to small business owners. Reduce the regulatory burden on entrepreneurial companies. Those are a few of the demands that delegates from the National Federation of Independent Business) will be making on Congressional leaders, political parties, and Presidential candidates in the coming months, following a NFIBsummit that brought more than 600 small business owners to Washington, D.C. this past weekend. [Fortune, June 13]

Big Iron. In the building that housed the world’s first fully electronic computer, the Army Research Laboratory is building a digital arsenal. The collection of big iron at the Army’s Aberdeen Proving Ground includes three SGI Origin2000 computers that rank on the latest list of the world’s 500 fastest supercomputers . The lab’s new Cray SV1 scalable vector system is undergoing tests in another building. As the lab’s workload has evolved from simple ballistic calculations to complex parallel simulations. ... Now, with four brands of supercomputers and a theoretical capacity of 1.9 trillion calculations per second, lab staff members provide high-level software training to Defense Department researchers while keeping a high-bandwidth network running. The Aberdeen computer lab’s history began in 1947, when the team that developed Eniac moved the pioneering computer from the University of Pennsylvania to Building 328 at the proving ground. Eniac was here. Eniac remained at the Maryland facility, then known as the Ballistic Research Laboratory, into the early 1950s. The lab later commissioned several custom-built computers, including BRLESC-I, which in 1962 was the fastest in the world. [Patricia Daukantas, Government Computer News, June 12] (I schlepped boxes of punch cards and read reams of printout as I did FORTRAN math modeling on BRLESC.) What can small bsuiness and SBIR do for BRL's big iron? Not much. That is government scale operation for government scale computation. SBIR was not designed to stroke such operations; it was designed (although SBA is now revising the history) to launch new government funded technology into a wider world. Innovative small business does not waste its time trying to launch supercomputers.

Many institutions will simply not survive the information revolution. Frankly, governments will be among the groups least effective in coping with change. They will try to preserve the status quo by passing laws to buttress it. The winners in a civilization remade around computers and the Internet will not be those who attempt to contain the technology. The winners will be those who invent new structures of government, business, and society in which technology is embedded. [William H. Davidow, Forbes ASAP, May 00] Says Johns Hopkins University economist Christopher D. Carroll, a former Fed staff economist: ''My view is that the stock market is really enormously overvalued. People underestimate the chance of a crash.'' As the recent market volatility shows, investors can change their minds in an instant. And a downturn in the stock market, by chilling consumer spending, could become self-reinforcing. ''That's why economists die young,'' says Carl R. Tannenbaum, chief economist at LaSalle Bank in Chicago. ''We have to be amateur psychologists as well as modelers.'' [Business Week, Jun 19,00] If you a small high-tech business whose market suddenly collapses, you can dash over to the government for an SBIR handout. There's plenty of money in the till. You will, however, discover a long queue in front of you, not of people like you but of people whose markets never collapsed because they never had any market but the government handout. They all claim new and innovative technological marvels or impressive scientific credentials but they don't do markets. Then you will notice at the exit door of the government a steady stream of these people exiting with money in their hands.

Al Gore's recent offer to rid America of the scourge of certain cancers reminded me of the opening sentence of Evelyn Waugh's 1953 dystopian fable, "Love Among the Ruins": "Despite their promises at the last Election, the politicians had not yet changed the climate." There have been wars on cancer before, of course, most notably those of the Nazis and of President Nixon. The former attempted to implement the measures against smoking that Mr. Gore now proposes, but came up against the kind of vested interest that Mr. Gore mysteriously omitted from his speech: a government, for example, that derived large revenues from sales of tobacco. [Theodore Dalrymple, Wall Street Journal, June 12]


If the market dictates all political results, policy outcomes will be the result of bribery and the sale of offices; government decisions and judicial outcomes will be sold to the highest bidder. On the other hand, if the state governs all economic activity, efficient allocation of resources will be sacrificed, and political and military values will take precedence over econ0omic gain. Finding a proper balance between politics and economics is not easy. [R Rosecrance, The Rise of the Virtual State, 1999] The SBA searches for the balance, too, particularly for one of its favorite programs - SBIR. Recently, when faced with a challenge that SBIR was producing no visible economic outcome, SBA publicly responded that SBIR is a government program for government R&D. Jere Glover, chief of the advocacy group, criticized a Josh Lerner piece in Science with the claim that the SBIR program is not a venture capital program. Its primary objective is to fund research that enhances public programs, which is a big climbdown from the rhetoric of 1982 and 1992 that it was a public VC program. Now that SBIR has mostly failed as a VC program (because the federal executing agencies want it that way), SBA grasps at any argument that can keep it alive. But then, Advocacy's role is to politic for small business and in politics, keeping your subsidy comes first and consistency comes a distant second. Advocacy's present problem is that some in Congress are asking why bother since there is no evidence that SBIR is making any difference.
There is, of course, an acid test for whether the agencies think it makes a difference: make SBIR permissive instead of mandatory. See how many agencies do it voluntarily. SBIR has had 15 years to show its merit and the agencies can use the test results as they see fit. If, however, it is to be imposed on unwilling agencies, there should be some compelling showing that the agencies have failed to extract innovations from small business and that the imposed structure will solve the problem. Don't hold your breath until that sort of consistency appears in handout politics!

Drug makers make a pile of money from the pharmaceuticals they develop with taxpayer-funded research. Should taxpayers get control over the price of those drugs, or even a cut of their profits? The question was raised two weeks ago when lawmakers from opposite sides of the aisle proposed that drug companies pay a "return on investment" fee when they profit from government-funded research. ... But actually imposing such a fee is fraught with political and practical difficulties -- not the least of which is determining how much of a role a government grant played in a drug's development. [Wall Street Journal, June 5,00] The old problem of how should the government see the benefit from funding R&D. SBIR has the same problem although the R&D funded there is a lot less likely to ever produce any economic benefit to anyone except the instant payroll of the performing firm. Because NIH's accounting problem would be intractable and the resistance infinite by the profiteers who would actually have to surrender money, there can be no practicable payback scheme wherein the government collects real money. For SBIR, though, there can be benefit accounting to judge whether the program at least does any measurable good at all. No money would change hands, but an economic report card would be produced on each agency entrusted with the charge of producing economic benefit from R&D investment.

DOD Ditches SBIR Economic Advocate
(May 26) The Defense Department ditched Jon Baron, the one guy at DOD Hqs who cared that SBIR would have an economic impact. The Small and Disadvantaged Business Utilization Office announced a new SBIR Program Manager who has no obvious history with SBIR, and, given the nature of SADBU offices, probably little economic interest. Jon invented Fast Track, which drew fire from the advocates of contract research, by convincing the Secretariat level (political appointees) that commercialization was good for DOD and good for SBIR. Since DOD spends half of the government's SBIR, and since no one else I ever met (except my boss Dwight Duston) in 37 years in DOD cared about integrating commercial markets with R&D, the chances of SBIR ever being anything but a politically inspired handout to small firms (who are themselves deceived as to what they are getting) keeps shrinking. Jon came to DOD from the House Small Business Committee where he oversaw the 1992 re-authorization of SBIR and tried to inject the idea that innovation has to be commercialized to have any effect. The House Science Committee probably remains the last bastion of hope for economics in SBIR. DOD has caved in to the generals and admirals who want more money for their conventional weaponry and nothing to do with integration of commercial R&D with Defense R&D. They are holding out for a Republican President and Congress who will fill their wish lists. Visionaries like Jon Baron are merely an impediment.

VCs can be nostalgic, even for companies that never made them a dime. They remember the good old days, when a business plan had a shelf life of more than a year. When ruthless competition didn't render investments worthless even before the first round of dunding. When the term living dead referred almost in an endearing way, to struggling technology companies that, with a little extra parenting, creative management, and luck, could turn around and make something of themnselves. If you are writing a Commercialization Strategy for an SBIR Phase 2 proposal, you should be held to standards that relate to how you will compete in such markets. Not to worry, though, the government expoects ten-year shelf lives of business plans to the extent that the government cares at all.


