Research Entrepreneur

Vision, Humility, Perseverance

2012-01-15T13:26:00.000-06:00

Perhaps the most daunting aspect of being a Research Entrepreneur is the solitude. Inherent to being an innovator is a willingness to go out on a limb, to test the waters, to traverse the uncharted. To find oneself in the middle of a field, without guidance, and to choose to continue is a humbling act.

You may notice the words "solitude" and "oneself" in the paragraph above. There's a conventional wisdom that says single founder firms have an up-hill battle to success. Paul Graham, the well known and respected co-founder of Y-Combinator has gone so far as to list it as mistake #1 on his list of The 18 Mistakes that Kill Startups:

What's wrong with having one founder? To start with, it's a vote of no confidence. It probably means the founder couldn't talk any of his friends into starting the company with him. ...

[OUCH!]

But even if the founder's friends were all wrong and the company is a good bet, he's still at a disadvantage. Starting a startup is too hard for one person. Even if you could do all the work yourself, you need colleagues to brainstorm with, to talk you out of stupid decisions, and to cheer you up when things go wrong.

The last one might be the most important. The low points in a startup are so low that few could bear them alone.

Well, the point that you can't do it all yourself, that you need to brainstorm, that you need someone to cheer you up rings true. Yet the lows of being an entrepreneur are Everests to the valley I endured for four years post-PhD applying unsuccessfully for 150 faculty posts.

What exactly do we mean by "single founder". I've come to realize that even if there is just one person at the start of a company, the entrepreneur who takes the burden upon oneself, there is little reason to suspect that person is alone. There are any number of ways to form a team. There is of course the community of advisors you bring around you, and your spouse (if your lucky enough to have one who is supportive), and your family.

For a Research Entrepreneur, frankly any innovator, it's important to take to heart Tachi Yamada's quote, which serves as tagline to this blog "Innovation has no peers -- by definition!" Just as important as having friends to talk you out of stupid decisions, is the willingness and fortitude to stick to good ideas even when others dismiss them.

For my part, I would not be too quick to dismiss the importance of a life-partner, supportive and critical in equal measure, who is willing to talk you out of stupid decisions, argue with you when you obstinately stick to your ideas until you come to an understanding, cheer you when things go well, and sustain you when they go wrong.

More than five years after resigning from adjunct servitude, setting out on my own path, founding a business that supports and extends my research, creating jobs for others along the way, I'm still here, single founder and all. [And still happily married, I might add!]

We are the Entrepreneurs

2011-12-24T15:35:00.002-06:00

My thoughts these days go to the core of being a Research Entrepreneur. With the Small Business Innovation Research program (SBIR) finally secure--knock wood--for another six years, there's a little time to reflect on where I came from and where I'm going. You see, four years ago, I was just an unemployed, disillusioned, interdisciplinary PhD. My terminal degree is ostensibly in Musicology with an Emphasis in Cognitive Science, followed by a two-year post-doc in Linguistics. I had never heard of SBIR.

I was unemployed because I had shirked my underemployed status as ~~janitor~~ Adjunct Professor of Music at Chapman University teaching 80 students a term for a gross salary just shy of $15,000/year, with no job security beyond one term at a time, no office, and no health or retirement benefits. Frankly, I may have been better treated as a janitor. That part's the disillusionment.

Despite the common view that professors are a well-paid, secure, and sheltered bunch, that's the reality. Far more end up in adjunct servitude than land tenure-track posts. There's the satisfaction for you of society's promise to those who go through college, to expect their hard work will be rewarded with a decent job, like an apprentice paying their dues to train for a lifelong vocation. This promise is fantasy.

I laugh sadly therefore at Mitt Romney's recent response to a college student at a town hall meeting in New Hampshire that "what I can promise you is this. When you get out of college if I'm president, you'll have a job. If President Obama is reelected, you will not be able to get a job." [Story embedded: skip to 1:40]

The promise is hollow whatever end of the political spectrum it comes from, unless of course someone is proposing a nationalized workforce, and guaranteeing employment. But I haven't heard that, nor would I necessarily endorse it. Indeed, politicians these days seem to be stepping back from bold and specific promises. Our own governor here in Wisconsin once spoke of creating 250,000 new jobs in four years.

Governor Walker gave a talk at last spring's National SBIR Conference in Madison, in which I was pleased to hear a specific pledge not only of new jobs but of 10,000 new businesses in the state. A worthy goal. My proposal has been that one fourth of those new jobs should come from new businesses. According to the Kauffman Foundation, new firms these days create 4.9 jobs on average (my firm's current count is 4.3 FTE). Do the math: 1/4 x 250,000 = 62,500 / 4.9 = 12,755 new firms in the state.

But the promise of jobs as a reward for schooling and hard work is not only hollow; it's misguided. Jobs are not out there like commodities for us to choose among and purchase. Rather, each of us chooses a path to follow. The path ought be defined in part by our talents and skills, and by that which drives us beyond our limitations to make a lasting contribution, regardless of schooling or credentials. Sure, some of us will get jobs that align with our interests. But others of us will follow our passion, define our life's work, and become the job givers. We are the entrepreneurs.

In my view, the greatest value of SBIR is its ability to seed those passions and facilitate entrepreneurial risk-taking, which leads to transformative innovations and technologies, and the creation of myriad jobs along the way. The statistics bear this out. If political leaders are serious about creating new jobs, it is entrepreneurs and innovators who should be getting their attentions.

SBIR reauthorization (six years!)

2011-12-23T10:13:00.000-06:00

The old news by now is that the House has finally accepted most of the Senate's long-fought compromise language for SBIR reauthorization. Behind the scenes it was some great staffers on the Senate side, Kevin Wheeler (Sen. Landrieu) and Chris Averill (Sen. Snowe), as well as the herculean efforts especially of Sens. Landrieu and Snowe that made the difference. That along with over 1000 small business representatives who signed a letter urging the House to accept the Senate's compromise.

Multiple attempts have been made over the past several years (long-term authorization ran out in 2008), that failed to make it. SBIR has been kept alive by a series of (what is it? 14) short-term Continuing Resolutions, ranging from one-year to a mere few months at a time. Late 2009, the House & Senate Armed Services committees gave up waiting and inserted a one-year reauthorization for DoD SBIR in the Fiscal Yearl 2010 National Defense Authorization Act (NDAA).

This time round, Sens. Landrieu and Snowe were able to insert reauthorization language of SBIR for all agencies in the Senate version of the current NDAA (S.1867). The Senate passed this bill at the end of November. The House had already passed their version (H.R.1540) without any such SBIR language. As per rules, a Conference Committee was established to reconcile the bills.

With much grumbling, and a few not-so-beneficial tweaks on the House side, and the impetus driven by those 1000+ small businesses, SBIR language for a six year renewal was included, and accepted by both houses. Now, we still wait for the President's signature. But the previous veto threat from the White House (because of terrorism suspect detention language) has been recanted due to changes in that language.

The most counter-productive tweak from my viewpoint is Sec. 5106, which allows for bypass of Phase I at the discretion of "the head of the applicable agency", whoever that means, essentially permitting the government to leapfrog feasibility studies, and award a ~$1m Phase II on a project right from the start, possibly reducing the number of Phase I awards and thus consolidating the governments money in fewer bets, in effect steering SBIR more towards later stage development and away from early stage Research and R&D.

The issue is principally that SBIR remains one of the few significant sources for seed capital to support the high-risk/high-reward endeavors by America's small businesses that potentially lead to transformative technological advances. Without such seed capital, most small businesses will not be able to pursue novel and yet-unproven avenues of R/R&D. Large corporations are increasingly inclined to buy up innovative startups rather than funding high-risk R&D internally.

Without small businesses, and without significant investment in R&D by large corporations, universities remain the sole potential source for such research. But evidence suggests that small businesses are far more productive and cost-effective than large corporations (5x) or universities (20x) in transforming ideas from the lab into products in the marketplace. Why then would we shift the focus of the SBIR program, which has proven itself time and again for a quarter century, away from its role as a driver of innovation toward funding primarily later stage development of already proven ideas?

The only consolation I take from this, at the moment, is the word of Jere Glover, intrepid Executive Director of the Small Business Technology Council (SBTC) of the National Small Business Association (NSBA). SBTC serves in effect as the principal industry association for SBIR firms. Jere recently commented that the indications he's received are that despite Rep. Sam Graves insistence on including Sec. 5106 in the SBIR reauthorization language, agency program managers have no interest in bypassing Phase I.

Innovation holds inherent risks. Not every idea will make it. But if Thomas Edison had given up after his first hundred failures, or worse had avoided attempting something so risky as electric lighting, we'd all be in the dark. The metrics we should use are longer-term ones that show a notable success rate and return on investment from SBIR. But the pressure to reduce risks and focus on short-term commercialization metrics has already begun to take its toll. I don't speak merely of the inclusion of Sec. 5165 in H.R. 1540, which addresses the establishment of "minimum performance standards for small business concerns with respect to the receipt of Phase II SBIR or STTR awards". The fear I have is not that the high-standards and expectations of the SBIR program will be maintained. It is already (and appropriately) a highly competitive program in which proposals and projects are subject to a great deal of oversight and review of technical and scientific merit.

It is rather that there is a drive away from high-risk, early stage innovation, toward short-term later-stage development. At the DoD-sponsored Beyond Phase II conference that took place in September 2011, the closing keynote by Christopher Rinaldi, DoD SBIR Program Administrator, indicated that in response to such pressures from Congress, he was urging DoD topic authors to preference topics closer to commercialization over promising earlier stage efforts. In private conversation following his keynote, he said that he understood my concern, and that others share it. Although there would be guidance to focus on time to commercialization and commercialization success, a portion of topics would still be reserved for early-stage efforts.

What remains to be seen is how these incipient changes will affect the overall program, and whether they might impact its proven ability to identify intractable problems, and unleash innovative small businesses and entrepreneurs on the path to resolution. Let's hope only for the best!

Stay Hungry, Stay Foolish

2011-10-16T09:12:00.002-05:00

The video of Steve Jobs' commencement address at Stanford that is making the rounds on the internet includes a reference to the back cover of the final Whole Earth Catalog, encouraging its readers to "stay hungry, stay foolish." Jobs repeated the line to his audience of graduating seniors: "Stay hungry, stay foolish."

I've had two sayings for years that come close: "A hungry entrepreneur is a good entrepreneur," and often contend the best way to address uncertainty is with "cultivated naivety." In a March 2010 staff training tutorial, I described the idea this way:

Cultivated Naivety: The principle that it is better to be ignorant than to make hasty assumptions. It is the presumption that novel evidence provides the luxury of learning through experience.

As for hungry entrepreneurs, something happens when people get too comfortable. All too often, we get lazy, complacent, and risk-averse, leading us to protect more than innovate. Very few large companies can overcome this trend. And those that do, normally expend far more in resources than a lithe entrepreneurial startup competitor would, if the barriers to entry are not unnecessarily high.

