NCBI Bookshelf. A service of the National Library of Medicine, National Institutes of Health.

National Research Council (US) Committee on Capitalizing on Science, Technology, and Innovation; Wessner CW, editor. SBIR and the Phase III Challenge of Commercialization: Report of a Symposium. Washington (DC): National Academies Press (US); 2007.

Cover of SBIR and the Phase III Challenge of Commercialization

SBIR and the Phase III Challenge of Commercialization: Report of a Symposium.

Show details

Panel III: Challenges of Phase III: SBIR Award Winners

Moderator: Kevin Wheeler

Senate Committee on Small Business and Entrepreneurship

Ms. Wheeler briefly introduced Panel III, saying it would feature successful companies with experience in surmounting the challenges of Phase III.

Anthony C. Mulligan

Advanced Ceramics Research, Inc.

Mr. Mulligan said that his company had been founded in 1989 with capitalization of a thousand dollars and hope of a Phase II award from the Navy. His group had to survive for six months until a $500,000 contract came through in 1990, and the firm had grown steadily since then.

Advanced Ceramics Research (ACR) has two manufacturing facilities as well as a sales office facility in Washington, D.C., and has plans for two more manufacturing plants. Based on contracts in place, total projected revenues for 2005 were about $23.2 million, he said.

The business has evolved away from its early dependence on SBIR sales. For 2005, about $2 million of sales were projected to go to commercial, nongovernment customers; about $17.2 million for non-SBIR customers, primarily military; and about $4 million in the SBIR program.

Of the company’s total sales over its 16-year history, about a quarter will have been recorded in 2005. About $22 million came in commercial sales, primarily to the computer hard-drive industry, and $36 million came as non-SBIR government sales. About a third of the government sales were R&D transition dollars to take SBIR programs to commercialization. (See Figure 18.)

FIGURE 18. Sales history.


Sales history.

In total, the company had won almost $23 million in SBIR awards, averaging about one-and-a-half or two Phase II awards per year. They had won 75 Phase I awards and 25 Phase II awards altogether, most of them within the last two years. “We are on a very fast growth track,” Mr. Mulligan said.

He noted that commercial sales had dipped in 2001-2002 because the company moved most of its commercial manufacturing to a plant on the Tohono-O’odham Indian reservation, near Tucson, Arizona. Those sales are now growing rapidly.

Mr. Mulligan described the company’s commercialization strategy, emphasizing the following strategies:

  • Perform Work that Is Core to the Company’s Strategic Plan and Have a Clear Path to Commercialization. Unless this path is clear, his company will not write a proposal. The company had, on rare occasions, won Phase I awards that they turned down because their strategic plan had changed. They had also won Phase II awards or been asked to submit Phase II requests and turned those down because they did not meet the core strategic plan.
  • Hire the Best Possible Talent. The company is looking for cum laude graduates, PhDs, and people who are very competitive. They have found that employees with a built-in will to win are easier to manage, which fits well with the company’s aversion to micromanagement.
  • Apply Effective Incentives. The company’s bonus plan is four pages long, outlining how to get bonuses and how to earn more in many ways. For example, bonuses may follow a patent application, a patent award, or the sale of a license or commercialization of a product. Employees also share in license royalties and fees—everything important to the management of the company.
  • Emphasize Commercialization at Every Opportunity. The management of the company is always focused on this message.
  • Reach Out to the Warfighter. Previously, the company spent most of its outreach time with the program managers who control the budget in their effort to win government sales. Now they try to determine what the warfighters want and need, then “push the middle” to help that happen.
  • Constant Training. The company takes every opportunity to advance employees’ education, including sending people to school and hiring consulting teams.
  • Reach Out to Congress. The company tries to educate its Congressional members about procedures that are and are not working well. Although a difficult task for a small business, this has been important in helping to narrow the gap to Phase III transitions.
  • Leave No Stone Unturned. Perhaps the most important element, he said, is to take advantage of every factor in trying to leverage their assets and maximize their opportunities.

As an example of the last point, Mr. Mulligan described the commercialization of a technology at ACR that was completed in the early 1990s. It involved a set of ceramic composite technologies that originated from a Navy SBIR program for computer-automated control. The topic tied in also with a NASA program and a DARPA program, allowing ACR to develop a new technique of precision machining that revolutionized the manufacture of computer hard-drive disks. The technique brought down the price of the disks so dramatically that one out of every two hard drives in the world has been manufactured with the ACR technology. From 1991 to 1999 the company sold about $14 million worth of this technology.


He also described two recent case histories of Phase III transitions, both of which came quickly. The first was a water-soluble tooling technology the company began working on in 2002. This was a 6.1 or basic research program originated by the Office of Naval Research to develop the science as a way of making cheaper parts for the Joint Strike Fighter (JSF). During Phase I, this program won a prestigious R&D 100 award and ended up with a $25 million ID/IQ29 contract from NAV-AIR in 2004, of which $5 million had been funded and $6 million was due by contract. The technology had proven versatile—it was able, for example, to build inexpensively a part like a wheel, with hollow spokes and hubs, which could be made previously only with expensive tooling. This elicited a significant agreement with the automaker BMW, which wanted to use the technology to produce sport-utility vehicle parts, and has roused interest from both VW and Audi for the same purpose.

The second case history concerned the small unmanned air vehicle (UAV) business, which began in 2001. The Office of Naval Research granted a Phase I STTR in 2001, which had transitioned to $17.6 million in total sales, only $6.5 million of which were SBIR-STTR contracts. By the end of 2005, total contracts and sales are estimated to be nearly $30 million. He showed a chart of UAV business progress, including different UAVs and different technologies in UAVs, especially sensors, which would probably provide nearly half the company’s revenues in 2006.