As AnnaLee Saxenian, author of "Regional Advantage" notes, Silicon Valley has in effect become one large, distributed company. People job-hop so frequently that folks "joke that you can change jobs without changing car pools. Some say they wake up thinking they work for Silicon Valley. Their loyalty is more to advancing technology or to the region than it is to any individual firm." The great innovation of Silicon Valley is not the wowie-zowie hardware and software it has invented. Silicon Valley's greatest product is the social organization of its companies and, most important, the networked architecture of the region itself - the tangled web of former jobs, intimate colleagues, information leakage from one firm to the next, rapid company life cycles, and agile email culture. This social web, suffused into the warm hardware of jelly bean chips and copper neurons, creates a true network economy. [Kevin Kelly. New Rules for the New Economy, 1998] And the government thinks it can re-create this world in Montana with a few handouts to allegedly high-tech modern small companies? Hah! The idea that SBIR or any government program could reproduce Silicon Valley defies belief. Money in Silicon Valley multiplies; money in Montana furnishes temporary jobs. If not in Monatna, then where? Nowhere. SBIR as now conceived and managed has no hope of affecting America's role in a global world. Even if the champions of making it into an economic engine of some sort, which it is NOT now, it would have only a minor impact. But as the re-authorization wends its way through the Congressional committees, there is resistance to even asking the question of what could SBIR become and what has it really done for the American economy? The defenders of feel-good handouts don't want their assumptions undermined by facts and unbiased analysis.Even the opportunity to convert SBIR to an economic basis, even if managed by federal agencies with no stake in the outcome, is being foreclosed.


The Netherlands has launched an extraordinarily ambitious project to overhaul all levels of government around one simple premise: Meet the needs of the citizen first, rather than organize government to meet its own internal logic or bureaucratic efficiency. [Don Tapscott, Forbes ASAP, May] Imagine if SBIR were organized that way. A proposer could get an answer quickly, usually NO but at least clear, and any project could start to move when the proposer was ready, not just when the goverenment was good and ready. But then the whole business of government would be ruined, as it is being in the Netherlands, by an attitude of service to the small high-tech community rather than to the government machine.


Governments of all political persuasions have come to play an ever increasing role in our lives, as they grapple with multifarious problems whose persistence make the labors of Hercules look like child's play in comparison. The New Deal was bitterly vilified as socialism in the 1930s, but spending by the US federal government at the time was less than 6% of the overall economny. The state's share of the economy in Briatin under Margaret Thatcher was considerably higher than it was under the most openly socialist asministration in the country's history, that of Clement Atlee in the late 1940s. Despite this huge growth in govbernment acitivity, problems stubbornly remain. [Paul Ormerod, Butterfly Economics, 1998] SBIR makes an example of government progrma in which whetever is done is either too little or too much despite being of no consequence anyway. No one has ever shown that SBIR contributed one penny more in any economic measure that doing nothing would have done. Still, its advocates plump for more money on the argument that whatever happened, more of it is better. The politicans in the empty states have benefitted somewhat in pushing for more spending in their states regardless of a probable net national misdirection of investment. They, too, make no economic case. Their economics are wishful thinking, only their political calcualtions make any sense. They despise more government except for more government money for their electorates.

One of the most active players in Central Ohio's fledgling venture capital arena will launch a $35 million seed fund this month to help finance businesses hatched by major Midwestern universities, including those at Ohio State University. It would become the seventh fund for Indianapolis-based CID Equity Partners, which runs a branch office in Columbus. The company's investment portfolio is made up of 20 Midwest companies, 12 of which are based in Ohio. [Laura Newpoff, Business First of Columbus, May 15]

Heard in the Halls. At the national SBIR conference a lot more companies were talking about venture capital and commercialization strategies than whining about the gap between Phase 1 and Phase 2 and the inadequacy of the funding amounts per contract.

"You have a government that's geared to the Industrial Age and industrial economy, whose oversight works at an incredibly slow pace," says former presidential candidate John McCain, chairman of the Senate Commerce Committee. "Meanwhile, technology travels at blinding speeds." Could McCain know about SBIR proposal annd contract processing?

Wanna Compare SBIR Public Companies to NASDAQ? Ann Eskesen's Inknowvation has an SBIR Index that calculates percentage weekly moves for the lump of SBIR public stocks and compares itself to NASDAQ. It is one measure of how SBIR companies are doing after they go public. Whether it is calculated on the same weighting basis as NASDAQ is unknown because the site doesn't say what weight each company has in the index. It just babbles "systematic analysis and related tracking". Ann claims she makes no claim for the value of SBIR to these companies and she just says they are "involved with" SBIR. How and to what extent is left unsaid. "involved with" ranges from the getting started money to ATMI and buying just one useful item from Qualcomm.

Fitzgerald is out to demonstrate the shortcomings of a frequently made conservative claim: that the Americans spent the Soviets into a ditch in a high-tech game of chicken, especially after Ronald Reagan's famous ''Star Wars'' speech of March 23, 1983. In it, he proposed a long-range research and development effort to make nuclear missiles obsolete. Cold war tension built alarmingly. Two years later Reagan delivered to Congress a newly concrete proposal for a ''Strategic Defense Initiative.'' Seed funding for an elaborate missile defense system requiring dozens of space-based laser cannons was set at about $25 billion for five years. By the end of that time, the program had begun to collapse in a welter of technological difficulties and embarrassing choices. But then so had the Soviet Union. [David Warshaw, reviewing Frances Fitzgerald's "Way Out There in the Blue" , Boston Globe, Apr 30,00]

Whatever her degree of blind cheerleading about Dragon and other things, Ann Eskesen gets a lot of credit for doing for SBIR what no one else wants to do - publicize the facts and figures, the names and places, the arguments and counterarguments. Ann's site at Inknowvation has a lot of useful data and stories open to all comers, especially critics like me of the federal agencies' squandering an opportunity to make a economic gain for themselves and the high-tech community.


Once a politician, ... A Massachusetts poltician wants to hand money to R&D companies. Why? Why not? Most politicians believe the myth that subsidies to R&D are the pixie dust for local high-tech success, and love to pontificate about it. Just listen to Roscoe Bartlett of the US House Small Business Committee. SBIR is built on the subsidy-yields-gold myth. State Rep. Barry Finegold is pushing a proposal to change the state's research and development tax credit rules in order to let unprofitable companies take advantage of it, which he believes will help ensure the state stays competitive, says Roberta Holland, Boston Business Journal, Apr 17. Who will pay for what Finegold says will be a $3M subsidy? Look in the mirror. Says Finegold, Tax credits and tax incentives should not be bad words. It's not about corporate welfare. It's about maintaining jobs and maintaining a productive state. Oh, sure. Air Force Talks Fast Track. The Air Force says it continues to increase its emphases on SBIR Fast Track (which could be just bureau-fluffle to satisfy external overseers). DOD says it awarded Phase 2 contracts to 95% of FT applicants as opposed to about 40% of the non-FTs. And 70% of the winners were first time Phase 2 winners - the result of an appetizing 4:1 match for complete newbies. Meanwhile, the SBIR beneficiaries establishment (multiple winners and the SBA) oppose cost-matching in Phase 2. Air Force has apparently found that the entrepreneurs who can hustle matching money can also hustle a better product. Of the 164 awards over all DOD, 13 went to one company, Digital Systems Resources, that loves the Navy blue that gave out all that money for natching from Navy programs. Two awards went from BMDO to Nitres which was just bought by Cree for $200M.