Education: Budgetary Strawman

2011-10-09T14:28:00.000-05:00

Rep. Paul Ryan (WI-1), Chair of the House Budget Committee, has been recently quoted attacking President Obama as "a pyromaniac in a field of strawmen". Cute turn of phrase. Unfortunately, it characterizes most of our nation's political figures, including Ryan himself. There was an article in yesterday's New York Times entitled "Anti-Federalism in G.O.P. Race Aims at Education". While I might be inclined to dismiss attacks on education as a drive toward insular ignorance, as I read the article I began to think there is surely merit in rethinking our nation's approach to education, and to consider that there might be cause for reducing spending on education without compromising our nation's strengths.

As an "unschooling" dad and entrepreneur, I find that "No Child Left Behind" and "Race to the Top" both overvalue conformity and standardized testing over creativity and innovation. The Economist recently did a profile (without questioning the underlying assumption of validity) showing a global obsession with standardized tests. Perhaps Obama's recent moves to relax the federal education-related requirements on states and locales is a move in the right direction.

But I wondered if calls to reduce or abolish the Department of Education might not have some moment, in this age of austerity. This is a difficult question for me as a research entrepreneur since I have and plan to again propose R&D projects to the DoEd. Reducing their budget necessarily reduces my opportunities. But I firmly believe in supporting the greatest good for the greatest number even when that sometimes counters my own short-sighted self-interest. So I took a look at Third Way's "Your Federal Tax Receipt" to get a handle on just how big the federal education budget is, to determine how much fat might be cut. Um... talk about strawmen!

Over all expenditures for education related items amount to less than 3% of the federal budget, more than half of which is for elementary and secondary education. That still leaves a little room for trimming some of the arguably misguided federal mandates toward conformity and standardization. The push for our children to acquire skills for the workforce sounds a bit too much like the call for maleable assembly-line workers of a century ago. To this entrepreneur, it lacks the drive toward innovation that I'd prefer. Still 2.9% is not a smoking gun. Far from a bloated bureaucracy, DoEd administration accounts for a mere $0.12 per $1000 in taxes collected.

After elementary and secondary education, another 1.1% is accounted for by Pell Grants, special education, and rehabilitation services, which seem worthy enough. Expenditures for "Innovation and Improvement" at $0.29 per $1000, and the Institute of Education Sciences at $0.17 are neglibile as well. Even if Michelle Bachman or Rick Perry were able to shutter the Department of Education, the result on the deficit would be akin to you or me finding a dime on the street once in a while and sending it to the IRS. Put in perspective, the same $1000 in taxes pays for $204.39 in Social Security benefits, $130.67 in Medicare, and $47.06 on operations in Iraq and Afghanistan.

Come on America, isn't time we put aside pettiness, and work together to resolve our nation's ills? Let's make the hard choices, and set our priorities to what will create the most benefit despite our political or ideological leanings. What would be so wrong about rallying behind both Barack Obama's and Scott Walker's efforts to create high-quality jobs? Who cares who gets the credit! Ideologies don't garner results. That comes from rolling up our sleeves and getting dirty together, rather than simply slinging the dirt around.

House Small Business Committee's CLOSED Mic

2011-10-07T14:49:00.001-05:00

The majority site for the House Small Business Committee is called "Open Mic". A better name perhaps would be "Censored Mic: tell us only what we want to hear."

On September 23 I posted a couple comments. My comment on the main page, regarding SBIR reauthorization has never been posted. When I called, a staffer explained that they get many postings, and not all are open for the public to view. Huh? I thought it was called "open mic". I guess you have a different understanding of that term. Surely, they have a right and responsibility to keep discussions on topic. But to censor views that don't support their portrayal of things is a bit beyond the pale.

The other comment I posted on the "feedback" page regarding the high cost and uneven burden of health insurance for small companies, garnered the following response:

Delivery hasfailed to these recipients or distribution lists:
SmallBusinessPress@mail.house.gov
The recipient's mailbox is full and can't accept messages now. MicrosoftExchange will not try to redeliver this message for you. Please try resendingthis message later, or contact the recipient directly.

Not quite what I was hoping for. So, I resubmitted the comment on their main page. Still no posting. A week later, I resubmitted a somewhat extended and specific version of my SBIR reauthorization comments on their resources page summary of H.R. 1425, which presents an incomplete and misleading depiction of the actual bill. For your edification, despite the actions of the House Small Business Committee, I append that September 29 comment and my suggestion for dealing with small business health insurance below. You can judge for yourselves whether they warrant censorship.

SBIR Reathorization

We need long-term or permanent reauthorizationof SBIR. The Senate had called for 14 years, then compromised for 8. Noshorter! The three year reauthorization in HR 1425 (section 101) is woefullyshort. It takes more than three years for a single review and award cycle forPhase I and Phase II. Small businesses and agencies need the certainty of along term reauthorization in order to develop crucial innovations.

We need SBIR to be retained as it was intended: to spur innovationand business creation. That means, there should be no softening of the smallbusiness definition criteria and no accommodation for businesses majority ownedand controlled by any entity other than individuals or another smallbusiness(sections 106/107). No large venture capital-owned businesses (no hedgefunds/no private equity); no large corporation subsidiaries. This is needed toensure cost-effective use of taxpayer dollars to support innovations, businessand job creation, while cutting out the middlemen. "Financial structure"matters!

SBIR should be expanded to reflect the value of small innovativebusinesses, which employ 40% of American tech workers. We currently receive amere 4% of federal contracts and grants. The percent allocations for SBIRshould be increased from 2.5%. A reasonably conservative figure would be 5% ofagencies' budgets for SBIR. As a minimum the Senate (S. 493) compromise ofincreasing SBIR from 2.5% to 3.5% over ten years should be adapted.

There should be absolutely no loopholes created for bypassing PhaseI (section 105). Period. Small dollar (~$100-150k) Phase I awards are necessaryto ensure that the program continues to seed the earliest stage, highvalue/high risk/high reward ideas, without overextending the federalgovernment's commitments. Phase I allows risk to be mitigated, while providingcapital for early stage ideas that have nowhere else to get funding!

Thousands of businesses, tens of thousands of patents, hundreds ofthousands of jobs depend on the House Small Business Committee doing what'sright for SBIR and the nation. We depend on you not to cave into to specialinterests. SBIR needs to be maintained as a merit-based driver of innovation,problem solving, and job and business creation and growth. It has succeeded inthis for over a quarter century. No more compromises.

Small Business Health Insurance

Here is a simple idea to benefit small businesses andtheir employees, and to simplify the burden on insurance company actuaries.Here is a new regulation that would simplify things, while providing for a morefair distribution of health care costs among the population.

Require that health insurance providers establish ratesby geographic region and other broad demographic measures, rather than by thesize of the employee pool at a particular company. It is absurd that thepremiums charged per employee are two or three times the rates that would becharged for the exact same employee if they walked across the street to workfor a company with 800. If rates were determined fairly, without regard to thesize of the company pool, my rates would drop substantially, allowing me tocontinue providing coverage, while rates per employees at large corporationswould barely nudge upward. It would be a fair distribution of rates, reflectingthe actual risk factors per individual, and would even the playing field, sosmall businesses could compete on an equal footing with large companies for thesame quality employees, without having to gouge their own bottom lines.

Patents: good for innovation or stifling?

2011-09-23T14:03:00.003-05:00

The August 20 issue of The Economist includes an article entitled "Intellectual Property: Patent Medicine" which discusses many of the problems with the American patent system, most of which were not addressed or redressed by the latest "patent reform" legislation. Here's the alarming statistic:

In recent years, however, the patent system has been stifling innovation rather than encouraging it. A study in 2008 found that American public companies’ total profits from patents (excluding pharmaceuticals) in 1999 were about $4 billion—but that the associated litigation costs were $14 billion.

At times it seems for a small innovative business that the effort and costs involved with preparing and filing patents may not be supported by the benefits that accrue. Retaining ideas as trade secrets, or protected in other ways like via SBIR data rights, may be a better means to protecting a company's intellectual property.

Layoffs are not job creation!

2011-09-21T08:29:00.006-05:00

So, with the news that Bank of America is laying off thousands of workers, it's difficult to understand the press by some of today's politicians to resist any effort to close tax loopholes, and require that citizens across the spectrum of incomes bear a fair share of the burden to patch up the nation's deficit and regain a strong footing moving forward. It's hard to see these large corporations as job creators as they are so often referred to. No, entrepreneurs and small businesses (many that grow into large businesses) are job creators. Multiple studies have shown that. New business creation is the most effective means to creating sustainable, and high-quality jobs. Counting minimum wage entry level positions as job creation is ludicrous! And coddling the behemoths that hire and fire in waves is not protecting or supporting job growth in this country.

Let's put forth a plan that will work: let's forge an Entrepreneurial America!

Tax Receipt

2011-09-21T08:26:00.003-05:00

A year ago, I posted a note on Third Way's proposal that tax payers receive a receipt for how their money was spent. Recently I noticed that they've posted a tax receipt calculator on their website. Plug in your taxes paid, and a rather thorough itemization shows up.

Amazon: right or wrong?

2011-09-09T11:46:00.004-05:00

Amazon is undeniably an innovative company, with great potential for growth. That, however, should not be excuse to redefine the rule book. Amazon has been on the wrong side of a straight-forward commonsense issue of fairness. There is no reasonable justification for online retailers to avoid collecting the same sales tax their brick and mortar competitors must collect. Most state laws require the consumers to pay these sales taxes regardless of whether they have been collected, so any price comparisons that exclude taxes in one case but include them in another provide the consumer with a false view of pricing advantages. Why should there be an added burden for the consumer and state revenue enforcement agents to save online retailers from collecting sales tax?

As politics is the art of the possible, perhaps the deal recently brokered in California is right and proper. Compromise is good. Fairness is essential.

No entrepreneurs, no jobs!

2011-09-08T20:58:00.003-05:00

USA Today reports Fewer people choose to be self-employed. The article by Laura Petrecca reports that the category of "incorporated" self-employed workers in the USA has dropped by 726,000 since August 2008. In the face of a drive to create new jobs, this is an alarming statistic, since entrepreneurs who incorporate account for the overwhelming majority of soon-to-be-hiring firms.

To be plain, if we want to create jobs in this country, it is time to focus on entrepreneurship. Let's see if the powers that be in Washington, DC and in state governments across the nation step up to the plate, abandon political posturing and do what's right for the nation, our people, and our economy!

Corporate Welfare America

2011-08-31T09:05:00.005-05:00

David Kocieniewski published an article in today's New York Times entitled "Where Pay for Chiefs Outstrips U.S. Taxes," reporting on a study that found many of the highest paid chief executives lead corporations with the lowest tax burden, despite bumper profits. Now, the issue here is not principally the widening income gap between rich and middle class. Putting aside whether a corporate CEO or any employee of a firm is worth $18m/year (which by the way translates to $8,653.85 per hour for a standard year of 2080... hell, let's give them the benefit of the doubt, they work hard, let's say 80 hours per week... well then, it's only $4,326.92/hour!), the notable finding is that current United States policy is "rewarding tax avoidance rather than innovation."