He then listed a series of lessons learned:

  • Hard Work and the Desire to Commercialize Do Not Guarantee a Successful Phase III. There are still real barriers in the acquisition system.
  • The Navy’s Technology Assistance Program Can Help Small Businesses Integrate a Complex Process. ACR had done four SBIR programs with them, of which the first three had already succeeded in commercializing, and the fourth seemed to be moving toward success. He suggested a careful look at what makes the TAP so effective.
  • While Breaking into the Federal Acquisition System Is Difficult, ID/IQ Contracts Ease and Accelerate the Process. 30 ACR had three ID/IQ contracts, two at the Office of Naval Research and one at NAV-AIR. Both places, he said, made it easy for those who want to make purchases quickly.
  • Program Managers Need Incentives to Work with Small Businesses. Program Managers in the federal acquisition community do not intentionally shun the small business community, but they have no strong incentive to embrace a new technology or process from a small business when the risk is likely to be higher.

In closing, he said that the SBIR program works very well. It is highly competitive, and ACR wins only three out of every ten programs it tries to win. However, said Mr. Mulligan, the acquisition system is falling short in not being ready to take advantage of fast-moving technologies and capabilities. There is no effective bridge between the acquisition community and those who are developing innovative technologies. Building this bridge, he said, should not be the sole responsibility of the SBIR community; the acquisition community must help pull those new technologies across.

Nick Karangelen

Trident Systems

Mr. Karangelen introduced himself as president of Trident Systems, a small systems engineering firm. He was a Naval Academy graduate in the class of 1976—“one of [Admiral Hyman] Rickover’s boys in the nuclear Navy during the Cold War,” serving in submarines. He then went to work at TRW for a couple of years, and then for IBM to work in Manassas, Virginia, on submarine combat systems.31 In 1985, he said, “my mother died, and I decided that life is short and I better decide what I really want to do.” With about $11,000 in his pocket he started Trident Systems, which has grown today into a $25 million company.

Trident had produced a number of successes including bringing in about $30 million in revenue over the last 12 years from touch-screen technology developed under SBIR contracts as well as achieving a number of DoD transitions for SBIR technology. He said he would not talk about these successes, however, because he wanted to focus on how to improve Phase III of the SBIR program.

Improving the Acquisition System

He referred to the end of Mr. Mulligan’s talk to open a discussion of the shortcomings of the acquisition system. Mr. Karangelen agreed with the need to address these shortcomings and began with the FY 1999 Defense Authorization Act. That Act outlined six procedures the SBIR program should follow. The first was that major acquisition programs should designate liaisons to the SBIR community. This had been done, he said, but had only designated individuals in laboratories that represented dozens of programs. What was needed, he said, was a designated SBIR liaison for every major program. Another Defense Authorization Act recommendation was to establish good linkages between SBIR solicitation topics and acquisitions people. This, he said, was also done, and today some 60 percent of SBIR programs are directly related to acquisition programs.

A third recommendation was for senior acquisition executives to issue guidance to acquisition programs that would make SBIR part of their ongoing program planning. The goal was for these executives to keep track, as they moved to the next milestone, of which SBIRs were in their plan and, most importantly, in their budget. With the exception of a few “aggressive, innovative, and enlightened” program managers in the Navy, and perhaps a few elsewhere, this was not being done.

He said that an explicit directive to include SBIRs in the mainstream of acquisition was written into the revision of SBIR documents32 by Dr. Gansler, but it was removed before finalization. He said that other Congressional reports over the years had also contained “good ideas” that were never implemented, most likely because they would mean changes to the way “business had always been done.”

He blamed not the large DoD prime contractors, but the DoD itself, which had grown comfortable in dealing primarily with big prime contractors and large, horizontally integrated companies to address acquisition needs. This focus on the largest companies had led to less competition, even though many medium-sized companies, such as ATK, which offered good alternative technologies, were disappearing. It was also hard for the smaller companies, such as Trident and ACR, with just a few hundred employees, to survive in the current environment. He said that the DoD, was resisting change, as “all big, bureaucratic organizations do,” and that the push for change needed to come not only from Congress but from the top of the agency itself. He added that even Dr. Gansler, who was Defense Under Secretary for Acquisition and Technology in the Clinton Administration, was unable to change the system from within.

Moving SBIR into the Mainstream

Mr. Karangelen urged the conference participants to “take a hard look at what it will take to change the ratios”—that is, to reduce the 89.9 percent of all federal R&D contracted out was presently going to the 100 largest firms. He said that less than four percent of the R&D budget contracted out was contracted to businesses of fewer than 500 people.33 He also said that of all R&D spending of every kind generated by the federal government, only 0.4 percent goes to small technology businesses, even though perhaps a third of all scientists and engineers in the United States work for small businesses.

He said that the fault did not lie in the SBIR program itself, which was highly competitive, drawing dozens of firms to compete in every topic area for Phase I awards. The problem was that the acquisitions system did not consider the SBIR to be in its main stream of activities, so that program managers seldom reach out to the small firms, even though they represent a huge resource of talent and innovative energy. Nor do program managers always see the advantage of the SBIR program in helping them to vet out small companies able to work with government contracts and identify the best among them.

A Suggestion for Filling the Funding Gap

Mr. Karangelen suggested that better acquisition habits could go a long way to fill the perceived “funding gap.” That is, by the time a program manager finishes a Phase II competition, several small companies might be vying for the same technology area. Normally, one of these could be chosen with confidence for a Phase III contract. If the firm is not ready, a good practice would be to issue a smaller version of a Phase III contract that would allow the company to survive as it develops the technology. He argued that the funding gap “exists largely in our minds, and in the minds of the program managers,” because the money is there, but it is usually committed to a large prime contractor already under contract. In all, he estimated, some $400 billion in potential funding was tied up in this way and unavailable for funding the gaps between Phases I and II and the acquisition system.