Perfect! The market volatility could not have come at a better time for the SBIR advocates of business mediocrity. Just when a few voices are saying that the venturesome capital shortage that underlies SBIR has ended, along comes a dive in incubators. As Michelle Leder notes in the New York Times, Apr 16, the incubators toocks have been poiunded almost senseless. CGMI down 68%, Safeguard Scientifics down 66%, Rare Medium down 84%, Acacia Research down 76%, and Internet Capital down 80% from their highs. The pandering politicians can now clearly allow SBIR to escape the discipline of the market by reviving the too-little-capital plea. They should now rush the re-authorization into law before the volatility turns around.


A Selling Climax?
(Apr 5)Whew! Was that a classic selling climax? Have the worst excesses of valuation been wrung out? The SBIR wonder stocks had a classic ride with which their young technology-focused founders may have no experience. SDL fell 30% before closing -9%, Kopin from down 28% to closing at up 10%, II-VI from down 20% to closing at up 1%, ATMI from down 20% to up 14%, Emcore from down 50% to -7%, Conductus from down 30% to -17%, ViaSat from down 40% to -26%, APA Optics from down 24% to -12%. Quick traders had a chance to scoop up these stocks, many of whom even make rising profits, at prices unheard of a week ago. What should SBIR do about all this turmoil? Nothing. These companies are the SBIR economic winners and the stock trade values have little effect on their business prospects. The high-tech stock market had become more like a casino than a logical trading floor for business ownership.
What SBIR should do is create more companies to enter this bazzaar. Any company that can qualify for this trading floor has made a big mark in economics - it has attracted public capital. if that isn't the prupose of SBIR, what is? More nice solid science for which the government could choose performers by lottery? Who's trying to do it right? BMDO! In the decade ahead, BMDO will have a choice of high-tech products from the market shelf that would not have been there without nursery help from SBIR. The other military services will also enjoy the fruits oif BMDO's investment and weep if they ever discover the opportunities they have passed up to fund safe sound R&D for which they will pay the full development cost and a premium procurement price. What a shame that the Congressional oversight committees don't take more notice of the short-sightedness of military or NASA SBIR programs.


On my assertion that federal agencies pay little attention to market dynamics or futures in allocating and deciding their SBIR awards, I could have added my usual refrain: EXCEPT AT BMDO. There, the SBIR decision maker views the high-tech business sector as the customer of the SBIR Program and is not embroiled in the endless budget allocation squabbles. Note: the usual R&D bureaucrat's main role is to defend his budget day in and day out. The SBIR guy knows that by investing in those companies that begin innovative technologies now, BMDO will benefit in better technology developments later when the programs and primes need them. If and when the politicians decide to plunge into a big system for gazillions of billions of dollars. For now, the politcs is cheaper if they just keep screeching platitudes at each other. In a further development at BMDO, the Science and Technology program, which was king in the 80s, is about to relegate its now meager activities to the military Services, who do all the real work anyway, to leave a few technocrats at the Pentagon. How many bureaucrats does it take to manage no dollars? But SBIR will stay and the decider will continue his view that high-tech business is the customer. The Greehouse Fund is not your typical startup vehicle. "This is not a VC fund", says Taysom," and it's not a corporate venture fund. It's a hybrid of the two. We dream our worst nightmare and then invest in it." [Peter Taysom, Reuters' News, quoted in Forbes on-line, Apr 3] What a great line for the government to use if it ever decides to use SBIR for some worthy investment purpose instead of buying the R&D it already well understands. Like the military agency that wants to control every aspect of a prototype development for an item the demand for which should be one or two. The start-up, after some exploration of terms, will refuse the Phase 2 money, saying, "I cannot work with that person and the item will have no market value." BMDO will get a chance to fund a Phase 2 at the same company for a high-risk item the demand for which, if it works, should be gazillions.BMDO will take the right view of whether to invest in a risky idea.


BEVERLY HILLS, CALIFORNIA -- As 1,200 disciples of Michael Milken waited eagerly to hear how the venture capital luminaries at the Global Conference 2000 were going to help them make even more money, the panelists issued a wake-up call: There is Too Much Venture Capital Money Out There Today. Now, keep in mind, this motley crew of venture capitalists, like its siblings, prefers its commodity to be scarce rather than in the plentiful amount it is today. ... Another trend the panelists discussed was the growing impact of angel and corporate investors. Today, virtually every new deal that is not borne within the confines of a venture capital firm is leveraging private investors for their first round. Avram Miller, former vice president of corporate development for Intel (Nasdaq: INTC) and current board member of Internet incubator CMGI (Nasdaq: CMGI), extols the virtues of corporate investing as an important strategy for the new millennium. [The Red Herring on-line] If you are an SBIR company whose finance plan is to have the government support the product development and buy the product, you are dreaming the wrong dream. If you are going to seek anything except more R&D, you will need a commercial product to sell to the markets with the real money. For that you will need finance; bootstrap happens slowly and mostly in storybooks. Make yourself a realistic business plan, and attach it to your Phase 2 proposal for the few feds who care; it may make a difference once in a while. A good business plan will certainly stand out in most agencies. Even if the government people pay no attention, you'll be better prepared to bounce back from the letdown when the government pulls the plug on you.

From Gun R&D to Incubator
(Mar 28) The Army is under pressure to turn its prime gun lab into a commercial incubator. Benet Labs in Watervliet (my first 21 years of life) NY occupies eight of 150 buildings at the arsenal. It spends $35M a year on structural coatings and materials that are used to get higher velocities and therefore longer ranges for guns. The Army gun manufacturing accounts for 56% of the work at the arsenal. It is the only large gun maker in America. The arsenal has been going through a constant reduction in force, slipping from 2,400 in 1990 to 600 next year, Now the Watervliet Business and Technology Partnership, an economic development group charged mostly with attracting non-military business to the arsenal lusts for the property for an incubator. The partnership, which wants $1 million in the state budget for its redevelopment, sees that Benét as an attraction that draws private companies to look for space. The Army says it wants to make the arsenal a government-owned, privately run complex, and it is in discussions with three defense contractors who want to form a joint venture and run the facility. But the Army's slow pace has led to discontent from local officials, most notably U.S. Rep. Michael McNulty, who want to see the arsenal redeveloped quickly. [story by Jean DerGurahian, Business Review Reporter, Mar 27] The area would like to keep more of those Rensselaer grads who see Silicon Valley in their cross-hairs on graduation day.


Moving on Washington. Armed with $200 million and a brand-name venture capital firm, [Lloyd] Mahaffey intends to find the most promising undiscovered entrepreneurs around the Beltway and shape them into big-time CEOs. For the last four months, Mahaffey has quietly established himself in Pittsburgh as director of Atlantic operations for Redleaf Group, one of the top venture capital funds in Silicon Valley. ... The California newcomers are part of a tidal wave of money pouring into the venture capital community in Washington. Last year, VCs invested a record $928M in Internet-related companies in the Washington area, a fourfold increase from 1998, according to the NVCA. [WashTech, Feb 29] The Virginia Senate race can fight over the credit. Two ex-governors, one the son-in-law of a President and one the son of a famous football coach. Although we all want a world with good wages, universal health care and low unemployment, those goals are not rights at all in the sense of our constitutional rights. They are nothing more than a government demand that Americans surrender their property and wages to achieve government-mandated objectives. If we believe in the protective rights outlined in the Constitution, we cannot consistently believe in any entitlement right that negates those basic rights. [TJ Rodgers, Forbes, Mar 6,00] The same argument applies to handouts like SBIR. Both SBIR advocates and Rodgers talk as if the government was some isolated body unconnected to the nation's populace. That's a convenient stand to take for either raiding the Treasury or damning government programs. The reality is that the people in general support good government programs and the anti-government activists find no traction from their speeches in the regular elections.