“We have no evidence that C.E.O.’s are fashioning, with their executive leadership, more effective and efficient enterprises,” the study concluded. “On the other hand, ample evidence suggests that C.E.O.’s and their corporations are expending considerably more energy on avoiding taxes than perhaps ever before — at a time when the federal government desperately needs more revenue to maintain basic services for the American people.”

That's something for the policy wonks in Washington to consider as they move ahead with tax reform and deficit reduction plans.

How Not to Create Jobs

2011-08-26T12:22:00.009-05:00

If the brinksmanship of the past few months is any indication, the last thing on politicians’ minds is actually clearing the decks for innovative entrepreneurs to create new businesses, jobs and commerce. With more than 112,000 small employers in Wisconsin accounting for more than 52% of private sector jobs and a whopping 97.9% of all state employers, you’d think our voice would be louder and clearer.

Yet efforts to support small business creation and job growth are too often silenced in the din of politics. The remarkable fact is that most state and federal plans intended to create jobs are woefully misdirected—biased toward producing profits for middlemen and investors rather than efficiently creating new businesses and jobs. Let me explain: if a contract goes to a start-up or small company, the entire amount can be spent to create jobs and innovations; If the funds rather go to supplement investment in companies, investors reasonably enough expect to skim off a profit, leaving a reduced portion of funds to support jobs and innovations.

In March of this year, U.S. Senator Mary Landrieu introduced a bill (S.493), years in the making and culminating from a herculean effort to address the concerns of multiple constituencies. The bill enjoyed bipartisan support with eight co-sponsors: three Republicans and five Democrats. It was blessed by small business organizations, federal agencies, and investor outfits as an acceptable compromise. S.493 had one simple objective: to extend the SBIR and STTR programs which direct a small percentage of federal R&D spending toward small businesses and partnerships with universities.

The costs are negligible: the nonpartisan Congressional Budget Office estimates administering the program at a mere $30m/year, to award more than $2B in contracts and grants to America’s small businesses. In effect it is budget neutral: They are not separate line items, only a percentage of whatever funds are budgeted to federal agencies.

The program has been around since 1982, has founded or expanded some 28,000 businesses, many of which became major employers like Qualcomm with 17,500 employees. America’s small businesses account for nearly 40% of patents issued, but receive a mere 4% of the federal R&D funding. For every $400k of taxpayer money, small businesses produce one patent. Universities in contrast require nearly $15m of federal subsidies for every patent issued. In terms of efficient use of funds, small businesses produce results!

Unfortunately, before a full vote in the Senate, at least 150 mostly unrelated amendments were proposed to S.493. In May Senate Majority Leader Harry Reid tabled it. The leadership of the House Small Business Committee is supporting instead H.R. 1425, a bill that would radically change SBIR/STTR for the worse. The House version as it stands would in effect destroy these programs, shifting the focus from seeding innovative job-creating research into a scheme to subsidize Wall Street hedge funds, private equity, and venture capital, concentrating our bets in a few mostly mature companies that have already been identified by investors as potential cash cows. Here are a few of the changes that are proposed:

Current law requires a short-term, low-budget Phase I for all awardees to prove the feasibility of an innovation before a large outlay of taxpayer funds; H.R. 1425 does away with this requirement, allowing untested ideas to receive $1m or more right from the start, reducing the number of new ideas that get tested.
Currently, SBIR/STTR contracts and grants are reserved for American small businesses, owned and controlled by individuals, permitting 100% of the funds to go directly to the company for jobs, benefits, and research; H.R. 1425 does away with the small business requirements, transforming the programs into subsidies for hedge funds, private equity, and venture capital.
Companies with fewer than 500 employees employ about 40% of the nation’s scientists and engineers, but receive only 4% of federal funding; H.R. 1425 would further distort this situation, removing the opportunity for great ideas to be taken to market.

Why on earth would we dilute a program that has created hundreds of thousands of Main Street jobs to subsidize the profits of Wall Street money managers? Why would we radically alter a cost-effective, proven job creator? A vote on H.R. 1425 is expected September 12. The House leadership must support a better bill. At the very least, they should accept the compromises already achieved in S.493. A better bill means a stronger economy for us all.

Perhaps there's a better way?

2011-03-21T12:06:00.004-05:00

I read the following in the NASVF NetNews dated 3/18/2011:

Angel Investor Tax Credit Produced 47 Jobs in 2010

The angel investor tax credit spurred $28 million in funding for 67 Minnesota companies in 2010—and those 67 companies collectively created 47 jobs last year, according to a report that the Minnesota Department of Employment and Economic Development (DEED) recently submitted to the Minnesota Legislature.

Angel investors collected just over $7 million in credits from the state in 2010. Because $11 million in angel investor credits was available in 2010, almost $4 million in remaining funding will roll over into 2011—bringing the total available to nearly $16 million this year.

Jeff Nelson, the angel tax credit’s program coordinator, anticipates that all of the funding available this year will be used up by the end of 2011 as the program picks up steam, adding that he was pleased with the 2010 results. The tax credit program was signed into law on April 1, 2010 but didn’t kick off until July.

Quick math: $7m / 47 new jobs translates to an astounding $148,936 in lost state revenues per job created!

Now, I am not about to argue that the state should not support small business growth and job creation. But somehow I find it hard to believe that this is the most efficient means to support small businesses and job creation? In today's climate of tight budgets, we should be seeking cost effective means to stimulating innovation, new businesses, and sustainable job growth. I find it difficult to fathom that nearly $150k in tax credits to investors per job created can be justified! There must be a better and cheaper way to offer incentives directly to entrepreneurs, or tie tax credits directly to jobs created and the value of those positions on the local, regional, and national economy.

Put it in another perspective, my firm is about to engage in a new joint development project with a local UW campus supported via the modest Wisconsin Small Company Advancement Program (WisCAP). It will create one full-time position on campus immediately, and likely 2-3 more at my firm within the next year. The cost to the state is a mere $65k per full-time job. That is more than twice as cost effective than the Minnesota program so highly praised in this article.

Hirono sponsors new SBIR/STTR bills

2011-02-25T10:09:00.004-06:00

Quietly, Rep. Mazie Hirono (D-HI) introduced three bills in the House of Representatives, designated H.R. 447, 448, & 449, known as the SBIR Enhancement Act, the Small Business Innovation Enhancement Act, and the STTR Enhancement Act. Significantly, these bills would increase the SBIR percent allocation from 2.5% to 5% of agency's extramural R&D funding, and increase the STTR allocation from .3% to .6%; they would raise Phase I award levels to $200k, and Phase II to $1.5m (Recent SBA guidance suggested $150k & 1.5m); included as well is a stipulation that award levels be adjusted every five years.

Rep. Hirono sponsored all three bills independently, without co-sponsors on January 26, 2011. All three were referred the House Small Business Committee and the House Committee on Science, Space and Technology. Hirono serves on neither. There is no news on discussion or consideration by these committees, but on February 10, the bills were referred to Science & Technology's Subcommittee on Technology and Innovation.

There is nothing in these bills however that addresses reauthorization of the Small Business Act itself, so presumedly any debate or discussion on the duration of reauthorization would be handled separately, or would be amended to these bills.

Washington: Let's get on with SBIR reauthorization, to support small business innovation, job creation, and economic growth!

New Businesses Not Small Businesses

2011-01-04T11:26:00.005-06:00

Entrepreneurship.org has published a post (New Businesses Not Small Businesses) about a new study by Ying Lowrey, an economist with the Small Business Administration, who "estimates that on average, each new startup is responsible for 5.6 jobs created".

To put it in perspective, my company was founded in May 2008, as a one-man shop operated in a home office. Today, we employ 7, have an office building downtown Racine, and are projected to bring on an additional four staff members in 2011.

I recently heard a story on Wisconsin Public Radio that our new Governor Scott Walker is ready to issue a multimillion dollar tax incentive to some company to create around 300 jobs in Madison over the next few years. As I calculated at the time, the incentive translates to about $45,000 in cost to the state per job created.

What if, we offered $45,000 in grants or tax incentives to entrepreneurs for creating new businesses in the state (perhaps with a signed contract that the new business must remain in the state for say three years). Now, if Lowrey's study is accurate, each new business on average would translate to 5.6 jobs created (all of which would have to remain in the state for the period of time agreed to), meaning the cost to the state per new job created would be a mere $8,035.71.

What a bargain! Somehow it sounds more efficient to me for the state to be incentivizing new business creation than simply atracting old businesses into the state. And there's no saying the same approach couldn't be applied by other states, or even the Federal Government. Let's see, if $40 billion were used in that way, rather than used to bail out "too big to fail" firms, we'd have about 5 million new jobs in the country today. I wonder how many employees AIG or GM has?

The House fails us again!

2010-12-23T09:39:00.009-06:00

Well, folks, SBIR is still on life support. Despite the valiant efforts of the leadership of the Senate Committee on Small Businesses and Entrepreneurship (in Sens. Snowe & Landrieu), and the unanimous consent of the U.S. Senate in passing S.4053 yesterday, the House failed once again miserably to do something good for the country.

Despite apparent willingness by outgoing Speaker Nancy Pelosi and Steny Hoyer, the intervention of the House Shafting Businesses Committee, namely in the personages of outgoing Chair Nydia Velazquez (D-NY), and incoming Chair Sam Graves (R-MO), who both opposed "unanimous consent" as a mechanism for voting on the bill, the bill was never considered. It does look distinctly like, despite the musical chairs of the committee leadership, the House SBC will continue to shaft small businesses at will. Will incoming Speaker John Boehner have the courage to do what's right?

Remarkably, an unprecedented alignment of forces supported S.4053. It was endorsed not only by small business organizations, but also by both the National Venture Capital Association and the Biotechnology Industry Organization who have been heretofore the major opponents of any compromise short of redefining small business to the point of meaninglessness.

Yet, there are indications that misguided or insidious elements in the academic community (including the White House Office of Science and Technology Policy) are working to defeat any continuation or expansion of R&D involvement by the small business community. I can't say it better than Rick Shindell, so I'll let his words make the case:

Some university organizations are claiming that these greedy SBIR small businesses are trying to steal R&D funds away from them by raising the SBIR allocation from 2.5% to 3.5%. In an emergency letter (Dec 22, 2010) to the House leadership, The Federation of American Societies for Experimental Biology cried out "This bill would increase the SBIR set-aside by 40 percent…"

What these groups won't tell you is that well over 1/3 (closer to 38%) of all the scientists and engineers in the US work for, or own small high tech businesses but these businesses get only about 4.3% of the government's research dollars, and that's inclusive of the 2.5% SBIR allocation!