Unleashing the Innovative Power of Small Business

Mr. Karangelen said that his basic message was that there was nothing wrong with the SBIR program. It worked well, especially in the Navy program where it had been “put on a pedestal and polished.” The fault lay instead with those program managers who did not consider it to be part of their mainstream. If these program managers would place the SBIR in their budgets and in their planning, he suggested, they could unleash “the innovative might of small business in America” and the country would reap a bounty of “better products faster and cheaper.”

He closed by quoting the 1982 law authorizing the SBIR program. Its purpose was “to ensure that federal R&D procuring officers and program managers make use of the wealth of resources available from small businesses in addressing the mission and research needs of their agencies.” The SBIR program was not a welfare program for small businesses, he concluded, but a way to get the DoD what it needs “faster, better, and cheaper.”

Thomas Crabb


Thomas Crabb, vice president and chief financial officer of Orbitec, said that his firm was founded in 1988, around the same time as other companies represented on the panel. He and his early partners began, he said, as “three guys in their houses, working in the back bedroom, trying to make things happen.” The initial focus was to develop technologies for plant research in closed systems for the International Space Shuttle.

Within a few months, the founders had won several contracts and the firm, based in Madison, Wisconsin, evolved rapidly. Orbitec now employed nearly 100 employees, and revenue had grown from $6.3 million in FY03 to an estimated $11.8 million for FY05. Their main customer has been NASA, along with the DoD and a few other agencies. The firm was approaching $100 million of Phase III awards. Although getting these awards was difficult and time consuming, an even greater challenge turned out to be maintaining NASA funding once contracts had been signed.

Among the technologies and products produced for government were high-quality flight systems, high-performance combustion and propulsion, portable simulation for training and operations, and innovations for systems and components. Among commercial products being pursued were environmental controls and tissue culture for the biotechnology markets, LED lighting for aquariums and human lighting applications, instrumented biomedical devices, plasma processing, nanocoatings, water purification, and environmental sensing and control. The firm also planned to do “next-generation agriculture” to allow crop growing in manufacturing warehouses.

Looking Beyond SBIR to Commercialization

The strategy for dealing with the federal government within Orbitec was to arrange the firm’s capacities—engineering analysis, electrical systems, and mechanical software—toward current contracts as well as beyond them. In this strategy, government Phase III awards are regarded as “transfer points” leading to other markets beyond government procurement. The firm also maintained a pipeline of technologies that are ready to approach commercialization, all of which share the ability to integrate into single systems for the Space Station or Shuttle and therefore have very low power needs, and small mass and volume. Such constraints, he said, require and breed new technologies.

In order to deal with both technology push and market pull, Orbitec had created a separate entity called Planet LLC, which is a technology incubator. Product development and licenses flow from Orbitec to Planet, while royalties, R&D for product upgrades, new market-pull ideas, SBIR marketing plans, licensing agreements, and commitments for SBIR flow from Planet to Orbitec.

Orbitec’s involvement with SBIR Phase I and Phase II awards began during the firm’s first few years. Beginning work on its first Phase III around 1994, it encountered frequent budget problems starting with the first award in 1998 and the second in 2000. However, because it did good work in the Phase III, it received more Phase III work. “So Phase I and Phase II awards played a very, very good seed capital role in establishing Phase III,” he said, “which has really been the engine of growth.” The company had experienced many different combinations of grants and outcomes, with Phase I grants, for example, leading to additional Phase I awards, Phase II awards, and even directly to Phase III commercialization.

The Advantage of “Small Phase III” Grants

He discussed Orbitec’s “key NASA Phase III experience,” in which NASA had been helpful in providing a “small Phase III” to get over the Valley of Death that loomed beyond Phase II. The technology was not ready for a full Phase III, but the agency gave the company time to demonstrate it with a smaller grant, enabling it to fly a demonstration payload. With that success, it was rewarded with a Phase III contract of $57 million for the “development and flight of a Plant Research Unit for the International Space Station,” followed by additional contracts. Without that initial “push” to help the firm survive the funding gap, he said, many subsequent products would not have been developed.

Mr. Crabb added that this success was enabled by the unbundling of a large NASA contract in 1995. The contract was for a complex life sciences system called the Centrifuge Accommodation Module, which included an incubator, cell culture unit, insect habitat, and other habitats. Two large aerospace firms, Lockheed and McDonnell-Douglas, were competing for the whole contract, and Orbitec was a subcontractor to McDonnell-Douglas, which was working on the Plant Research Unit. NASA decided to divide the contract, rather than awarding it all to a single, large, prime contractor. This permitted some contracts to European firms and allowed three assets to be procured by small businesses, including Orbitec. The small firms gain invaluable experience, as well as funding, by contracting some of these large jobs, which would not have been possible without the contract unbundling.

The Downside of Contract Downsizing

He brought up the subject of contract downsizing, in which a proposal is accepted by a customer but proposed budget levels are not met. He said this was a serious issue for the SBIR program, with a long history. Orbitec’s $57 million contract for the Plant Research Unit—its largest NASA contract to date—was reduced by more than 80 percent after the first year. After the second year it was again reduced, by more than 78 percent. The company survived only because of the lobbying efforts of allies in Congress and at NASA. Orbitec endured similar reductions on a contract for an animal habitat. In all, he estimated that the company would lose more than $60 million on Phase III contracts. These reductions were not due to Orbitec’s performance, which had been rated excellent by their customer within NASA.

He attributed this to his company’s lack of sufficient clout within NASA to maintain budget levels at a time when NASA was changing its priorities, notably including a shift in emphasis away from the International Space Station and toward the moon and Mars.

The impact of Phase III contract reductions was especially severe because the contracts were by then the growth engine of the company. He showed a slide illustrating the impact of the reductions over a five-year period, when the Phase III revenues grew from a trivial level to the majority of revenues.