As the Congress reconciles its two versions of SBIR re-authorization, the politicians are doing what politicians do best - a handout solution to yesterday's problem. They pretend to be providing capital - they are doing no such thing because they simply shift R&D performers - even though the venture capitalists say there is no shortage of venture capital or of bright ideas, but there is a serious shortage of people with the ability to execute the ideas. Those firms that cannot get the right people will probably fail. [quote from The Economist, Mar25]. Curiously, if the Congress actually increased venture capital flow to innovative companies, it would only make the real problem worse. Meanwhile, the SBIR lobbyists are living in the same bygone world. The Small Business Technology Coalition. wants more money even though it says there are few good metrics for the program. It, too, blathers a hodge-podge of statistics and myths about small business to justify a handout. And in the hope of squashing any taint of economics in SBIR, it wants the Congress to ban cost-sharing in SBIR Phase 2s. It thus says we can have a better economic result from SBIR if economics and market-pull are banned in Phase 2. Why such inconsistency? The main donors to SBTC are companies that do government research for a living. If economics were a lively criterion, SBTC members would get a smaller share of the pie. If you added up the economic return from the list of SBTC success stories (except AstroPower), you could not buy a respectable piece of SBIR winners SDL, ATMI, and CoreTek all of whom welcomed the co-investment strategy of BMDO's SBIR and have graduated from SBIR nursery school into adult life.

One SBIR firm wants open access to the intellectual property of others. Though I know it may run against the SBIR grain, I am concerned that if companies like Celera 'own' the data, the rest of us could be held hostage and required to pay dearly for access to the data - the cold hand of commercialization. Here is the classic case of being in SBIR for the research dollar and having no respect for the monopoly that incentivizes private investment to take the huge risks of R&D. I suspect the company wants it both ways - access to others' data and a patent on whatever it discovers. The blurb appeared in the forum discussions of Ann Eskesen's Inknowvation site.Actually, in the forum, 66% of those responding, a self-selected group, agreed with the Clinton-Blair statement of open access. The two governments have clarified that they did not mean to invade the intellectual property of private firms (and thereby destroy the value of the biotech industry), only that data already public property from public funding.

Senate Feeds Have-Nots
(Mar 27)The Senate found some money for the SBIR have-not states in the form of outreach and mentoring. Which is small potatoes and does not compromise the national competition aspect of SBIR. The agencies are still free to choose without consideration of what state a proposal comes from. They are also still free to keep choosing projects with no competitive economic prospects. The Senate and House thus close their eyes to any economic of government's intruding in the marketplace. No hard evaluation and no economic metrics. Good news for the many R&D service contractors who will do almost anything the government will pay them for, Motherhood, apple pie, the flag, and small business win again the hearts and minds of politicians.

Colorado Gold. Entrepreneurs who need cash to fund their dreams may get help from insurance companies, under a bill expected to be introduced into the Colorado Legislature today. House Bill 1296 would give tax credits to insurance companies that invest venture capital in Colorado small businesses. Insurance companies typically invest premium money on Wall Street. But Rep. Gary Mc Pherson, R-Arvada, wants to encourage them to put those dollars in Colorado start-ups. Under his proposal, insurance companies would earn tax credits of up to $20 million in exchange for their investments. Although Colorado companies reaped a record $1.7B in venture financing last year, small businesses still struggle to get the first $1-3M, said Jerry Donahue, executive director of the Boulder Technology Incubator, which helps small companies by providing business expertise and office space. [Denver Post, Mar 17,00]

Chicken or Egg. Did SBIR help the company or did the company help SBIR? Like politicians associating themselves with anyone's success, the SBIR advocates claim that SBIR helped the companies who are now public. Take one case (not randomly chosen) - Visx. It had one Phase 2 (Phase 1s shouldn't count as investment) in 1992, the same time that Autonomous Technologies got the Phase 2 extension matching private investment from BMDO. At the time Visx had already been public for four years with a market cap in the range of $100M and had steady losses until 1995. About $40M cumulative loss. In 1998 Visx shot out of its box to a $5B market cap as the largest marekt share in the industry - about 75%. It since has suffered from new industry competiton and is back to around $1B market cap. Should SBIR take credit? As much as you should take credit for Untied Airlines's success having bought a few transAtlantic tickets in 1990.While the SBIR money was probably used for some good R&D, its absence would hardly have been noticed. Government nursery capital programs should be having unmistakeable and noticeable effects on new technology companies. The BMDO money in Autonomous was the entire revenue for the company in 1992 and induced a 150% investment match that got the company into FDA trials. The escape, of course, from polically warm and fuuzzy (and meaningless) vague references to success is some accounting scheme that measures an economic return as a percentage of the SBIR spending/investment. A hypothetical equity share is one such normalizing scheme that captures the government's economic value as output instead of the more usual input measures. .


Don't Ask, Don't Tell infects SBIR law. The Senate is on track to prevent any hard questions about SBIR's economic performance. While inventing handouts to have-not states to help them get more SBIR money in competition with the have states, the Senate wants to kill the House provision for an NRC study. Says one observer, SSTI, Many proponents of the SBIR program considered the study unnecessary, pointing to the SBA annual reports and the several studies completed by the General Accounting Office over the life of the program. That is: don't ask, don't tell, and let the mediocre investment continue in an election year. The empty state Senators are dreaming and scheming to get a piece of subsidy that will be mostly wasted. The jobs will last only as long as the subsidy. Nobelist Gary Becker notes that The U.S. has relatively few obstacles to starting new companies, raising private capital, or going public. ... Reducing artificial obstacles to startups is far different from the generous subsidy programs begun recently by Germany and other countries desperate for more dynamic economies. Subsidies generate ''safe'' startups that appeal to bureaucrats, not market demand. The tremendous spontaneity found in Silicon Valley could never be reproduced through bureaucratic hothouse support. ["Global Silicon Valleys? First, Kill All the Subsidies", Business Week, Mar 27]