In actuality, universities and SBIR small businesses are helping each other more than ever before. Each entity has its strengths and they can leverage each other's assets to improve chances for success.

This is not about greed; this is not a scramble for diminishing crumbs. This is about propelling the US and the world forward, out of this mess of a recession, toward a better and brighter future. This is not a zero-sum game. The more innovation, the better our lives, all of our lives, will be.

What is the best way that we as a society can support innovation? SBIR is right there at the top. And as a boon, it creates jobs and excitement along the way. Seed funding for innovative startups; and for the startup of innovative ideas, transforming those ideas into commercial products, from start to finish. That's what SBIR is all about.

Let's get this taken care of in the new Congress, without prevarication and without delays. Is there leadership enough to get this renewed for 8 years before the current Continuing Resolution expires on January 31? Let us hope!

S. 4053: Will SBIR finally be reauthorized?

2010-12-22T10:45:00.004-06:00

Word is that Senator Tom Coburn (R-OK) this morning released his hold on legislation, allowing the Senate to vote on and pass S. 4053, which includes a compromise reauthorization of SBIR.

Passage of this compromise legislation is supported and urged by many innovative, job creating small businesses across the country.
Please urge the current Speaker of the House Nancy Pelosi to take up and vote on S. 4053 in the House of Representatives.
Please urge your Representative in Congress to vote FOR this legislation.

House Democratic Leadership Snubs Small Businesses

2010-12-18T22:00:00.005-06:00

No telling whether Sam Graves (R-OH) will emerge as Committee Chair a stronger leader for small businesses than he has proven to be as Ranking Member, but one thing is for sure, the House Democratic leadership continues to snub small businesses in not giving Nydia Velazquez (D-NY) the boot. Having proven herself completely without regard for the interests of small businesses, she yet remains the highest ranking Democrat on the House Small Business Committee, swapping places with her heretofore side-kick Sam Graves. She steps down to Ranking Member just as he steps up to Chair.

It's hard to imagine that Graves could do a worse job than Velazquez. Where in all the concern over a dismal economy, and confronted with the evidence that small businesses, especially the newest among them, are the true drivers of job growth, is there leadership enough to stand up for entrepreneurs?

It is high time that we make a shift from an economy dependent upon large corporations (and their periodic bailing out) toward an economy of self-reliant, independent, innovative, doers. It is high time that we cease embracing the ideas of an old economy, and start looking towards a new one, where college graduates consider themselves as likely to start their own firms, or join a startup, as they are to send around a dozen (or a hundred) resumes to name-brand firms with roots generations old.

There is balance to be regained: not in seeking to destroy those corporations, but simply in levelling the playing field so all companies compete on their merits, regardless of age or size. There are too many inequities in today's system, that stifle creativity, innovation, and job growth, that won't be fixed simply by bending the president's ear to the claims, and requests, and demands of corporate behemoths.

Tomorrow belongs to the entrepreneurs! Today is time enough to realize that.

Angels or Demons

2010-11-19T09:06:00.011-06:00

Following up on my recent post regarding Angels' reduced appetite for seed and startup investing, the October 2, 2010 print edition of The Economist presents a brief article entitled "Venture Capital: Angels or demons?", which argues the opposite point, describing a category of creature it dubs super angels "who run funds that invest in deals considered too small to be of interest to traditional venture-capital firms.":

Established firms have rediscovered their appetite for seed funding: Greylock Partners, a well-known venture firm, this week said it had launched a $20m seed fund.

So, the question is, which is it? Well, obviously it can be both. One problem we face is what I term the Depth-of-Field Problem. The concept of depth of field derives the world of photography and describes the range of clarity that surrounds a point of focus. The greater our distance from a point of focus, the more things look alike. The closer we are, the greater variety we can distinguish.

This often leads us to stereotype and cluster that which we have the least experience with, as the title of the above cited article implies: angels or demons? Despite entrepreneurs' and investors' possibly differing motivations, it is possible to find common ground. From my vantage, the greatest need in our economy is for seed and startup funds, which often provide the spark to an entrepreneur's kindling. Anyone interested in providing it is an angel in my book.

***Edited to add:
Here's a link to the Greylock Discover Fund, cited above, which anticipates investments from $25k -$500k.

Angels Decreased Appetite for Seed and Startup Investing

2010-11-09T10:52:00.004-06:00

Posted on Entrepreneurship.org: Angels Decreased Appetite for Seed and Startup.

Here's the alarming statistic:

Angels’ seed and start-up stage investing declined to its lowest level in several years...

The question remains: who will pick up the slack? Will SBIR be renewed at a moment in the economy when seed capital is most crucial?

More importantly, will the politicians elected to office in Washington (on both sides of the aisle) finally find the will and inspiration to alter the face of our economy, by shifting the focus from protecting jobs at large corporations to encouraging business creation?

We need more small businesses, that create jobs, and grow into large businesses. We need a new economy. We need innovation, and rejuvenation. Entrepreneurs do that. Let's mow down the weeds, and let entrepreneurs compete and thrive!

What's so free about the market?

2010-11-03T08:21:00.005-05:00

In case any of you had any lingering suspicions that there actually exists anything close to a free market in the United States, that produces anything even resembling a level playing field for all participants (Giants and Lilliputians alike) think again. Here's a little excerpt from the Wall Street Journal article about General Motors that link goes to:

Now it turns out, according to documents filed with federal regulators, the revamping left the car maker with another boost as it prepares to return to the stock market. It won't have to pay $45.4 billion in taxes on future profits.

The tax benefit stems from so-called tax-loss carry-forwards and other provisions, which allow companies to use losses in prior years and costs related to pensions and other expenses to shield profits from U.S. taxes for up to 20 years. In GM's case, the losses stem from years prior to when GM entered bankruptcy.

Whether or not a "free market" could produce ideal circumstances for supply and demand to determine fair pricing on all things from wages to food (a suspect and highly debatable point even in the abstract), we may never know. Ideology, rage, and protest aside (all of which are in the ascension these days), there is no free market extant. Unless we work to mitigate the inequities in the system, meaning in clear language, remove the barriers to competition on the merits of a company's technology or services, rather than any number of pre-existing advantages, there is no high ground on either side of the debate.

I wonder if any of the changes in Washington will allow leaders to step up to the plate, swing, and crack the ball high and over the fence. Only time shall tell.

After 31 years, the "-Man" takes a hike

2010-10-26T12:39:00.002-05:00

Sony will discontinue production of its Cassette Walkman in Japan, 31 years and 400 million sales after its 1979 debut. So much has happened technologically in the past three decades! And here's the latest speculation: Will Apple Buy Sony? - Douglas A. McIntyre - Business - The Atlantic

An Entrepreneur as Chief Economic Adviser

2010-10-15T08:00:00.004-05:00

Today's Wall Street Journal (15 Oct 2010) prints an article by Elizabeth Williamson ("Obama Backs Away from CEO Search") on the pending replacement of Larry Summers as Director of the National Economic Council to the White House . There's been buzz lately that his replacement should be a corporate CEO, to smooth relations between the White House and the Business Community.

Here's my take: what we need is a successful (preferably bootstrap) entrepreneur, to advise the nation on how to lead our way to an entrepreneurial economy. Everyone is talking about jobs these days. We don't need jobs so much as we need businesses. Businesses start, and grow, and produce profuse amounts of jobs because entrepreneurs take advantage of opportunities.

They create far more jobs than all of those corporate behemoths combined. If the government has a role in this, it's simply to ease the path to those opportunities, it's to remove the corporate welfare that has created an unlevel playing field.

Let's stop holding on to the past; instead let's allow the failings of that old thinking to provide the opportunities for innovation!

Is VC a Degenerative Disease?

2010-10-07T15:28:00.004-05:00

Here's a pithy quote from a recent WSJ Venture Capital Dispatch blog post:

Venture firms have now gone a full decade without collectively returning a dime, causing their investors like pension funds and university endowments to question whether the venture capital model even works.

Is there any reason that an entrepreneur with a cart full of ideas, excitement, passion, and motivation should pause, gesticulate, and faun over VCs to gain their attention and hope for their largess?

For my part, I'll stick to developing the winning ideas, figuring out a way to make it from napkin to market to profits, with or without the suits to back me up.

What do your taxes pay for?

2010-10-01T10:05:00.006-05:00

Here's a great idea from Third Way: provide an accounting to taxpayers just what their taxes are paying for. It would put plain and in the open the debates going on about taxes and spending. The issue is not how high or how low taxes are, but what we as consumers get in exchange for our investment.

If I go to the corner bakery and plunk down $3.18 for a bagel and pint of O.J., I know exactly what I'm paying for. I recall years ago, wondering about the mysterious "Kuver" on my restaurant bill in Slovakia. I had ordered a bowl of soup with bread for lunch. I was informed that Kuver covered the cost of all the condiments on the table (of which I had used none). In my eyes, it was an extra tax that I had not been aware of when I ordered. At a fast food joint in Germany, you'll likely be charged for a packet of ketchup, whereas in the States you'll find six stuffed into your carry out bag, when two would suffice. Do they charge more for the hamburger in Ohio than in Hamburg, to cover the cost of condiments? Surely, the consumer is paying for them one way or the other. Which is the fairer model: pay as you go, for what you use, or pay anyway for what you're given?

If I am to subsidize others, shouldn't I be aware of that in advance? There are good reasons to spread expenses around: what I don't need today, I may have need for tomorrow. If I pay to help my neighbor now, perhaps she'll pay to help me in the future. That's the whole point of insurance. But knowing what things cost, and aligning spending with priorities is key. If we think of taxes as an everyday expense for services or goods rendered, we'll be much better off in determining whether or not we're paying for something we wish to, and better informed to decide who should be stewards of that money.

Another Continuing Resolution

2010-09-29T16:31:00.005-05:00

Nydia Velazquez' continuing war against the interests of small businesses notwithstanding, we've got yet another reprieve for SBIR and other SBA programs (number nine in a long series of continuing irresolutions, for those keeping count). Why is she still chairwoman of the House Small Business Committee?

via thomas.loc.gov

S.3839
Title: A bill to provide for an additional temporary extension of programs under the Small Business Act and the Small Business Investment Act of 1958, and for other purposes.
Sponsor: Sen Landrieu, Mary L. [LA] (introduced 9/24/2010) Cosponsors (1)
Related Bills: H.R.3614, H.R.4508, H.R.5849, S.1513, S.1929, S.3253
Latest Major Action: 9/28/2010 Cleared for White House.
--------------------------------------------------------------------------------
MAJOR ACTIONS:
9/24/2010 Introduced in Senate
9/24/2010 Passed/agreed to in Senate: Introduced in the Senate, read twice, considered, read the third time, and passed without amendment by Unanimous Consent.
9/28/2010 Passed/agreed to in House: On motion to suspend the rules and pass the bill Agreed to by voice vote.
9/28/2010 Cleared for White House.