The Good, the Bad, the Ugly

He concluded by summarizing Orbitec’s experience with Phase III. The “good,” he said, was that the Phase III process screens and selects worthy projects. Phase III advances good businesses that meet government needs, enables small businesses to become prime development agents for agency needs, and can fuel commercialization through the Valley of Death.

The “bad,” he said, was that Phase III can last more than five years before a technology is ready for commercialization; Phase III opportunities are not frequent, especially where large, bundled contracts preclude opportunities for small firms; and few key people are aware of the benefits of Phase III to government.

The “ugly,” he added, was that a small firm cannot count on contracts from Phase III once won, bringing skepticism from investors. Small business activities seem easier to cut from budgets because they have less clout within the federal government. From the small firm’s point of view, one result was a “poor credit rating”: “The bankers and the investment community need to trust that that contract is going to be there. You can’t have a contract cut by 80 percent and have your financiers trust that you can maintain your technology development.”

He recommended several steps for improving what he considered “an already great program”:

  • Continue Efforts to Unbundle Contracts. This will enable small businesses to have more opportunities to participate.
  • Solidify Government Commitment to Phase III Projects Once Awarded. This should include a Phase III termination clause with enhanced payments and penalties, and some guarantee of proposed funding within 20 percent of contracted amounts.
  • Apply Incentives to Motivate Large Prime Contractors to Partner with Small Businesses. This can including penalties for avoidance or re engineering and rewards for strategic efforts to build a culture of joint working relationships.
  • Provide Bridge Funding to Incubate Phase III Projects. Once transitioned, he said, the benefits of small business should be clear.

He closed by recommending several strategies for small businesses interested in participating in the SBIR program. First, create a product strategy that transcends the government need and fits commercial markets. Second, never write a Phase I proposal without having a vision for the Phase III and/or commercial product. And third, maintain advocacy activities throughout the SBIR work to seek allies among technical monitors, ultimate users, contract managers, SBIR management, and congressional representatives.

Robert M. Pap

Accurate Automation Corporation

Mr. Pap said that he would review his experiences, “both good and bad,” with SBIR projects, which extended back to the founding of his company in 1985. Accurate Automation, with 22 employees and projected 2005 sales of $3.5 million, had won 71 Phase I awards (4 STTRs) and 46 Phase II awards (4 STTRs) and had produced 17 Phase III products and contracts. The firm designs, develops, and manufactures emerging commercial technologies, such as unmanned boat and aircraft systems and signal processing devices.

To illustrate some of the company’s projects, he began with a video representation of the cockpit of a jet fighter. At the request of the National Transportation Safety Board, the company had developed the ability to compress an image and validate the image without using a watermark or altering the image. He then showed the bridge section of an aircraft carrier. Using its first SBIR in 1985, the company developed the ability to send data from several places on land to an aircraft carrier. That ability had evolved into a new product designed for use with radar. Finally, he showed photos of three unmanned vehicles, part of a family of unmanned boats, airplanes, and other systems for the Navy.

SBIR Projects

He then discussed the X43A Telemetry Subsystems, a $1.5 million Phase III project for the Air Force, which had evolved out of the X30 National Aerospace Plane project. During the X30 program the company was asked to bid on a project that the larger contractors preferred not to do—fault diagnosis on the fuel distribution system. The fuel in this case was slush hydrogen, which is highly explosive and dangerous. Accurate Automation was able to design a safe telemetry system to transmit data to the ground in real time, even during the X-43A’s de struction in June 2001. It was then used successfully on later non-crash flights as well.

Next he described the Phase III MALD SDD, a unique 150-to-300-pound-thrust jet engine required by the Navy as an SBIR. The MALD was a new design for an air-launched guided/powered flight munitions that could be dropped as a decoy from a B-52 or an F-16 aircraft through an F-35 bomb bay. Accurate Automation was encouraged by the Navy to prepare a bid and won a small contract from the Air Force, assembled a team, and bid on the larger MALD program. The team designed a full-sized system and built a prototype capable of advanced autonomous flight that could mimic a real rocket as well as do obstacle and threat avoidance.

A Project with an Unhappy Outcome

The experience did not turn out well, said Mr. Pap. Their engine, although developed specifically for the requirement of a decoy, was not considered, even though it was able to thwart the ability of a sophisticated enemy to detect its decoy nature through jet-engine modulation. The engine was not being used in the system adopted by the Navy.

The more important part, he said, was the payload. His company developed a technology of plasma dynamics for the Army, Navy, Missile Defense Agency, and NASA. It protected the payload area from the body of the aircraft, and allowed it to carry payloads that were dangerous to the rest of the vehicle. This meant that it could operate not just with a radio on the front, but could carry a directed energy weapon, which was important to the United States.

“Unfortunately for us,” said Mr. Pap, “we were teamed up against Boeing, Northrop Grumman, and Raytheon. We spent a million-and-a-half dollars, put together a team that competed with everybody in the industry, and the winner, Raytheon, will not even talk with us.”

The Air Force selected Raytheon, bypassing Accurate even though it was the low bidder. Certain individuals, he said, were at that time giving contracts to various prime contractors, and “we were victim.” But the company built the vehicle, and sold one to NAV-Air, and the technology was used on an unmanned boat that the Navy was using on mission modules for a combat ship.