Tales of Biotech Subsidy
Inknowvation, one of the most shrill SBIR advocates has recently begun to post stories on public firms "involved" with SBIR. It makes no direct claim that the SBIR caused the public status nor does it attempt to measure the effect of SBIR on the company's fortunes. Just "involved". A lot of the firms are biotech firms that have had a big run this year in market cap even if no new useful developments on profits. Here are two companies recently highlighted by Inknowvation.
Repligen (Needham, MA) has lost a bundle cumulatively since 1990, about $100M. It says it will sell privately another 2.6M common shares at $8.6 each, with proceeds of $22.4M. It raised $9M last spring through a private placement at $2.50 per share. Stock price has jumped from 3 to 15 this year. It claims we have the resources to aggressively develop our product candidates. ... Furthermore, the Company’s growing product sales and low burn rate reduce financial risk, creating an investment opportunity which is unique for a developing biotechnology company. . It develops new drugs for the treatment of autism, cancer, organ transplant, and neurological diseases based on the modulation of newly discovered disease mechanisms. That's a really tough road in competition with Merck etc who can stand the long approval cycle for drugs. Tiny companies can be R&D performers for drug labs but stand little chance of selling a volume drug. SBA data says Repligen has had one SBIR Phase 2 in 1985 from DOE and four Phase 1s after that from NIH. It has been public since 1987, traded as high as 25 in 1992 and had been below 5 since 1994. With all that private sector investment, what does government think it is doing at Repligen which claims such a strong position. I wonder what it tells the government about its financial need that justifies SBIR funding CuraGen (New Haven, CT) exploits data from the human genome project. It raised $16 million from some of the same organizations that are funding the human genome project, as well as from NIST and the ATP to develop a set of tools that would allow them to mine the human genome. We positioned CuraGen at the intersection of two major forces, 'biology and information technology. Our first two advisors, one was from Intel and one was from Amgen, helped us to position CuraGen at that intersection; utilizing our technologies to translate genomic data into information that will directly lead to the development of new pharmaceutical products; products which will provide CuraGen with a sustainable competitive advantage. And since then, we've grown from three to 300 people. [says founder Dr. Rothberg in The Wall Street Transcript] The stock price shot up over 24% when it was announced in a major professional journal the day before that the firm had completed the first map of protein interaction within an entire model organism. [says Inknowvation] The price has gone from 5 to 250 in a year and back to the 130s, to a $3.6B market cap. It lost $18M for the last nine months and $30M since 1994. IPO Mar 98 with $150M market cap. Its 3 employees at startup in 1991 have grown to 300 emps. SBA's SBIR database shows only one Phase 2, in 1993, from which it is theoretically possible to trace the whole company advance into the business world. If so, the government could claim a huge hypothetical equity profit as an SBIR economic performance metric.
Note 1: Inkowvation says the SBA SBIR data are quite inaccurate and NIH does not make it easy to mine its database of awardees. DOD has the best mineable data base of SBIR awards. Note 2:These stories support Josh Lerner's suspicion that government venture capital programs pick companies that are already winners and therefore don't need government propping up.
Wall Street misinterpreted that [Clinton-Blair] pronouncement as an attack on patent rights--and investors well beyond biotech quickly paid the price. Biotech shares tumbled almost 13% in a day, ... get ready for plenty of violent market gyrations. That's because living systems are unpredictable. We're not dealing here with conventional engineering. Biotech has no equivalent of the computer world's Moore's Law, which tells us that chip power will double every 18 months. Human biology took billions of years to evolve and doesn't take lightly to radical intervention by clumsy humans in white coats. Unpredictable science makes for irrational behavior in the marketplace. ... Not to worry. In the short term, these stocks were probably inflated anyway.And the herd is bound to wheel right around, driving stocks back up. At base,genomics--the study of genes and their function--wields the magical power to create drugs from the 3 billion bits of information contained in the human genetic code. Analysts predict that biotech companies will launch as many drugs in the next five years as they have the past 20. [Ellen Licking, Business Week, Mar 27] Is any harm done by government shoveling small amounts to well funded drug developers? Depends on what you think government's role should be. If you are an SBIR advocate or recipient (or both), you want the money. Collecting taxes to spend what doesn't need to be spent? If you believe that government should fill only those needs that the private sector cannot do for themselves, or must be done in the public interest, you don't do government R&D for good stuff that the private sector will do anyway. A claim that the SBIR dollars in Cubist or Repligen or CuraGen are doing good stuff is NOT a sufficient argument. Only tax-and-spend politicians think that way. Strangely, the Republicans on the Small Business Committees have become tax-and-spend when it comes to SBIR.


Senate Has A Plan
(Mar 10) Chris Busch, who watches the SBIR in Congress, says SENATE SBIR BILL MARKUP SCHEDULED 21 MAR 00. The Senate Committee on Small Business (SBC) is scheduled to markup the SBIR reauthorization bill on Tuesday, 21 Mar 00, according to SBC staff members. Members of the SBC will introduce the bill prior to this date. Action by the full Senate on the SBIR reauthorization bill is targeted for Apr 00, and should be sent to the President for signature in May 00. The Senate SBIR reauthorization bill will reauthorize the SBIR Program through 30 Sep 2010, and leave the SBIR budgets unchanged at 2.5% of agency extramural R&D. The bill also will authorize a "Federal and State Technology (FAST) Partnership Program" for the FY 2001 through FY 2005 that provides for SBIR outreach.The Senate bill will be reconciled with House bill H.R. 2392 (Small Business Innovation Research Program Reauthorization Act of 1999). H.R. 2392 was introduced 30 Jun 99, passed in the House on 27 Sep 99, and referred to the Senate on 28 Sep 99. Don't make too many large wagers, though, that the Senate will actually do the bill in April and have it signed in May. It did not happen that way last time in 1992. Who knows, maybe Tom Delay can get the House to impeach the President again?
Commercialism Is Good for Defense, says Dwight Duston in an opinion piece in National Defense, a pub for hard core DOD supporters. Duston, who for many years in BMDO oversaw the R&D-commercialism combo, tells some anecdotes of companies whose products work both for BMDO and for the commercial markets. What's more, he says, the commercial stuff will come back to help BMDO in cheaper parts. Several of the stories come from SBIR awards in surprisingly the most commercially minded of all the government SBIR programs.Irvine Sensors, Autonomous Technologies, Silicon Designs. Now if only the Director(s) of BMDO would believe Duston's thesis! But alas, military leaders of deployment-bound projects have little time for such stuff. The good news for BMDO and commercially-minded innovative technologists is that BMDO's SBIR program acts as though the Director actually believed Duston's thesis.It is possible that the Director believes in benign neglect of programs that cost him nothing and get him some good results. ("cost nothing" means he has to spend the money on semi-commercial stuff under the SBIR law that bars him from converting the spending to ordinary deployment activities. It's the classic "lemonade" situation that smart bureaucrats use when they have no choice.) If you have a hot new technology that would be good for "lighter, faster, cheaper, etc" and has big commercial appeal, BMDO is the place to take your SBIR proposal. The money's free and you will get a lot of incentive to partner with investors for your own good.

Richard C."Mike" Lewin has seen his investments hit it big---real big. He turned a $750K stake in two start-up companies into $44M in recent months. But Lewin won't be buying a Mercedes-Benz or a vacation villa, or taking the Concorde to Paris for lunch. All of his profits, in fact, went straight to the state of Maryland. After all, it was taxpayers' money in the first place.Lewin is one of the few venture capitalists on the public payroll. The state set up its Enterprise Investment Fund, which has an annual $2.5M budget, in 1994 with the hope of attracting private venture capital and creating new jobs. ... The enterprise fund has invested about $11.25M in 33 Maryland companies. So far those firms have created about 600 jobs, .. The fund gives technology start-ups from $150K to $500K, if they have a sound business plan, a promising technology and three times as much backing from private venture capitalists. In exchange, the company promises to stay in the state for five years, and the state gets shares for its investment--no more than 25 percent of the company.... Connecticut, which has a quasi-state agency that manages its equity investments, made about $21M off 19 companies last year after four years of operating at a deficit, said Pamela Hartley, director of business development at Connecticut Innovations Inc. Massachusetts Technology Development Corp, another quasi-public entity, said it expects to make $35M this year when it sells off its shares in a telecommunications company and an information technology firm [Washington Post, Mar 6]

The SBIR cheerleader says 250 firms with SBIR are publicly traded. Her Website promises to reveal the facts. Doing an analysis of their economic contribution and the government's contribution to them should be interesting. I follow 26 NASDAQ-listed firms which I think is about the whole list of companies where SBIR made some contribution (or tried). That leaves at least 200 firms in the OTCBB pink sheets marsh.


SBA Wants $15M
(Mar 3) SBA asked Congress for $15M to help SBIR companies commercialize. Our research indicates that even after the firms in our SBIR have fully developed their products, they still lack the venture capital they need to market and fully commercialize those high quality technologies. Commercial venture funds typically are not interested in the types of investment opportunities SBIR firms present at that stage, referred to as phase III, of their development.We request $15M in FY 2001 to fund the first-year of a three-year SBIR Phase III matching grant pilot program, designed to promote commercialization of the research and development (R&D) efforts by small high technology firms.
Talk about waste! SBA has no more hope with $15M than it would with $15B of converting the non-commercial stuff that the agencies fund into market-demanded investment-attracting products. If Congress wants economic return from SBIR, it need not spend a nickel on commercialization. Indeed, all the money so spent would be wasted anyway. The long failure of Tech Transfer by government should be evidence enough that you cannot make a commercial product out of a turbulence model over a fighter plane's nose. Congress need only jack up the agencies to fund projects and companies that have demonstrated investability. It has a model - BMDO - where the government will fund the high technical risk portion of a demonstrably new technology on the condition that the company attract co-investment as the technical risk declines. SBA hates co-investment and is constantly carping at the BMDO approach. But no government agency that hates co-investment can ever make a go of commercialization of anything. We live, after all, in a capitalist world where our national economic success comes from entrepreneurs and innovation acting out small experiments with other people's money. The good will be copied and the bad (most) die with only a small capital loss. SBA's idea seemingly is to substitute a government subsidy to the ideas that would die with that small loss.
Oh, don't worry, SBIR straphangers! Congress isn't ready for that kind of radical surgery on a nice free handout program. Politics doesn't work that way. But it could save the taxpayers $15M by not giving the SBA a doomed program that would probably be followed by a steadily increasing demand in future years with no economic proof of its value. The so-called free-market Republicans with their nominal majority could at least show some principle and prevent this government wheel-spinning.