Thanks to Rick Shindell and all the SBIR advocates out there who overflowed Speaker Pelosi's voice mail, and contacted their own Representatives. Now let's get some real resolution in the form of reauthorization.

Repeal the New 1099 Requirements Now!

2010-09-22T10:33:00.003-05:00

Embedded with the recent healthcare legislation was a misdirected effort to raise $17B in revenues over ten years by burdening small businesses with an onerous reporting requirement that according to the National Small Busines Association (NSBA) would increase the average number of required 1099s a small firm would need to file from 10 to 86! The new rules, set to go into effect for 2012 purchases, would require a 1099 report for "any purchase from a vendor of goods or services worth $600 or more during the calendar year".

The Senate recently failed to repeal this requirement. Several new efforts in both the House and Senate are directed at redressing this matter. Of particular note:

Rep. Dan Lungren (R-CA) is sponsoring the Small Business Paperwork Mandate Elimination Act (H.R. 5141), that would fully repeal the reporting requirement, but does not offset the lost revenue.

Sen. Mary Landrieu (D-LA), Chair of the Senate Committee on Small Business and Entrepreneurship, is sponsoring the Information Reporting Modernization Act of 2010 (S. 3783), which would raise the threshold for businesses to file information reports to $5,000 from its current level of $600 and would index the threshold to inflation after 2012. Unlike a similar recently failed amendment to the small business bill (S. Amdt. 4595 to H.R. 5297), offered by Sen. Bill Nelson (D-FL), Landrieu's proposal would not exempt businesses with fewer than 25 employees and does not include an offset to pay for the change.

Perhaps it's too much to ask, but it'd sure be nice if we could put aside campaign posturing for just a moment and focus on actually taking care of the business of governing! The proposals are out there. How many other politicians will step up to the plate and just swing?

Innovation vs. Old School Short-Sightedness

2010-09-20T14:40:00.007-05:00

Today's Financial Times, includes a news analysis quoting the former U.S. Auto Czar Steven Rattner comparing allowing the auto inustry to fail with "dropping the economic equivalent of an atomic bomb on the Midwest."

Dramatic, huh? The question is... what would constitute "allowing the auto industry to fail." See, to my mind, encouraging transformative technological advances with the potential not only to retain old jobs but create new ones is a viable alternative to injecting good cash into bad businesses.

Try this on for size: rather than propping up the behemoth auto makers, why not create a pool of cash, say $100 million (small change to what they threw at the giants) to finance a handful of awards for projects that would push the envelope, creating, developing, and commercializing innovative automotive technologies, and a whole bunch of jobs with them. It'd be a cross between SBIR and public venture capital.

Why does it have to rest on private initiative, like the Automotive X-Prize to support these sorts of projects? Rather than arguing that allowing some particular old firms to fade is the equivalent of letting the automotive industry fail, perhaps government officials would do better to think outside the box. If we're going to spend taxpayer dollars on supporting business, why not do it in a way that supports society and job creation as well?

Problem is: if you hire people like Steven Rattner, former private equity executive, to run a bail-out scheme, you're likely to get results in line with old school short-sighted thinking. Perhaps it's time to be bold!

Taxes & Small Businesses

2010-09-10T09:13:00.006-05:00

Arguing that the sunset of the previous administration's tax cuts for those earning more than $250k net will hurt small businesses & job creation seems a bit of a stretch. Here's a post on the subject on Growthology. Be sure to read the comments, in particular note the following remark: "Wouldn't the fact that pass through profits are taxed at a high rate encourage reinvestment? If we want businesses to hire then pulling money OUT of the business should be discouraged."

And here is a letter to the editor of the Wall Street Journal from this morning:

Your Sept. 3 op-ed "The Small Business Tax Hike and the 97% Fallacy" by Kevin A. Hassett and Alan D. Viard makes a misleading argument about small businesses in order to justify borrowing $700 billion to finance the extension of the Bush tax cuts for the wealthiest 2% of Americans.

Messrs. Hassett and Viard concede that 97% of small businesses will pay nothing more in taxes under the president's plan to allow the Bush high-income tax cuts to expire on schedule. Yet they argue that even if only 3% of small-business owners would be affected, this small fraction reports a large amount of what they term "small business" income.

The problem with their argument, however, is that it counts any type of partnership income, sole proprietor income, or S corporation income as small-business income. Thus, they count as small-business income profits that go to a partner at a major law firm or hedge fund. Our analysis indicates that small-business owners under this definition, who would be affected by allowing the top two rates to increase as scheduled, have an average gross income of over $1 million. Keeping the Bush tax cuts in place for these taxpayers would not likely result in additional job creation, and it would add significantly to federal budget deficits and debt.

The experience of tax policy over recent decades clearly demonstrates, and the Congressional Budget Office has confirmed, that tax cuts for the highest-income Americans—regardless of whether their earnings are classified as ordinary or small-business income—are not an efficient way to stimulate the economy or create jobs.

Michael F. Mundaca
Assistant Secretary of Treasury for Tax Policy
Treasury Department
Washington

Winslow Sargent, Chief Counsel of Advocacy, Small Business Administration

2010-08-26T10:02:00.006-05:00

President Obama has taken the August recess of Congress as an opportunity to issue a Recess Appointment to Winslow Sargent to be the Chief Counsel of Advocacy of the Small Business Administration. While some objections have come from those in the small business community because of Sargent's connections with a small Wisconsin Venture Capital firm, there is good reason to believe his appointment will benefit small innovative businesses and the Small Business Innovation Research (SBIR) program. His nomination, held up for months by neglect and political posturing, was supported by the Small Business Technology Council (SBTC) of the National Small Business Association (NSBA) . Here is the NSBA commentary on the appointment.

Below is the relevant section from the White House Press Release:

Winslow Sargeant, Nominee for Chief Counsel of Advocacy, Small Business Administration
Winslow Sargeant is currently a Managing Director in the technology practice at Venture Investors, where he works with entrepreneurs to create innovative companies in underserved communities. From 2001 to 2005, he was the program manager for the Small Business Innovations Research (SBIR) Program in Electronics, a new office in the National Science Foundation's (NSF) Engineering Directorate. Previously, Sargeant co-founded Aanetcom, a fabless semiconductor chip startup company with seed funding from Cisco systems which was acquired by PMC-Sierra. Prior to Aanetcom, he held senior engineering positions at Lucent, AT&T Bell Labs and IBM. Sargeant currently serves on the Boards of Silatronix and Pattern Insight. He serves as a Director of the University of Wisconsin Foundation and was the Vice Chairman ofthe UW-Madison Astronomy Board of Visitors. He is a member of the Boards of Directors of WiCell, WiSys and the Waisman Center. Sargeant is a Trustee for theWisconsin Alumni Research Foundation (WARF) and also serves on Purdue UniversityDiscovery Center's Research Board of Visitors. Sargeant received the inaugural2002 University of Wisconsin Distinguished Young Alumni Award and was a 2003Outstanding Engineering Alumni Awardee from Northeastern University. He receiveda B.S. from Northeastern University, an M.S. from Iowa State University and hisPh.D. from the University of Wisconsin-Madison, all in Electrical Engineering.He is a member of the society of Kauffman Fellows, Class 11.

Re-election Posturing Sticks it to Small Businesses

2010-08-04T11:05:00.003-05:00

I have difficulty understanding how some politicians consider political maneuvering that damages small businesses, which has a deleterious effect on job creation and economic growth is somehow in the best interest of getting themselves re-elected. [SIGH]

via NSBA news:
Small Business Jobs Bill Stalemate in the Senate
1099 Reporting Repeal Defeated by House Politics

Proposed Tax Credit for Investors in SBIR firms

2010-08-03T11:38:00.002-05:00

Proposed Tax Credit for Investors via The Pursuit.

Now all we need is some tax incentives for the entrepreneurs and small businesses themselves, to reward bootstraps as much as those who take outside investment:

Allow the self-employed to fully deduct the cost of health insurance premiums, just like the rest of the employed population.
Provide all employers (regardless of size) with tax breaks for creating net new jobs. Let's create a level playing field that actually rewards job creation.

Support the Small Business Jobs Act

2010-06-30T15:19:00.002-05:00

Scott Hauge's Small Business California blog posts the press release for Sen. Mary Landrieu and Sen. Max Baucus' recently released Small Business Jobs Act. I encourage you give voice to your comments and support by contacting Caroline Bruckner in Sen. Landrieu's office.

When are we going to contain health care costs?

2010-06-23T11:27:00.003-05:00

Like most small business owners, I'd like to take care of my employees as best as I am able. In part, that means providing reasonable health care coverage. Unfortunately, reasonable is not often used in conjunction with health care and small business. Like in so many other areas, small businesses are squeezed by unreasonable forces. Why is it that the cost of insurance for an employee at a firm with a handful of employees is 2-3 times what that same employee's cost would be at a firm with 5000 employees?

It's the same individual, with the same risk factors, and the same dispositions and predelictions. No more no less than if they were employed at a larger firm. But for some reason, health insurance companies are allowed to charge substantial more of small businesses than is reasonable. It would be like offering a discount card at the coffee shop only to employees of companies of a certain size, and charging a premium to anyone from a smaller firm.

Many of you can't even begin to imagine how expensive it is for a small company like mine (six, soon-to-be-seven, employees) to provide coverage for our workers, which I would relinquish only under severe duress, because I'd like to treat them at least as well as I would like to be treated.

To give you a sense of it: current total premiums for my employees account for 26.6% over payroll. The company covers most of employee's premiums and a lesser portion of their dependents'. In real terms, that means on average for every $100 an employee earns, the insurance company receives $26.60, of which the company pays $15.35. Put another way, health insurance costs the company about twice as much as payroll taxes. Yes, I believe everyone deserves coverage. But unless we contain costs, this is as unsustainable as the housing bubble was.

When will the bickerers in Washington get it?: we don't care what party you're from, whether you're an incumbent or an outsider, what labels you assign to others or they assign to you. We care about you getting the job done. CONTAIN HEALTH CARE COSTS so we can get on with doing what small businesses do best: innovating and creating jobs!

$1m, 3.5 years, 7 jobs

2010-06-23T10:50:00.004-05:00

The SBTC is looking to make the case in support of investment in small R&D businesses as a means for driving innovation and creating high-quality sustainable jobs. Here's the rundown on my firm:

April 2008: Unemployed PhD attends SBDC seminar on starting a Technology Business; First knowledge of SBIR.
May 2008: Company founded.
June 2008: First SBIR proposal submitted.
August 2008: DoD SBIR Phase I awarded ($80k).
June 2009: DoD Phase I Option exercised ($70k); part-time assistant hired.
October 2009: Moved to larger office; second part-time employee hired (Master's degree).
February 2010: Second DoD SBIR Phase I award ($70k).
March 2010: DoD SBIR Phase II awarded ($750k); two full-time researchers hired (one PhD).
May 2010: third part-time employee hired.
[August 2010]: anticipated start date for fourth full-time employee (PhD).