As a result of this experience, Mr. Pap offered the committee several recommendations:

  1. When an SBIR company and a major manufacturer offer a bid, and the bid is led by the SBIR company, the past performance of all the major companies should no longer be allowed as a selection consideration.
  2. When the selection authority has used false statements in the Source Selection Decision Document to award a contract to a major company over the SBIR company, the SBIR program office should be authorized to run a parallel effort as a Phase III that is supported from the DoD element line item of the program. Each modification to the contract would be provided to the SBIR-led team until it has been given a satisfactory Phase III award by the selected prime.
  3. Lastly, SBIR program offices in DoD should have funds to support (under contract) a major proposal by an SBIR-led team when existing hardware has been developed by SBIR funds. Unlike the large prime contractors, a team of small businesses has no funds to compete in a major program through the “plus-plus reimbursement in their overhead.”

Protecting Sensitive Knowledge

He raised the issue of protecting sensitive knowledge. He had been approached by the Navy, a major supporter, which in the mid-1990s wanted to fund the company’s work on plasma. Accurate Automation developed a device that protects a wave guide from an HPM or EMP attack.34 Accurate Automation now has a contract and has tested the device extensively for duty on ships. He noted that the company tried to work with a university on the project, but could not reconcile the need for weapon secrecy with the university tradition of publishing research results.

He described a similar problem with another technology, a radio frequency mitigation device to protect radar and electronic warfare systems from HPM and EMP attack. Descended from work begun in 1979, this technology acts as a shield to divert an incoming shell. Again, he said, such a “disruptive” technology, which fits the SBIR model, must be developed in secrecy. It is not well suited for university research, both because of the secrecy requirement and because it takes 7 to 10 years to develop.

He closed by urging a continuation of the SBIR tradition of supporting high-risk research, and addressing questions of interest to the “best and brightest” PhDs of all ages. He also urged more of the “skunk-works” approach, where technologies for the military could be developed under conditions of intense focus and, where necessary, security.

Mark Redding

Impact Technologies, LLC

Mr. Redding said his company was founded in 1999 to work in an area of business known as “predictive equipment health management technologies,” which included conditioned-based maintenance (CBM) and prognostics and health management (PHM). Since the company’s formation, it had been awarded more than 45 SBIR Phase I contracts and 27 Phase II contracts, with customers including most DoD agencies. The company received the Tibbetts National Award in 2002 for demonstrated SBIR success, and its first Navy ID/IQ contract, in 2004, for $25 million.

The company was formed with a staff of five people in 1999, and by the end of 2004 it employed 56. By the middle of 2005 it had reached 75 employees, mostly mechanical, electrical, and software engineers. Revenue growth had roughly paralleled employment growth, with projected 2005 revenues of $9.3 million. The number of SBIR awards in the past year had been relatively flat, while revenue and employment continued to grow, which one would expect during a transition to Phase III. That is, some technologies were moving into commercial markets and supplying additional revenue. He noted, “We would not be the company that we are today without this program.”

A High Success Rate

Impact Technologies had earned contracts from many major agencies, including Navy, Air Force, Army, DARPA, ONR, AFOSR, and NASA. Its commercial defense customers included Honeywell, GE, Boeing, Goodrich, Rolls-Royce, Lockheed Martin, Northrop Grumman, and Pratt & Whitney. Compared to the national average success rate on Phase I proposals of about 10 percent, he said, the rate at Impact had been over 50 percent. In converting from Phase I to Phase II, where the national average success rate is about 40 percent, the rate at Impact was approximately 90 percent. He attributed this success at least partly to the practice of teaming with either a large prime or a university in the Phase I proposals and in clearly identifying the customer’s needs at the outset. The primary focus within the company was now transitioning or commercializing the SBIR-developed technology.

One of the technology areas of Impact was equipment for detecting and diagnosing equipment problems and predicting the future operation of that equipment, which allows maintenance to be scheduled at opportune times. The company does this for a broad range of applications, including avionics, propulsion, AMAD/drive train, structures, sensors/data, flight controls, and fuel/hydraulics.

Other systems where the company develops technology are the Joint Strike Fighter (F-35), CH-47D Chinook Helicopter, H-60 helicopter, USS Briscoe with Gas Turbine CMB, DD(X) submarine, Expeditionary Fighting Vehicle, M1A1 Abrams Tank, FCS Manned Ground Vehicles, and F-15/F-16/F-117 aircraft.

The company had recently been awarded a small Army contract to analyze wartime data from an Apache helicopter to use as justification for diagnostic systems on such equipment. Impact was able to react quickly to that need, and to actually perform risky development of technologies while not under contract. He said that a large company would be unlikely to do this without a contract.

Improving the Phase III Transitions

He then offered some observations, based on the company’s experiences, regarding the Phase III transition challenge:

  • Impact had found Phase III funding to be very limited. While the company had won more than 30 contracts considered to cover Phase III, the dollar amounts of the awards were relatively small, averaging about $50,000. He believed that this was because the company was not part of the acquisition process.
  • The technology readiness level at the end of Phase II is generally not sufficient to allow commercialization. This creates a funding gap between completion of prototype development (Phase II) and actual insertion or commercialization. The $25 million ID/IQ contract mentioned above was funded with an initial delivery order of $50,000—the only funding that had been awarded to date.
  • There was no clear funding path or insertion policy for SBIR-developed technologies.
  • The company’s experience in selling to the large prime contractors had been difficult. Unclear issues included a “not invented here” attitude and unclear allocation of intellectual property. The most nettlesome issue for the company had been the difficulty of meeting the standard contract terms and conditions of a large prime. He told of being selected after competitive bidding and then having to wait six months for the small firm’s data rights clause to be inserted by the prime into the contract.
  • The company’s most positive experience had been the Navy’s Transition Assistance Program. “It’s by far what I would consider to be the best example of helping small businesses commercialize,” he said. “It’s not the final answer—I think improvements could be made—but it’s a good first step.”