Irvine Sensors (Costa Mesa, CA) announced yet another Phase 2 SBIR to to demonstrate a superconducting digital router for high-speed communications. Under the contract, Irvine Sensors plans to exploit TRW's superconducting high speed switching technology to develop a "super switch" that could evolve with the communications industry's ever-increasing need for speed.. Since the contract is from BMDO and since Irvine has had lots of such contracts, you can bet the co-investment hurdle is pretty high since BMDO does not believe in funding a new technology until the market awakes. Which is why BMDO stopped funding the superconductor companies years ago when the technology worked but the market wouldn't buy it. Today the market seems ready for superconductors for wireless but that wouldn't have happened until wireless got loved by the public.


Another Incubator. Tampa Bay wants one too - a high-tech incubator. A new venture capital firm starts in Sarasota this month with a focus on early-stage technology firms with big company prospects. In addition, it hopes to propel the Florida west coast's first incubator. New South Ventures is the brainchild of five entrepreneurs whose credits include selling businesses to Steve Jobs, chief executive officer of Apple Corp., and Bill Gates, chairman of Microsoft Corp. The New South Ventures' founders, who have started 17 companies, are: Gary Arnold, managing partner; Rob Campbell, partner; John Montelione, partner; Harvey Vengroff, partner; and Norm Worthington, partner. They intend to invest their money to fund deals ranging from $250K and $1M and are prepared to do a transactions up to about $3M, Arnold said. They will target early-stage businesses with the potential of becoming $100M corporations. [Catherine Mitseas, Tampa Bay Business Journal, Feb 28] Since 1607, when Captain John Smith and company established Jamestown, Virginia, the English-speaking inhabitants of the New World have enjoyed the longest-running and most consistent economic boom known to history. Historians estimate that from 1800 to the present the U.S. economy has grown an average 3.8% a year. (Obviously there have been exceptions: depressions in the 1890s and the 1930s; financial panics in 1819,1836, and 1857; and a Civil War from which the South truly recovered only in the last generation.) With an average population growth of 2% annually, this figure means the gross domestic product per capita increased an average of 1.8% a year. On average, every American generation has enjoyed a living standard 69% higher than that of its parents. [Walter Russell Mead, "Get Used to Growth", Worth on-line]


Who said yesterday,The only contribution the government made to the Internet was the early research over 30 years ago? A conservative Congressman from Texas, a Silicon Valley VC, one of Al Gore's political enemies, the US Chamber of Commerce? No, it was Bill Clinton in a meeting with lots of cyberfolk about cyber attacks. Does that mean that the fiction that SBIR plays a critical seed role in new technology is no longer the White House position? If you are writing an SBIR proposal on some technology related to fiber-otpics, will you say the usual pieties about fiber replacing copper? Like GaAs was going to replace silicon? Does you computer have either fiber or GaAs in it or connected to it? Why not? Because as Mark Tatge explains in today's WSJ "Wire Makers Thrive Despite Advent of Wireless Phone, copper is cheaper to make and install; fiber costs 50% more to install. BellSouth says "Not all out customers are demanding entertainment and high-speed data services." Never mind, though, you can still recite all those pieties; the government technical experts who review SBIR proposals don't seem to be in touch with commercial markets anyway and want to hear that their favorite technology is the best looking creature around.

The Rich Got Richer, and the Poor Got ... A Political Promise. Although venture capital boomed in '99, Business Week (Feb 7) reports that only half the states increased their VC investment over 1998. And six states got 75% of the loot. Steve Cochrane of RFA/Dismal Scientists says that free water,lower taxes, and cheaper houses won't make up for skilled workers, noveau-techno-riche individuals, and top grade college output of Silicon Valley and the Northeast. So, what do the have-not states do? Appeal to the Senate for SBIR spending on things like ouitreach and mentoring as if so little money spread around the empty quarter would make a difference. The have-not states want the handout bad enough to block re-authorization until they get their way.


Dixie Cooking. Georgia companies raised $373M in venture capital in the final three months of 1999 -- more than twice as much as any other quarter in Georgia's history and enough to earn the state its first Top 10 ranking nationally. [Atlanta Bus Journal, Feb 14] Information technology enthusiasts will have a chance next month to mingle with some of the region's hottest high-tech players. The Alabama Information Technology Association (AITA) hosts its first IT forum March 9 at the Birmingham Museum of Art, says AITA chairman Tim Taylor [Birmingham Business Journal]

Germany Invades Washington. Staff Reporter When there isn't enough food, only the biggest and the fastest eat. Nowhere is that more true than in the Washington area's technology industry, where venture capital funds are in a frenzy to sink their teeth into the best of the start-ups. And much like sharks, venture capitalists can sense the frenzy from a long way away. The latest stalker in Washington's waters, lured by the smell of early-stage investments, is New York-based Rothwell Capital Partners. Rothwell has begun raising a $100M fund to invest in local companies. The private equity fund may open an office in Washington, said President and CEO Sahir Khan, but the fund will be managed by Danet Strategic Consulting, a merchant consulting group based in Annapolis and owned by Deutsche Telekom. [Jake Richardson, Washington Business Journal, Feb 14]

Wanna play politics? Or just see what is unfolding with SBIR? Both Small Business and Science subcommittees have held recent hearings. See the arguments heavily weighted toward more of the same (whatever that is). A couple of advocates have Websites. Looks like Congress will wring its hands about commercialization and then simply re-authorize another 8-10 years. For Congressional testimony at House Small Business and House Science (including a statement by yours truly). For present beneficiary advocates of research-only, Small Business Technology Coalition. For a broad discussion backed by an advocate, Two Cents.

Checking You Up. A client reports that his SBIR contracting ran into a snag when the contracting offcicials took a sudden interest in foreign nationals working on the project even though the contract would be entirely unclassified and driven more by commercial appeal that military sales. Have the bureaucrats gotten a Wen Ho Lee syndrome like officials did after the Pentagon papers episode? Bureaucrats don't like to hear Congressional politicians natter about insufficient security when the horse is running around outside the barn.

Nothing New, Please. Mack's central argument is that whereas the ethos of scientists and engineers in an R&D agency such as NASA is (or was) one that encourages technological innovation, the users for whom NASA's experimental systems are intended are generally technologically conservative. The promoters of R&D projects in NASA derive professional satisfaction from developing state-of-the-art devices that are potentially capable of transforming if not revolutionizing current practices in a field. They define their prime role as being not to provide a service to users but to push technology to the limits of the possible, Accordingly, they are unresponsive to the different and even opposed demands that the users make of them. Users, by contrast, are suspicious of the promoters' ambitions, and resist attempts to impose new and improved technologies on them. They seek devices that are relatively simple, reliable, inexpensive, and compatible with the knowledges and practices with which they are familiar. NASA's potential clients, in fact, wanted product that was as similar as possible to that which they had already used for some time. [John Krige, "Crossing the Interface from R&D to Operational Use: The Case of the European Metereological Satellite", Technology and Culture, Jan 2000]

A Final Thought Can government policy keep up with The Speed of Innovation? asked Gary Bachula in his talk Strengthening our National Innovation System at the NSTC's Summit on Innovation: Federal Policy for the New Millennium. November 30 and December 1, 1999.