Summary: Government R&D contracts awarded to one start-up firm in the amount of $970,000 has translated to the creation of 7 jobs (three PhDs, one Master's). Do the math*: that's less than $40,000 of government investment per job per year of the contracts, or less than $57,500 per FTE!

* $970,000/3.5 years/7 jobs; $970,000/3.5 years/4.825 FTE.

Hungry Entrepreneurs Innovate

2010-06-11T11:33:00.001-05:00

Startups: Poverty is Underrated. Be Glad That You’re Not Rich (via TechCrunch)

TARP neglects small businesses. Are you surprised?

2010-05-13T11:19:00.003-05:00

via Thomson Reuters News:

U.S. Small Firms Not Benefiting from TARP: report

WASHINGTON (Reuters) - The U.S. government's program to bail out the banking industry is not doing much to help small businesses play a part in the economic recovery, an overseer of the government's bailout program said on Thursday.

Firestorm against Nydia Velazquez

2010-03-13T07:28:00.006-06:00

Small Business California notes the rising firestorm against Nydia Velázquez, current (and hopefully soon-to-be-departing) Chair of the House Small Business Committee, whose loyalties to small business seem to be ever more in question.

Rick Shindell's SBIR Insider posted notice a few days ago of Nydia's latest outrage in the form of the following statement (in her official capacity as chair of the House SBC):

Without the participation of venture-backed companies, the SBIR program has become little more than corporate welfare for marginal companies who are unable to secure external market based funding.

It's quite amazing really that she could be so (willfully) ignorant of the ways innovation and job growth have been spurred in this country for the past quarter century, and the essential role that SBIR and perhaps other similar programs have played in SEEDING innovative small businesses.

Once again, for the record, if there are any VCs out there with even the slightest interest in SEED FUNDING, stand up and be heard. No? Noone! I didn't think so.

SBIR, remade in the image of the puppet masters who control Nydia Velazquez (D-NY) and her companion-in-arms Sam Graves (R-MO), the committee's ranking member, would cease to foster, support, and sustain small business innovation and job growth. Unfortunately, it's not simply their actions, but the general inaction in Washington that most threatens the economy and the prospects for innovative high-tech small businesses to play our leading role.

The offending comment was not a private offhand remark, but passed on March 4 by unanimous consent of the entire House Small Business Committee as part of the committee's Views & Estimates document sent to the Chair of the House Budget Committee. Interestingly, the document was subsequently "corrected" to reword the offending passage, softening the language that calls for exactly the same thing: dismantling of the SBIR focus on seed funding of small businesses.

Read Scott Hauge's firestorm post on Small Business California. And read Rick Shindell's background on the story I describe here, then take action to urge our elected officials to do what's right. I join Fred Patterson in his call to have Velazquez removed as chair of the House Small Business Committee. It's time. Is anyone in the leadership in Washington listening?

IEEE Position Paper on SBIR

2010-03-08T15:21:00.004-06:00

The Institute of Electrical and Electronics Engineers (IEEE) has issued a policy paper (dated 12 February 2010) regarding SBIR reauthorization. Their statement is in keeping with the quarter century success of the program, in support of retaining the 3-phase nature of the program, and preserving its focus on encouraging and seeding innovation from small independently-held businesses. They argue for increasing allocations to the program, and for streamlining the awards process to shorten decision making.

Common sense!

Is Defensive Publishing Appropriate for Small Businesses?

2010-02-19T09:54:00.006-06:00

IBM has announced its plans to expand "defensive publishing" rather than patenting as a means to protect its intellectual property. A patent prevents others from practicing the specifics that are covered by the patent, but opens up a Pandora's box of potential work-arounds and litigation. Defensive Publishing is in essence placing IP into the public domain, rendering it thereby unpatentable by anyone, even the inventor.

Since public domain knowledge can be cited as prior art against patent applications, the onus would rest on any subsequent inventor to prove novelty beyond whatever is covered by the defensive publishing. Such an approach would allow IBM or anyone else to practice their art, to use the IP that has been published, making it more difficult for others to restrict that practice by means of a patent.

I have considered this an approach, easier and cheaper than preparing and submitting patent applications, then waiting the 2, 3, 5 years it takes to hear whether it's been approved or denied. The fear for a small business is that while a company like IBM has name recognition and a reputation to rest on, a small little-known quantity like my firm may easily be swallowed up. Were I to engage in defensive publishing, it would protect the ideas in preventing others from restricting my ability to practice them. But it might ring the death knoll of my company.

The fear is that as soon as those ideas become valuable, a large company with a top-notch marketing team, a long-standing reputation and credibility might simply scoop up the ideas, rebrand them, and put me out of business. It's a tough call, a very tough call. Because in the heart of, I'm a researcher. Far worse than going out of business would be for the ideas to never see the light of application.

But am I ready to prepay my company's cemetary plot, in hopes that we won't need to use it any time soon?

Harry Reid: Remiss of Duty

2010-02-18T10:39:00.002-06:00

Senate Majority Leader Harry Reid circumvents the efforts of the leaders of the Finance Committee to strip the current Jobs bill of Small Business provisions. Just who does the leadership in Washington think will create jobs in this country?

Contact your Senator to do something about it!

Is China's Growth Unsustainable?

2010-02-15T14:48:00.007-06:00

Of course, all things good and bad come to an end. The Economist's Robin Bew is projecting an 8%+ growth rate for China's economy in 2010. But a little talked about statistic may soon end China's hubris. As The Economist reported back in December, the year 2010 will likely mark a major milestone in China's demographics.

Largely a result of China's one-child policy, the percentage of the population dependent on others (mostly the elderly and the young) will begin to rise for the first time in decades. Over the coming years, as fewer and fewer active workers support greater numbers of pensioners, we will see China's economy plateau and then shrink. I wonder what the ramifications of this demographic shift will be on governance? Only time will tell.

Inside Boxes

2010-02-10T13:22:00.007-06:00

In an article ostensibly lamenting the collateral impact of increased security for America's borders, the following sentence appears:

Among postdoctoral students doing top-level reasearch, 60% are foreign-born.

Putting aside the implication that native-born doctoral students are somehow subpar, I wonder at the worldview that might make sense of such a statistic. Just what could "top-level research" possibly mean objectively? By what stretch of the imagination might we constrain cutting-edge research into manageable gradations, such that some students' research could be deemed top-level, mid-level, low-level, remedial?

It would seem that such a worldview might in part be to blame for what Commerce Secretary Gary Locke has described as a broken innovation ecosystem. If innovation is stifled in America today, a large part of the blame rests in the assumption that the value of research can be known in advance, that such value can be assigned on the basis of what is already known, rather than on the basis of what is yet to be discovered.

At the risk of repeating myself, it is to support and sustain the discover of new innovations that there is such a need in the economy for seed funding, small pots of money to sustain a spare few researchers testing the mettle of their ideas, and driving the successful attempts to market. The Small Business Innovation Research program (SBIR) is one of the few sources for such seed funding, and just now it's being held hostage to the whims of the House Small Business Committee, in particular the committee's Chair, Nydia Velázquez, and Ranking Member Sam Graves. Their maneuvering has kept the SBIR program from reauthorization for two years now, doling out so far six short-term continuing resolutions. Whatever their motivation, support for innovation and small businesses is not among them!

Can Karen Mills pull it off?

2010-02-05T13:25:00.005-06:00

SBA Administrator Karen Mills talks with NPR's Renee Montagne. It's good to hear all the recognition of the value and contribution of small businesses in creating jobs. Let's get on with it!

Listen here:

Direct Lending to Businesses

2010-02-05T10:32:00.005-06:00

The New York Times reports on a small business owner's question posed recently to President Obama during a town hall meeting in Tampa, Florida. Steve Gordon's proposal was that if the government is to be involved in supporting loans to small businesses, why not lend directly to those small businesses? Obama's response was to explain that the SBA doesn't have the infrastructure in place to process and oversee direct loans; that local banks are better able to handle such loans more efficiently. The frustration of course is that even these local banks are still lending too little, too late.

Interestingly, this comes on the heels of the President's renewed pledge to do away with subsidies to support private lending to students, in favor of an expanded Direct Student Loan program. One difference perhaps is that the Direct Loan program already has in place the infrastructure to handle these loans. Regardless, there are still those who resist such a move toward reducing wasteful and inefficient government subsidies.

Is there any reason that the SBA and the Direct Student Loan programs couldn't team up to handle small business lending as well? With all the talk of increasing partnerships between universities and entrepreneurs, wouldn't such a pairing be an appropriate first step?

It is a valid question and worthwhile discussion to be had: what is the most efficient means for utilizing existing government revenues for the purpose of supporting and sustaining the development and growth of job-creating businesses?

Hidden Agenda in Supreme Court Decision?

2010-02-03T07:53:00.005-06:00

No, I can't speak from any inside information, nor do I have the stomach to fathom or dissect the motivations of Supreme Court Justices. But the recent decision regarding campaign finance has a hidden impact that seems to be largely overlooked in the tumult of coverage:

Who has the most to gain from a greatly expanded and lucrative market for self-interested campaign ads?

I'll give you a hint: where will those ads appear? With all the widespread talk of trouble in the media world; with even Rupert Murdoch lambasting Google for republishing media content for free; newspapers dying; television advertising suffering...

Got the picture? Campaign ads provide a potential windfall for those advertising platforms currently suffering an immense reduction in revenues. The National Small Business Association implies as much in their reporting. Could the Supreme Court's ruling be influenced in part by the economic misery of traditional media? No telling. The results will likely speak for themselves!

Commerce Secretary Locke almost gets it

2010-02-01T09:48:00.011-06:00

U.S. Secretary of Commerce Locke seems to have a sense that innovation is what drives an economy, that supporting entrepreneurship is key. Yet, the worldview he presents of where innovation comes from is deeply entrenched in the idea that smart ideas come from universities, and entrepreneurs' role is essentially limited to bringing smart university folks' ideas to market.

[Commerce Secretary Gary Locke Announces Plans for Forum on R&D Commercialization at Universities]

The problem that Secretary Locke seems to miss is that:
The university system is BROKEN! The rewards and incentives are not extant for the majority of the country's best and brightest innovators, who fall through the cracks of a broken university system!
There are simply not enough research faculty positions to employ the great bulk of innovative thinkers who are not hired for standard faculty positions because they're focused on researching new ideas that don't easily fit within the confines of traditional and change-averse disciplines, who are therefore erroneously judged to be less-qualified or less-desirable as teachers. Those who are granted tenure track positions are quite often bogged down with too many classes, too many students, and too many committee assignments to effectively teach and research.