The Need for Overall Improvements

He proposed several improvements for SBIR. The first, which would be inexpensive, would be to educate the large prime contractors about the SBIR pro gram, including its objectives and some of the IP issues. He also proposed a new type of SBIR program, similar to the STTR program, with a new type of contract that requires a small business to be teamed with a large prime for the technology insertion. This would be, he said, a “real Phase III contract.” Finally, he suggested additional funding for TAP-like programs, with more focus on networking and brokering deals between the small businesses and the large prime contractors. He noted that part of the Navy program includes a small amount of market research to identify potential customers, and urged more such research.

He reiterated that for SBIR to be a success, incentives were needed for the large prime contractors to integrate SBIR-developed technology—but only for technologies that are deemed to be worthy by the DoD customer. He suggested that financial incentives were needed to induce the large prime contractors to integrate those technologies.

In closing, he raised the issue of whether venture capital firms should be allowed to participate in Phase I and Phase II SBIRs. He opposed this because of the likelihood that large VC firms would soon use their own SBIR companies to compete against the other “true” small businesses. He repeated that much of his company’s success had come as a result of teaming with large prime contractors in Phase I and Phase II, which had equal access to all small companies. Many of their Phase I proposals were supported by a large prime, such as Boeing, which also provided support to other small businesses. If such a firm had its own VC-backed company, it would be unlikely to support a proposal from Impact. And its own VC-backed company, with its vast resources for proposal-writing, would be able to produce a better proposal than could a traditional small company like Impact Technologies.

Tom Cassin

Materials Sciences Corporation

Mr. Cassin began by noting that Materials Sciences Corp. (MSC) was a very small business, so that his duties reached all the way from negotiating bank lines of credit to filling in as forklift driver when someone failed to show up for work. His company had 30 full-time employees, with approximately $6 million in revenue. Of the 30 employees, 27 were engineers, leaving three people to answer phones, write contracts, and process checks. The company relied heavily on outsourcing for auditing, CPA, legal, and other needs.

MSC was formed in the early 1970s to pursue fundamental research in characterization of composite materials. In the early 1990s, under new management, the company refocused on engineering services and intellectual property development through teaming arrangements with other companies, spinning off a company or licensing a technology. Currently, the company was expanding and adding capabilities, especially in manufacturing and testing of material systems and specialty materials development.

The company is located in an industrial park, like many small businesses, and has a testing support facility on-site with limited production. Most of its work is done for the Army and Navy, along with some commercial contracts. It works on Naval structures, including the DD(X) IDHA, the CHSV, and the EFV/ AAAV.35 It has Army contracts for an Advanced Composite Bridge, a Modular Composite Bridge, and an Advanced Composite Military Vehicle. It also has contracts (such as COPV Life Extension and Structural Health) to test and analyze products to extend their lifetimes by using new techniques and ways to manage them.

Difficulties of Technology Insertion

He suggested that a common theme his company shared with other SBIR firms is technology insertion, or perhaps the “velocity of technology.” He referred to the perceived 18-month life cycle of software and computer hardware, and compared it to the lifetime of a project involving basic materials development or materials integration, which would be 10, 15, or even 20 years. When a company develops a new materials system, he said, there is a barrier to entry, which is caused by an absence of design data, an absence of suppliers, and the real or perceived risk of any new product or technique, including the likelihood that it will be too costly to market. The good news, he said, is that once a materials system is accepted, it is likely to be used for many years, creating a strong incentive to push for technology insertion.

A Strengthening Alliance with Prime Contractors

He said that the SBIR program had been fundamental to his company’s involvement in both adding new technology to the DoD and strengthening its alliance with prime contractors. Recently, the prime contractors had begun to approach his company with suggestions, such as, “We have a technology gap. We need a certain technology, but we cannot insert that technology while we’re working on a program.” Materials Sciences had the flexibility to explore a new technology, develop it to an acceptable level, and insert it into an ongoing program. In more than half a dozen cases, an SBIR-originated relationship with the government and a prime had moved beyond the SBIR process so that his company had become a partner in designing programs.

Challenges in Working with the Program

He then listed a series of challenges his firm had encountered in working with the SBIR program.

  • Overcoming Fear of Risk. The largest challenge by far, he said, was convincing a project manager or Program Executive Officer to take the risk of incorporating a new technology from a small business. For the prime contractors, he said, risk drives everything, and he could easily put himself in the place of a project manager having to answer to upper management that a risky critical element in the design of a multi-billion-dollar program had been awarded to a small firm that might not be up to the task. He said that the challenge for both sides is to understand what the risks are and to reach a common understanding of how best to deal with them.
  • Protection of Intellectual Property. Legal costs are not covered by an SBIR contract, which means that a company has to pay for them out of profit or whatever monies exist to patent the technology. In addition, the cost of enforcing a patent if a competitor is infringing on it can be a million dollars or more. And SBIR firms, whose results are public, are vulnerable to infringement claims on existing patents, and it is expensive to demonstrate innocence.
  • Managing Cash Flow. The company must capitalize facilities and fund inventory and receivables. If a small firm spends half a million or a million dollars on a deliverable, and the technology is delayed by the recipient’s shipping department for a month or two, and by receiving for another four months, there is no mechanism to recoup the cost of that delay.
  • Lead Time Required for Qualification. Like many participants, Mr. Cassin criticized the long wait for SBIR decisions.
  • Second-Source Development. A customer is likely to say that the firm has an excellent product, but wants to know where else they can buy it if the firm disappears. The firm has to facilitate the effort to reduce the customer’s risk.
  • Creating a Sustainable Infrastructure. In the specialty materials business, a firm may rely on one or two subcontractors or suppliers for hard-to-find materials. A prime may see this as another element of risk, so it must be mitigated in some way.
  • Product Diversity. Mr. Cassin returned to the image of the Ferrari and the hay wagon. A company that parks its Ferrari to jump on a hay wagon— a partnership with a prime—may still not be safe. “The wheels may fall off; the hay may catch fire; Congress may decide a program is no longer needed. If something happens, the small firm has to run back to the Ferrari again and speed off in search of another hay wagon.”