Yet More Money for Start-Ups. When Florida produces its next high-tech start-up company, stat pensioners may get a piece of the action. Gov. Jeb Bush's Internet Task Force is considering a proposal to invest millions of state pension-fund dollars in Florida-based venture-capital firms that help finance new high-tech and Internet businesses in the state. Or, according to the plan, the pension fund could invest directly in the start-ups themselves. The proposal suggests investing as much as $500M, about 0.5% of the total $100B fund. ... All this comes at a time when venture-capital dollars to Florida are swelling to new heights, according to PriceWaterhouseCoopers' annual MoneyTree survey. For the first three quarters of 1999, the survey shows, Florida companies received about $377 million in venture capital -- already a 24% increase over the 1998 total of $301 million. [Wall Street Journal, Jan 26] They'll be looking for new editions of Autonomous Technologies

What many people may not appreciate, however, notes economist Steven G. Cochrane of RFA/Dismal Sciences, an economics consultancy, is how concentrated venture investment is becoming. ''California and the Northeast are benefiting enormously,'' he says, ''while most other areas are being ignored.'' Similarly, knowledge-intensive industries are garnering the lion's share of funds, while other industries are left out in the cold.The investment pace is little short of breathtaking. PricewaterhouseCoopers reports that U.S. venture-capital firms shelled out a record $9.04 billion in 1999's third quarter, up 138% from the year-earlier level. That brought the nine-month total to $21 billion, 50% more than funds invested in all of 1998 and nearly four times the 1995 tally. Unfortunately, many regions aren't sharing in the bonanza. At last count, only half the states had garnered more venture capital in 1999 than 1998, and six--California, Massachusetts, New York, Texas, Washington, and Colorado--were accounting for nearly 75% of the total, compared with just over half as recently as 1995. [Business Week] The perfect situation for a political solution to a political problem. As Willie Keeler said, "Hit 'em where they ain't." Since Josh Lerner found that only areas with an already active capital investment correlated more employment growth and SBIR, give up on SBIR for such areas and focus on the have-not areas where SBIR is likely to do no good at all.If VC cannot make progress, why would a government pseudo-VC do any better? Who cares, say the politicians, we can get votes by fixing this obvious investment maldistribution.

Who's Making the Policy? The most humorous part of [British Prime Minister] Blair's remarks came when he admitted that, up until a year ago, he didn't even know how to use a computer. He went on to explain that, in order to rectify his computer illiteracy, he took a public computer course and ended up testing near the bottom of the class when it was all over. Said Mr. Blair, "I began to appreciate the challenges I would face trying to transition Britain into the new economy when an unemployed chap in my class asked me how I did, and I realized I had scored several points under him." [Tony Perkins, The Red Eye] And Blair is considered one of the more with-it politicians.

More SBIR? If Clinton gets his way with more R&D spending, $3B of which $600M is info tech, SBIR will automatically go up another $75M. Whether such an increase actually happens is another matter altogether. The bidding for next year's circus has just begun as the White House slowly leaks the State of the Union propositions.

So what are you waiting for?Dive in!, says the Navy's new oceanographic research page. It doesn't talk about how the Navy uses ocean sound to find the other guy's subs and hide its own - a big time Navy business. Wanna get Navy's attention? Find something new or develop a new gadget for ocean acoustics even as Congress wrestles with how many attack subs is enough for whatever world power status the US will assume.

Strategic partnering is both a danger and an imperative. The usual SBIR company cannot put a product into the market, and NO, the better moustrap idea will go nowhere. The company needs someone who is alreaqdy in the market where the new technology can make a profit. But beware, the partner has some strong incentives to grab whatever's valuable. Caterpillar got caught. An arbitrator ruled that Caterpillar engaged in "fraudulent and deceitful conduct" by improperly patenting and then seeking to market clean-fuel technology for diesel engines belonging to a former joint-venture partner. The strongly worded opinion by arbitrator Costello supports allegations made by tiny, closely held A-55 Inc (Reno, NV). The arbitrator concluded that "under the guise" of a joint venture with the smaller firm that lasted from 1994 to 1996, Caterpillar and its officials "misappropriated" technology intended to reduce emissions of oxides of nitrogen. The engine maker has obtained six patents over the past few years and has applications pending for 12 others. A-55 contends some of those applications were filed before the breakup of the joint venture. The ruling shows "we are a serious player in alternative fuels," said Dan Klaich, A-55's executive vice president. [ANDY PASZTOR and MARK TATGE, THE WALL STREET JOURNAL, Jan 19]


The High-Tech Game Plays On
(Jan 19) APA Optics (Blaine, MN) gained 36% when it reported actually shipping DWDM product. E-Tek Dynamics (San Jose, CA) gained 31% when JDS Uniphase said it would buy E-Tek for $15B (in stock of course). AstroPower (Newark, DE) gained 10% when it promoted some executives to bigger titles. Cree (Durham, NC) collected $266M for 3+M shares in a secondary offering.Kopin rose 10% apparently just because Kopin breathes. Ortel (Alhambra, CA) gained 14%.
And what is the government doing today to create such stories for a decade from now? Are you kidding? The federal agencies, especially the missions agencies, are using SBIR to fund their ordinary R&D activities in a begrudged set-aside program. Why are they not focusing on creating wealth that everyone would enjoy, including themselves in the future? Why should they? Where's the gain for any agency head who has an average tenure of less than three years and no way to participate in the profits? Where's the gain for the agency permanent staff? Fuhgeddaboutit! If Congress wants big and clear economic gains, which is not the least bit clear anyway, it will have to dramatically re-organize SBIR's management.

The Answer is Romania. A government diplomat visited the Valley this month to assure staff-starved tech firms that they need look no further -- than Romania. James Rosapepe, U.S. Ambassador to Romania, met with several local technology companies on an economic mission to Phoenix sponsored by Maricopa Community Colleges District. Rosapepe said Romania may be the answer to Arizona's shortage of highly skilled technology professionals. ... The mission is part of an ongoing exchange program between Phoenix and Romania. In March, members of the Romanian Software Association traveled to Arizona to learn from local software firms and discuss potential working relationships. The embassy also is working with educators and students to ensure that Romania has the expertise American companies are looking for, Rosapepe said. [J. Craig Anderson, Phoenix Business Journal, Jan 17]

No One Knows Each of the men vying to become president wants voters to believe that he knows how to keep the good times rolling. The problem is, none of them really knows. Not even the experts know why the American economy is performing so well. ... Uncertainty has remained the common denominator as the main candidates have split into two camps. Gore, Bradley and McCain simply promise not to rock the boat. That tack is reflected in their shared affection for Greenspan.The other nostrum on offer is what to do to head off a downturn before it happens. Texas Gov. George W. Bush and wealthy publisher Steve Forbes say tax cuts are the answer. ... It's easy to see why the politicians are struggling with Economics 2000. The last time their ilk braved the cold winds of Iowa and New Hampshire, conventional wisdom held that unemployment rates below 6% would prompt inflation, inflation would lead the Fed to raise interest rates, and higher rates would cause recession. But unemployment kept falling, down to nearly 4%, and inflation never reared its head. The result has been a golden combination of low inflation, high employment, rising incomes and soaring stock prices -- with no end in sight. Next month, the current economic expansion, which began in March 1991, like Joe Dimaggio during his 56-game hitting streak. And it's just as hard to explain the economy's streak as it was Joltin' Joe's. Is it a delayed effect of the Reagan tax cuts? Is it the result of President Clinton's deficit reduction? Or is it a technology explosion that has little to do with either? [BOB DAVIS , Wall Street Journal, Jan 17]

