Monday, June 11, 2012

SBIR Eligibility at Time of Proposal

In the SBA's current proposed Policy Directive for SBIR, they propose a change in the time of eligibility determination. During the recent Navy Opportunity Forum, David Metzger addressed his concerns about this change. I confess this is the first time I've heard him speak on matters of SBIR when I differed with his view.

The proposed change (Section 121.704--When SBA Determines Size and Eligibility) states that the current regulations determine eligibility only at the time of award, whereas other SBA government contracting programs determine eligibility at the time of proposal. Their intention is to bring these separate determinations in line, and to provide a date certain to small businesses to ensure they are eligible at the time of proposal.

Metzger's contention is that this would reduce the number of SBIR eligible firms that are created. Here's why: Let's say you're a professor at a university, or a mid-career engineer or scientist in industry. You've got an idea that responds to a need or requirement for an SBIR. You prepare the proposal, while retaining the comfort and security of your "day job", with the intention of jumping ship or spinning off should your proposal be selected. By that view, determination at the time of award allows someone in a comfortable position to risk less because non-selection would mean merely that they keep their jobs.

While I'm sympathetic to the idea that lowering the barriers to business creation is in general a good thing, what David fails to acknowledge is that many research entrepreneurs don't have the luxury of a secure professorship or corporate paycheck. SBIR is strongest in providing seed-capital and direction to support great ideas that might otherwise languish, regardless of their source. Truth is, those of us most committed to building a long-term sustainable business based on innovative R&D are not cowed by the risks involved in striking out on our own. It is those hungry entrepreneurs who will remain most committed to seeing their ideas through, while many of those coming from industry or university settings may simply fold and return to their pre-SBIR status at the earliest sign of trouble, e.g. "the valley of death," possibly conducting the research, but failing to commercialize the results.

Even if they do succeed at commercialization, here's a scenario that I am not sure SBIR was intended to foster: Let's say you're that mid-career corporatier; you propose to an SBIR agency, and get selected. You take a leave from your post, spend six months or a year on Phase I, get selected for Phase II, and spend another couple years developing your technology. Towards the end of your Phase II, you make some phone calls to your old employers, pitch the new technology to them. They like that the government has paid your salary for a few years and has taken all the risk of the early-stage out of the picture. You've identified a transition customer, so your old company agrees to acquire your company, and hire you back.

The risk has been reduced for the inventor, who moves from the comfort of a secure job, to the temporary certainty of a government contract or grant. After a few years, the ostensible small business is simply reabsorbed into the large corporate structure. How is that different from the government simply contracting directly with a small division or team at a large prime? I've nothing against such an arrangement, and don't argue that innovations can't arise this way.

I simply don't believe that that is the greatest strength of the SBIR program. When I started my firm, I was three years out of my PhD, had spent most of that time applying for faculty posts (~150 in all), and finally gave up the hunt for an academic job in exchange for working full-time to make my R&D vision a reality. I'm far better at research than applying for jobs. Without SBIR, my company never would have survived, and I might be pumping coffee at Starbucks.

The issue is how best can the federal government spend its precious resources to support and stimulate transformative innovations that otherwise would never see the light of day. The safe and comfortable professor or corporatier if they're committed to them will likely pursue their interests regardless (as they already have access to more than 95% of federal R&D investments). Let's leave SBIR to drive innovations where they might otherwise never have a chance.

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