If we really want to leverage the capabilities of our universities and entrepreneurs, we need to strengthen both! If we want a real stimulus to the innovation economy, we must:

Provide the framework for universities to double their research faculty.
Judge universities on the percentage of their doctoral graduates who are fully and appropriately employed upon graduation, and create incentives for those who are most successful in this regard.
Provide the incentives for innovative thinkers to create, sustain, and grow their own research businesses (NEXT HINT: SBIR!)
Enough with the dilly-dallying: let's remove the roadblocks to reauthorization; let's remove the hindrances and watering down of a truly cost-effective, job-creating program and get SBIR pushed ahead.
Double the allocations (to 5%); keep award sizes within reason; retain the three-phase system; seed the ideas that drive the economy!

That's how to create a Research Entrepreneur economy! We want people who are equally passionate about research as about business. And we need to secure the environment where ideas thrive and are cultivated into proofs-of-concept; proofs are coaxed into prototypes; and prototypes are driven into the market.

Get on with it Washington!

Updating company address in CCR

2010-01-28T09:23:00.003-06:00

If you move the location of your offices, and try to update the information on the Central Contractor Registration, you might notice that the "physical address" fields are uneditable. If you call, the Federal Service Desk (866-606-8220) you may wait on hold for close to an hour, only to be told what I will tell you now:

Call Dun & Bradstreet directly at 866-705-5711.

The CCR gets their information from from D&B, which in turn gets their information from the relevant state registry. D&B will likely indicate that they can update the information manually, upon being furnished with appropriate documentation (e.g. a utility bill or bank statement for the company at the new address). But you should also update your company's information with the relevant state offices that handle registrations for companies and corporations. You will also need to login to CCR about 48 hours later, to confirm the updated information.

Come & Go

2010-01-15T16:24:00.003-06:00

Last month I wrote about a social networking site for innovators, Boliven. Sad to say, I just received notification of the pending dissolution of the site:

After approximately a year of beta product releases and extensive user feedback, the Board of the company has determined that it no longer makes good business sense to continue to operate the Boliven website and associated services. We were happy that over 100,000 unique monthly visitors and over 6,000 registered members found utility from Boliven, but as of the end of last year we had fallen short of some of our other operational and financial goals.

We have decided to make our website and its services available until next Friday, January 22. ... We hope that you will be able to find a suitable substitute for the services we have sought to provide. ...

That's too bad, really. Sorry to see them go.

Kosher Pork?

2010-01-06T15:56:00.005-06:00

I received a call today from a regional purveyor of business support services to small R&D businesses like mine. The CEO had been referred to me by a couple trusted advisors (two who had helped me along with my first SBIR Phase I proposal, and since). The call was to set up a meeting for later in the year to discuss the services they might be able to offer my company. What's been indicated to me is that they help small businesses like mine to obtain Congressional "plus-ups" to support Phase II+ and Phase III stage R&D.

Clearly, I'm interested in propelling my company ahead. I am committed to the research, and believe firmly in its potential to reach the broader commercial market. Importantly, I also believe that the results and products of this R&D will have a positive impact on people's lives. Else, I wouldn't be in this business in the first place. But something raises my hackles. It sure sounds to me like I'd be soliciting earmarks from Congress, pork in other words.

Now, I'm open to hearing what's on the table, what services they might offer my firm, what benefits might accrue. I don't want to be too hasty in judgment. Underlying the effort (at least in theory) is a desire to identify specific needs of particular agencies and to fill those needs with the R&D that we are best poised to offer. But part of my dilemma (as I've written before) is that I believe in a merit-based review process.

I fear that in pursuing the private interests of my firm (with horse blinders on), I might be violating a fundamental principle that I wish to uphold. The question (for me as for the Nation) is how to accomplish great things without sacrificing principles to get there. Do well by doing good, not the other way around.

Find Your Contract in WAWF

2010-01-04T20:33:00.005-06:00

WAWF (Wide Area Workflow) is the Department of Defense's "Web-based system for electronic invoicing, receipt and acceptance". When you have need to refer to your contract, but you don't have it easily at hand, you can find the electronic document on WAWF. Here is what you do:

Login to the system
Expand the Vendor submenu
Click on View Vendor Documents
Select the appropriate location code (CAGE)
Run a search for an active or archived document (i.e. an invoice)
On the search results page, the relevant found documents will be listed
If you click on the item in the Contract Number field, the relevant contracts and mods will be listed
Clicking on any of them will open the document in PDF

Lending to small businesses

2009-12-23T16:49:00.004-06:00

The December 12th issue of The Economist includes an article "Small business, big problem" regarding the continuing difficulties small businesses have in obtaining financing. A few pithy bits:

"America's large firms get 30% of their financing from the banks; its smaller enterprises rely on them for 90% of their financing needs."
"Small businesses account for the majority of private-sector employment in America and Europe."
"Firms with fewer than 500 workers accounted for 64% of the net new jobs created in America between 1993 and the third quarter of 2008."

The article in particular proposes that governments "offer relief on payroll taxes for firms that are vibrant enough to make new hires."

Is anybody in government listening?

Social Networking for Innovators

2009-12-23T08:33:00.005-06:00

A year ago at the Connecticut SBIR conference, I met Ryan Bloom, Vice President & Cofounder of Boliven, a social networking site for "Innovators at Work". It took me the year to follow up on his invitaiton to join the site. But I heartily recommend it as a venue for researchers, PIs, entrepreneurs, and innovators.

The basis behind it is to link people with each other based on a portfolio of their work, their contracts and grants, their patents and journal articles. The network is based on these tools of the trade. Their on-board searches are intended to find your efforts, and permit you to add them to your portfolio. Your coauthors are linked as part of your network. You receive updates when one of them is listed on a patent or has received a grant.

It's still a young network, but they seem open to and eager for further refinements. For instance, there is definitely room for improvement to their automated searches. A great deal that should show up doesn't, and there isn't yet sufficient facility for adding things. But I'm convinced it will continue to improve, and will prove a useful resource for those of us involved in innovation. Check it out.

Still not quite convinced

2009-12-22T20:39:00.006-06:00

Understanding motivation can be key. My friend Fred Patterson, the SBIR Coach, calls it WIIFM: What's in it for me?

Only... we're sold a bill of goods by common assumption, that it's we, the entrepreneurs, the inventors, the scientists, the researchers, who must go as supplicants to the trough of Investors, tripping over ourselves to convince the moneyed that we are worthy of their largess.

I'm still not quite convinced. Turning the tables, I wonder "what's in it for me"? See, I'm a lone researcher, a radical, an oddball, who after several years as supplicant at the trough of Academia, after 150 faculty applications, and a miserable stint of Adjunct Servitude, decided to shirk the bonds I had willingly taken on, and head out on my own.

I stumbled into SBIR. And, now, little more than a year and a half later, my firm is growing from one, to a staff of six (four full-time). We're patent pending, about to start our first Phase II, and our second Phase I with a different agency on a related but distinct project.

I believe in the mission of SBIR to support innovation wherever it lurks. I believe in SBIR as an open competition of ideas, not as earmarks. I believe in the wise use of public funds to spur and stimulate and foster and fertilize the fragile seeds of innovation. What a wonderful idea: small pots of money for outstanding ideas, to support a short path to proof-of-concept.

What's in it for me? I have learned. A spare six months to delve whole heartedly into the realm of my passions, to test the mettle of my ideas, to drive those naked thoughts into evidence. Yes, indeed, this will work, and it will solve your problem. Then, the chance to compete for Phase II funding, to support a full-scale R&D effort for a couple years, creating high-quality jobs along the way. Finally, the chance to make those dreams a reality by commercializing the results of those ideas and that passion, solving real-world problems, paying back the largess of public coffers. That's a win for everyone.

But what's in it for me to (possibly prematurely) sell off parts of my firm to investors, whose interest may more likely begin and end with dollar signs, not passion, or ideas, or public interest? I'm not much for knocking on doors, beating the bushes, and doing a song and dance for investment.

I'm not much for paper entrepreneurship, writing dazzling business plans. Sure, I can project millions in profits like the best of them. Only, it's far more interesting (and difficult) to actually achieve it. Do I need private investment to get there? Will private investment ensure I get there? Will it help?

Those are the important questions. I can't say I know the answer just yet. I'll answer a knock at the door, and listen in earnest to the pitch. But for now, I think I prefer if they work to convince me. I always enjoy a good song and dance.

Separation of State & Science

2009-12-07T12:13:00.005-06:00

The November 28, 2009 issue of The Economist includes a pithy opinion piece, ostensibly addressing the need for allowing the voice of a skeptical minority of climate scientists to be heard in the midst of political wrangling over climate change. More significant than the specifics of the context however is the broad-reaching argument regarding the necessity of separating scientific debate from political maneuvering. Here is a concise formulation from the end of the article:

There are no certainties in science. Prevailing theories must be constantly tested against evidence, and refined, and more evidence collected, and the theories tested again. That is the job of the scientists. When they stop questioning orthodoxy, mankind will have given up the search for truth. The sceptics should not be silenced.

Well said, indeed!

Tax break on profits again in jeopardy - The Boston Globe

2009-11-27T08:46:00.004-06:00

Interesting headline on the front page of today's Boston Globe (Tax break on profits again in jeapordy). What reasonable justification is there for treating the investments by some few in the potential of someone else's ideas to provide a handsome return-on-investment as different and better than the investments of entrepreneurs in their own creations? Why is that tax incentives go to hedge fund managers, and venture capitalists, and angel investors, but not directly to the entrepreneurs themselves who invest not only sweat equity but often stake their own savings and the safety of their families?

What is the motivation behind such tax incentives? The argument in their favor is that "raising taxes on investment" will "weaken the economy". But how? Look at yesterday's post, and the opinion piece by Josh Kosman. Are hedge fund and VC investments really benefiting the economy at large? That's quite a debatable point.

Perhaps we should look at the sustainable and broad benefits of an entrepreneurial economy, about the benefits that accrue from seeding innovation at the earliest stages, and supporting research entrepreneurs in pursuing and maintaining their passions for bettering society. Perhaps by focusing our energies and tax incentives on these individuals themselves instead, we'll more likely strenghten the economy!

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A case study in profits and job losses - The Boston Globe

2009-11-26T23:10:00.009-06:00

Josh Kosman, author of a new book predicting the impact of private equity in the next financial meltdown, has penned an interesting opinion piece in today's Boston Globe. He uses a local political debate as a jumping off point to discuss how a certain approach to equity investment has proven quite adept at creating profits for a very few, at the expense of both investors and the firms whose takeover they have financed. Notable is his presentation of how gutting a firm's R&D has negatively impacted its competitiveness and profitability.

Yet another argument for keeping a firm in the hands of those who believe in its mission, rather than those whose sole motive is to exit, with paper profits, at all costs.

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Interest for Small Business Checking

2009-11-19T12:49:00.002-06:00

Who would have thought that legislators would institute a law to forbid banks from paying interest on small business checking accounts? Apparently, the Banking Act of 1933 contains just such a rule. A couple legislators however have stepped up to redress this imbalance. Let's hope this reflects some positive momentum in support of small businesses.