Financing Difficulties

Aside from the SBIR program, the small firm has few choices for financing. Both venture capital firms and government dilutes the company’s control over its intellectual property. Even so, he said, his firm and other small firms were motivated by the opportunity to explore the unknown and create new, marketable technologies. He said there is an entrepreneurial spirit in America congenial to the small business and the adventure of a new technology. He invited the prime contractors to join in that spirit, which had begun to happen. “The primes are engaged,” he said, “and it’s just a breath of fresh air. There’s early buy-in right now.” The danger is that a small firm develops a good product and then finds no allies to help develop it. He was encouraged by the awareness on the part of the SBIR agencies of the Valley of Death, and said that getting through that valley depended on small businesses, not just the government.

He closed with several suggestions. First, in many cases there is just one known customer for initial SBIR-developed technologies. He said that the Navy TAP program helped his firm market its technologies to more customers. Second, he praised the models of OnPoint and In-Q-Tel as alternatives to government grants. The message he took from these programs was, “Invest in me, and you can get a return on your investment.”


James Turner House Committee on Science

Mr. Turner began by voicing his enthusiasm for the work of the panels, and optimism about the improvement of the program. He noted that when he worked on the original SBIR act, the framers realized that there were two kinds of technologies that could be called “commercial.” One is a technology designed for government use; the other is a technology designed for use in the private sector. He said that this difference was not stated explicitly during the discussions so far. For example, the teaming of small business with a prime is aimed at insertion, while teaming with a venture capital firm leads to private sector sales. He stressed the importance of remembering this distinction.

Adapting the SBIR Program to Changes in Business

He also recalled that in putting together the SBIR program and the amendments, “what we were doing was trying to think SBIR as a system—how you get from idea to prototype to actual commercialization.” He confessed that the model used was somewhat “clumsy” and linear, pretending to move through prescribed “phases.” Even so, he said, in the 20 years since the program started, many program managers have been creative in using and adapting the program, to the benefit of high-tech small businesses. The businesses described by the panel members were “completely different animals” than the first companies in the SBIR program, and “the framework has to change to accommodate that.”

“Managing” Serendipity Well

He said that the SBIR program has to plan for serendipity as well—for the company that begins by selling pet supplies and finds itself with a high-tech product, or another that starts in aerospace and ends up in biological systems. “One cannot predict where a great idea will lead,” he said, giving another example, of an entrepreneur who began to work on defense projects for display systems, but whose first commercial application was a technique to thwart counterfeiting of currency. For Phase III, it is important to think about the government as a whole, because the ultimate user of a technology is not easy to anticipate and may not even be in the agency that provided the original funding.

In the area of SBIR contracts, he warned against changes that have the appeal of reducing red tape, but that would also lower the protections for small businesses that are presently written into the Act. One such change would be to replace the term “contract” with the term “other transaction authority,”36 which he saw as a worrisome possibility. “I don’t think ‘other transaction authority’ is anything other than a contract that gets around a lot of the protections, such as intellectual property rights, which are in the existing act.”

He then invited panelists to elaborate on ways to improve the commercialization process.


A Cure for Contract Termination

Mr. Crabb said that his company could probably secure funding, such as investment bank loans, based on Phase III contracts. This funding would help them get through the “valley” to the next stage. He suggested several steps. The first is to examine the termination clauses. A Phase III contract can leverage additional investment if the firm is able to put limits on the ability of the customer to terminate the contract. This would essentially stabilize or guarantee the con tract, allowing the company to reassure other potential investors. With the termination clauses now in effect, he said, there are no guarantees; it is a one-way contract, with the decision power held by the customer.

In addition, he urged the agencies to unbundle their contracts. He suggested that one way to do this would be to motivate R&D teams of large and small businesses to work together. Also, he noted that the practice of NASA to grant “little Phase IIIs” allowed his company to prepare technology for insertion, and urged this practice for the other agencies.

The Issue of Earmarking

Mr. Karangelen raised a new issue—additional funding received under the name of SBIR through congressionally mandated budget insertions. Many small firms receive funding by directly asking members for assistance. The firm may argue that the technology is sound, and that an agency customer wants it, but the agency has committed all its funds for the year. The member, after checking with the agency, may earmark several million dollars into the budget to fund the project. As a result, a number of the more successful SBIR Phase III funds do not come from the DoD program managers’ initiative but from Congressional action. After some discussion of the pros and cons of this practice, he suggested that it would be preferable for the agencies, rather than Congress, to pick the best SBIR II outcomes and put them into the budget process with Phase III funding.

More about Risk

Dr. Parmentola added that agency S&T shared the same problem with transition as small business. That is, many agency research programs lack the technological maturity to please a program manager in terms of risk. The program manager has funding to test that technology but is reluctant do so where there is risk. In order to mitigate this risk, a program manager will look for people who have the experience of taking a concept all the way to engineering design, building a prototype, and entering commercialization.

A questioner asked whether Phase III activities are likely to attract the interest of the private capital markets, whether angel capital, venture capital, or other sources of investment funding. Mr. Redding answered that private capital is not interested in this area, especially in the aftermath of the “bubble.” Government as a customer is regarded as too risky, because of its ability to withdraw from a contract if policies change.

The Argument for Open Systems

Dr. McGrath asked about open systems and open-system architectures. The Navy was actively developing these, he said, and trying to determine the best acquisition strategy, such as unbundling. Mr. Karangelen responded that small business was a natural ally of what might be considered an open system, because such a system could easily be partitioned, or unbundled. The large prime contractors have created monolithic systems that are not open, he said. An open system would be one in which a small firm could build a part of the system and integrate it without the prime’s involvement. He said he was a strong advocate of open systems, being in the combat system business, “but it’s a real struggle.”