Cyber Friendly Maryland. In a bid to make Maryland a mecca for electronic commerce, Gov. Glendening and legislative leaders have agreed to push an ambitious package of bills aimed at creating the friendliest legal environment in the nation for doing business over the Internet. The "Technology Agenda" would promote high-technology businesses in the state while updating existing laws to deal with legal problems spawned by the cyber-revolution -- issues such as computer piracy, invasion of privacy and distribution of child pornography over the Internet. If adopted, the measures would be a major step for Maryland toward the "paperless" society that futurists have long predicted would result from the advent of personal computers. [Baltimore Sun, Jan 14]

The Power of Subsidy BERLIN. Across a continent that sees itself as the cradle of Western science and civilization, many political and business leaders have reached the alarming conclusion that Europe is rapidly losing ground to the United States in the growth industries of the future. Just as the NATO bombing campaign in Kosovo revealed a huge disparity in military capabilities between the Old and New Worlds, the merger between America Online and Time Warner has raised fears among Europeans that the United States is surging ahead in locking up an enormous commercial bonanza through future control of the Internet and other technologies. While Europe has scored a notable success with its mobile telephones, many leaders now acknowledge a basic policy failure of the past decade--subsidizing dying industries in an effort to preserve jobs--has contributed to the overwhelming superiority of the United States in such booming sectors as computers, Internet services, biotechnology and even investment banking. [Washington Post, Jan 15]

EV Still Out of Juice. SBIR proposers love to claim that their technology will be good for and will promote the acceptability of electric cars. The public ain't buying them. It is still a technology only a government could love. Oh, the government SBIR people will pretend to believe your story since it serves their purposes regardless of its truth. And only subsidies will support it, which is OK if you like subsidy politics. As the SBIR advocates do. But if you think you will have a real commercial potential, you're kidding yourself for at least a decade. You better plan on that long a subsidy. Baltimore Sun, Jan 12 says, GM has stopped production of its sleek EV1 electric car, citing waning interest from its customers. GM is shifting its attention from all-electric cars to vehicles powered by hybrid fuel-electric systems and fuel cells, which use hydrogen to create EV1s on hand and said that, while the company could build more, there was "no particular need." The company began building the EV1 in 1996, and hoped to eventually sell thousands of battery-powered vehicles as pollution-free alternative transportation -- especially in warm-climate cities beset by smog. It spent $350 million to develop the EV1, and promoted it heavily. And it billed the EV1 as a household's second car for short trips, and set a goal of leasing 100 a month. But after an initial flurry of interest, few buyers came forward, and the EV1's limitations became clear. EV1 leases cost between $400 and $600 a month, and for their money, owners got a car with a range of 80 miles that needed several hours to recharge.

Army Rewards Predictability
(Jan 12) Just as the Army hates uncertainty in the face of an enemy, it hates uncertainty in its SBIR Phase 2s. As always, the Phase 2 batch includes many just plain old analysis and modeling with zero probable economic impact. Development and Validation of a CFD/Controls Based Tool for Low Cost Pintle Motor Design; Divert & Attitude Control Solid Propellant Jet Interactions Modeling; Embedded Situational Awareness (TM) System for Army After Next Training and Operations; Improving Soldier Factors in Prediction Models; Highly Adaptable Uncertainty Estimation Methodology for Sensor Fusion Systems; Design, Material Selection and Life Prediction Software for Ceramic Matrix Composite Component; Computer Modeling and Simulation for Helicopter Task Analysis;Ground Vehicle Dynamics Subsystem Modeling for Multi-body Simulation Applications; Multi-Body Dynamic Two Dimensional Contact Analysis Tool for Transmission Design. Two companies won more than two awards: Physical Optics (big multiple winner across government) and SY Technologies. Judging only from the titles and number of awards to obvious contract service houses, the Army does not care about economic payoff. If you want to get Army SBIR money you will have to know just exactly what the topic is looking for and then propose a nice safe incremental advance in knowledge. To the extent, that is, that the Army knows what it will want when proposal approval comes around many months after the topic was invented. Judge the list for yourself. If you ask the Army, it will dutifully say that every award serves an Army need; you just won't be able to know what an Army need is until after the Army picks the winners.


Still No Evaluation.
(Jan 10) If you laid all the economists end-to-end, they still would not reach a conclusion. Nor did they reach any conclusion about SBIR's evaluation, despite a whole session devoted to the question at the American Economic Association annual meeting. Professors Josh Lerner, Al Link, and David Audretsch each talked around the subject. Chuck Wessner of the National Research Council said that trying to stop SBIR was like throwing tomatoes at tanks, that even if you elected your president and your Congress, it would still not end. And the economists are not eager to try. The advocates and the politicians have concocted a pleasant fiction that serves both groups. The federal agencies cannot or will not do anything to stop it because they have adapted to it by doing whatever they want under its cacophony of objectives, nor will they focus on its economic mission since economic gain does nothing for the agency. Self-serving bureaucrats? Is that redundant? The result is that hardly anyone cares whether it ever gets a good evaluation. What would anyone change if it got a bad evaluation? And if the economists will not evaluate it, why should the beneficiaries rock the boat?

The ATP program also got a session of pseudo-evaluation. The discussants (who were often presenters of some other paper) chopped up the presentations over the details of the correlations of patent activity with money input. No one seemed to mind that sample sizes of 50-100 could produce correlation metrics to 5-6 significant figures. In both ATP and SBIR, no economist mention ROI, although they did note that government programs are designed to recover a societal return which they could not measure anyway.

You're not alone - and not that young - if you have been suffering fits of deja-vu every time you hear fiber optics companies make predictions. Thirty years ago the nuclear power industry bragged that its new technology would deliver free electricity indefinitely. Now, fiber optics companies say bandwidth will be free too. However, there is no certainty that will be the case: it all depends on the demand for bandwidth. But there's no mistake we are heading for an exponential increase in network capacity during the next five years. [Lee Bruno, The Red Herring, Feb00] Do your SBIR proposal predictions sound dreamy like nuclear power's "too cheap to meter", or vague like "bandwidth demand will increase indefinitely"? Or do you make some credible estimates for your vision, if you have any vision other than a fun time exploring the technology? Would you be willing to invest your mother's pension nest egg in your vision? If not, why should anyone else?

Some Help!  MORE TALK THAN ACTION: States vow to help entrepreneurs but do little. Thirty-seven states responded to queries by the National Commission on Entrepreneurship, a Washington-based small-business advocacy group, about state programs that support entrepreneurs. One key finding: Many states' economic development plans make no distinction between entrepreneurship and conventional small businesses. The hot technology start-up with no profits but a bright future is lumped into the same small-business category as the family-owned grocery store. That can curb help. For instance, a state may boast it has lowered taxes on small businesses but such a gesture is meaningless to many entrepreneurial start-ups, which typically experience several quarters of losses in their early years of operation, says Patrick Von Bargen, executive director for the commission. ... Thirty-four of the 37 states that responded said they consider entrepreneurship part of their state economic-development strategy. But when asked for details, only four (North and South Carolina, Kentucky and Connecticut) had clearly articulated statements within those strategies. The others said that entrepreneurs could take advantage of general programs available to small businesses. [Wall Street Journal, Jan 4] The federal government has the same problem - forms of help that conflict with the stated objectives. SBIR may be the worst example of "help" for high-tech startup ideas and companies. New ideas and companies need flexible and patient seed capital plus business and market advice. That's NOT what SBIR, as presently built and managed, does. The federal administering agencies have NO INCENTIVE to act in the businesses' interests. So, they serve their own ends in funding the wrong companies the wrong way. Only BMDO seems to get it, and only then despite an unending internal struggle to bring SBIR to heel. 



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