James Rudd of the National Science Foundation said that NSF was involved in commercialization, but mainly with the private sector rather than with the DoD. He noticed that large corporations used systems to effectively involve small businesses and whether those techniques might be applied by DoD. He cited Proctor & Gamble as a large firm that hired certain companies, such as Nine Sigma and InnoCentive, to help them identify the best SBIR company to provide a particular service. He asked whether such companies might be helpful in the DoD space.

Mr. Pap said that he received several SBIR awards from NSF and had worked with search companies. The difference for DoD is that the agency wants to be able to use the technology it funds for its own purposes, and often there was no equivalent user elsewhere. Dr. Gansler added that a goal of the SBIR program is to sell a technology to DoD or NSF, and also to sell it in the commercial world. DoD then benefits from the lower costs and more rapid innovation stimulated by the marketplace. There are barriers, however, that prevent the most effective combination of civil and military technologies, and he urged the participants to address these.

Indefinite delivery/indefinite quantity.

An ID/IQ contract is a contract between a federal government agency and a contractor for the indefinite delivery of an indefinite quantity of services. Timing and delivery of the services is determined through agency completion of an individual task order or individual delivery orders.

The Command, Control, Communications and Intelligence (C3I) contract for the Virginia-class submarine was awarded to Lockheed Martin Federal Systems of Manassas in April 1996. This system is noted for its extensive use of open system architecture and “COTS” (commercial off-the-shelf) components, many of them produced by small businesses, bringing a new degree of system affordability and flexibility.

This directive was placed at section 5000.2R of the 5000-series documents of the SBIR program.

The SBIR program generally defines a “small business” as one employing fewer than 500 people. This adheres to the guideline of the Small Business Association for manufacturing and mining firms. Other “small businesses,” concerned with trade, construction, retail, agricultural, and other activities are usually defined in terms of average annual revenues.

Electromagnetic Pulse (EMP) is an instantaneous, intense energy field that can disrupt at a distance numerous electrical systems and high-technology microcircuits that are especially sensitive to power surges. A large-scale EMP effect can be produced by a single nuclear explosion detonated high in the atmosphere. This method is referred to as High-Altitude EMP (HEMP). A similar, smaller scale EMP effect can be created using non-nuclear devices with powerful batteries or reactive chemicals. This method is called High Power Microwave (HPM). Source: Clay Wilson, “High Altitude Electromagnetic Pulse (HEMP) and High Power Microwave (HPM) Devices: Threat Assessments.” Congressional Research Service, April 2006. Accessed at < >.

DD(X) IDHA refers to the composite Integrated Deckhouse Assembly (IDHA) for the Navy’s next generation destroyer. CHSV refers to the Navy’s Composite High Speed Vessel. EFV/AAAV refers to the Marine Corp’s Expeditionary Force Vehicle/Advanced Amphibious Assault Vehicle.

For example, the Defense Advanced Research Projects Agency (DARPA) has had the authority since 1989 to enter into contractual arrangements called “Other Transactions” with its private sector R&D partners. Other Transaction agreements are characterized by enhanced flexibility and reduced administrative burden when compared with the typical government procurement contract. Congress granted ARPA this “Agreements Authority” in recognition that a procurement contract is not the appropriate type of agreement for every form of Government-supported science and technology project. < >.



Indefinite delivery/indefinite quantity.


An ID/IQ contract is a contract between a federal government agency and a contractor for the indefinite delivery of an indefinite quantity of services. Timing and delivery of the services is determined through agency completion of an individual task order or individual delivery orders.


The Command, Control, Communications and Intelligence (C3I) contract for the Virginia-class submarine was awarded to Lockheed Martin Federal Systems of Manassas in April 1996. This system is noted for its extensive use of open system architecture and “COTS” (commercial off-the-shelf) components, many of them produced by small businesses, bringing a new degree of system affordability and flexibility.


This directive was placed at section 5000.2R of the 5000-series documents of the SBIR program.


The SBIR program generally defines a “small business” as one employing fewer than 500 people. This adheres to the guideline of the Small Business Association for manufacturing and mining firms. Other “small businesses,” concerned with trade, construction, retail, agricultural, and other activities are usually defined in terms of average annual revenues.


Electromagnetic Pulse (EMP) is an instantaneous, intense energy field that can disrupt at a distance numerous electrical systems and high-technology microcircuits that are especially sensitive to power surges. A large-scale EMP effect can be produced by a single nuclear explosion detonated high in the atmosphere. This method is referred to as High-Altitude EMP (HEMP). A similar, smaller scale EMP effect can be created using non-nuclear devices with powerful batteries or reactive chemicals. This method is called High Power Microwave (HPM). Source: Clay Wilson, “High Altitude Electromagnetic Pulse (HEMP) and High Power Microwave (HPM) Devices: Threat Assessments.” Congressional Research Service, April 2006. Accessed at < >.


DD(X) IDHA refers to the composite Integrated Deckhouse Assembly (IDHA) for the Navy’s next generation destroyer. CHSV refers to the Navy’s Composite High Speed Vessel. EFV/AAAV refers to the Marine Corp’s Expeditionary Force Vehicle/Advanced Amphibious Assault Vehicle.


For example, the Defense Advanced Research Projects Agency (DARPA) has had the authority since 1989 to enter into contractual arrangements called “Other Transactions” with its private sector R&D partners. Other Transaction agreements are characterized by enhanced flexibility and reduced administrative burden when compared with the typical government procurement contract. Congress granted ARPA this “Agreements Authority” in recognition that a procurement contract is not the appropriate type of agreement for every form of Government-supported science and technology project. < >.

Copyright © 2007, National Academy of Sciences.
Bookshelf ID: NBK11413