Anyone opposed to increased access to capital?

2009-10-22T09:52:00.006-05:00

Landrieu to Introduce Bill Increasing Loan Limits for Small Businesses.
(Thanks to Fred Patterson, the SBIR Coach, for spotting this):

Included in the bill is language to remove the "Small Business Innovation Research/Small Business Technology Transfer (SBIR/STTR) contracting exemption that was included in the Recovery Act." If you haven't been following along, someone (mysteriously, multiple hearings have been unable to unmask the culprit, as noone is taking credit) inserted language into H.R. 1, the American Recovery and Reinvestment Act, that effectively exempted $229 million of stimulus funds from being spent on small high-tech businesses for R&D under the SBIR/STTR funding mechansims (known as R41/R42 and R43/R44).

This action was arguably illegal, certainly unethical, as the language was inserted while the bill was under the authority of a conference committee, after having been passed by both Houses of Congress without it. As per the rules of Congress, the purview of a conference committee is to reconcile differences between House & Senate versions of a bill, not to introduce any substantive changes that were not a part of either bill.

If Landrieu's new bill passes, those $229 million* will be restored as per statutory requirements under the Small Business Act and numerous SBIR/STTR reauthorizations to set aside a small percentage (currently 2.8% total for both programs) of certain federal agencies' extramural R&D budget to provide seed (Phase I) and transition-to-commercialization (Phase II) funding for small business-led efforts. American recovery & reinvestment: it's even in the title of the act.

Access to capital means much more than providing loans to small businesses. And it means more than letting Venture Capital interest and investment serve as a proxy for a business' worth. There is a reason that SBIR/STTR have been so successful in stimulating the creation of new technologies, and getting those technologies to the end users where they will have the greatest effect, more effective than Venture Capital.

I've said it before, but it warrants repeating: it's all about seed funding, and continued support to get those sprouts to market!

* UPDATE * Actually the language of Landrieu's bill, S. 1832, would only restore $150m of the stimulus funds to SBIR/STTR. Apparently, according to Fred Patterson, this may have been a compromise NIH was willing to agree to. Considering Jo Anne Goodnight's current detail, away from her desk as NIH Coordinator for SBIR/STTR, to the Senate's Committee on Small Business & Entrepreneurship, it's not too far fetched that there is close (albeit tight-lipped) coordination between the activities of the SBE and NIH administrative personnel.

DoD-only SBIR reauthorization for 1 year!

2009-10-08T09:41:00.004-05:00

Rick Shindell gives the scoop (via SBIR Insider):

Wednesday, October 7, 2009 the House & Senate Armed Service Committees reached agreement on the conference report to H.R. 2647, the Fiscal Year 2010 National Defense Authorization Act (NDAA).

In this conference report ... there are 2 pages of language that in essence, reauthorize the DoD's SBIR and STTR programs for 1 year (ending September 30, 2010), and extending the Commercialization Pilot Program (CPP) for the same period.

This has no effect on the other ten agency SBIR/STTR programs that will expire on October 31, 2009 unless extended by another CR or reauthorized.

The NDAA should come to the floor of both bodies quickly for a vote, perhaps Thursday. There are some provisions that are controversial and a few that the President didn't want, so the bill's passage and the President's signing, although likely, will not be a slam dunk. We have a copy of the SBIR portion of the report at http://www.zyn.com/sbir/insider/SBIR-Armed_Services_Report-100709.pdf

... Obviously the Senate Armed Services Committee (SASC) and the House Armed Services Committee (HASC) actions reflect a vote of "no confidence" in the ability or likelihood of the other committees to reach SBIR reauthorization in a timely manner.
INSIDE STUFF: Senator Carl Levin (D-MI), chair of the SASC, who is also a member of the SBE, worked closely with SBE committee chair Mary Landrieu (D-LA) as did their staffers, to incorporate the entirety of the Senate's SBIR reauthorization bill (S.1233) into the NDAA. Some SBIR changes were made by the SASC including making the reauthorization for 14 years, making the CPP permanent (rather than its pilot program status), and expanding the CPP to the STTR program.

... Once it came to light that this action was for real and was gaining traction, HSBC chair Nydia Velazquez (D-NY), and HS&T subcommittee chair David Wu (D-OR) fired off a strong letter of complaint to HASC chair Ike Skelton (D-MO) and ranking member Buck McKeon (R-CA), along with a CC to Nancy Pelosi. (see http://www.zyn.com/sbir/insider/HASC_letter-9-25-09.pdf )

In the House, there was great pressure on Armed Services to stand down on the SBIR issue. Chairman Skelton would not cave but he would compromise. The 14 years were reduced to 1, CPP was also only 1 year and was not expanded to STTR.

This compromise should serve notice the other House committees that SBIR must be reauthorized properly or the DoD may run with their own program next year.

NIH Director seeks comments!

2009-10-06T16:03:00.002-05:00

NIH Director Welcomes Public Comments (via Genetic Alliance)

Earlier this month, National Institutes of Health (NIH) Director Dr. Francis Collins held a town hall meeting with constituency groups to outline a vision for the NIH, including putting science to work for the benefit of healthcare reform and advocating for a stronger US global health presence. In addition to responding to input during the meeting, Dr. Collins invited members of constituency groups to follow up with additional comments about issues facing their organization or community that should be brought to the attention of Dr. Collins and the NIH. The Institute is accepting comments on a rolling basis, and Genetic Alliance is collecting individual responses to inform our comments until Friday, October 9.

To submit your comments, please send them to the NIH at NIH-LISTENS@nih.gov and copy NCIAdvocacy@mail.nih.gov. To submit them to Genetic Alliance, please send them to Kristi Zonno, Director of Genetics and Health Policy, at kzonno@geneticalliance.org.

Sprouting Seeds

2009-09-21T08:02:00.014-05:00

My friend, the SBIR Coach, recently posted reflections from attending the Conference of the National Association of Seed and Venture Funds (NASVF). He mentioned a recent conversation he had with Laurence Briggs, CEO of a private investor network:

What they look for is a proved-out concept for a product or solution addressing a significant market with scalability, and a good coachable team appropriate for their stage of development.

I read those words, and wonder at the first requirement for private investment: a proved-out concept. The image that comes to mind, reasonably enough I presume, is that of a seed, for a seed undoubtedly predates such proof.

Last I checked my botany, a seed by itself is anything but proved-out, especially the seed of a new hybrid or an untested variety. But what a wonderful package it is! All potential and for explosive growth at that. A seed is quite resilient, enduring a great many torments, even years of neglect. But a seed needs a few things to realize that potential.

A seed needs warmth and moisture to sprout, which provides proof of its viability.
But a viable seed may still die without the proper nurturing. Once we've obtained proof of viability, the seed needs the suitable conditions to root and leaf and grow. This is the testing stage, where a viable seed is coaxed into a relatively mature specimen, a prototype if you will of the field or forest it might become. Now we have a plant, but what sort of fruits will it produce?
If a mature specimen warrants our further interest, we need to attend to the task of reproducing it, distributing it, continuing to examine and study it to discover the ideal conditions and create them in field or farm or greenhouse.

You may notice something in the image: It mirrors the process of seed capital as represented by SBIR.

Phase I is the seed-sprouting stage, where we take an unproven concept and prove it out.
Phase II is the stage where a viable seed is taken to prototype.
Phase III is the stage where a prototype is brought to commercialization in a broader market.

It would seem then that Phase I, the true seed stage, is the untouchable part to private investors. The greatest value of SBIR is its ability to leverage public funding, through a highly competitive process to identify the most promising kernels of ideas, along with the appropriate team to take it from unproven concept, through proof, prototype, then commercialization.

If SBIR is transformed--as many in the House Small Business & Science Committees are intending and entrenched to do--to preference the later stages of business development and growth (the stages preferred by Angels and VCs), then what source would remain for the true seed stage of innovation?

Some might argue that seeds are in too great abundance to be sorted by non-experts. Surely, it is the risk factor involved that stays many Angels and VCs from entering the fray at this early stage. Yet innovative science and technology take time, sustained effort, and commitment: often more of these three than most realize or would care to support.

This is perhaps the genius of SBIR: it allows Program Managers to define high priorities for their particular programs, to solicit proposals that address those specific priorities, have these proposals evaluated by experts, if not experts in the fields of research at least expert in the problems that need resolution. It permits federal agencies that spend billions of taxpayer dollars to reserve a small portion of those funds for work by small businesses, to serve the greater good, to stimulate innovations that might otherwise sprout and die on the sidewalks of neglect and indirection, ones which large corporations and universities have not or could not achieve.

It focuses the minds of innovative researchers to solve realworld problems, fertilizing the growth of the entrepreneurs who will create and lead new industries built on new technologies that remain unimaginable today. Innovation by definition has no peers. Again, I ask, if SBIR will no longer support this earliest stage, then who or what will?

Nota Bene: we judge small businesses differently

2009-09-04T19:35:00.010-05:00

First, a disclaimer: my firm currently has an SBIR Phase I proposal under review at the NSF, submitted in early June, for which, if selected, the author of this post would serve as PI. That said, I respect the integrity of the process and trust that my comments here should have little to no bearing on the merit review of the proposal, either positively or negatively.

The NSF website prominently notes:
Consideration of proposals usually requires up to six months.
From the viewpoint of a small business seeking support for R&D, I would welcome the passage into law of §204 (3) (B) of H.R. 2965 EAS :
...a final decision on each proposal shall be rendered not later than 90 days after the date on which the solicitation closes unless the Administrator determines, on a case by case basis, that a decision may be extended from 90 days to 180 days
That's old news (though we still await the final version of the SBIR/STTR Reauthorization Act)! What caught my eye today however was a passage on the NSF website, from their instructions to the Phase I Technical/Commercial Peer Review Panel. Here it is verbatim [emphasis theirs]:

(N.B.,SBIR/STTR INTERPRETS THE NSF CRITERIA SLIGHTLY DIFFERENTLY THAN THE REST OF THE FOUNDATION BECAUSE WE ARE LOOKING AT RESEARCH THAT IS CLOSE TO PRODUCING A MARKETABLE PRODUCT (i.e., "Advanced Applied Research,") NOT BASIC RESEARCH. The science/engineering entailed in the project may be well understood; the novelty may lie in the application.)

Interesting use of the word may there. What if... let's be radical here... what if the science and engineering were cutting edge, rather than "well understood" despite its origin in a small business, rather than a university? What if the novelty lay not merely in the application, but in the approach itself? Let's just say it does. Let's just posit the possibility that a small business enterprise might be truly innovative. What then?

I'd like to think that my firm fits that latter description, because frankly it doesn't well fit the former. The science and engineering is not well understood (at least not outside my company), because it's novel. I have argued on this blog rather passionately for seed-stage funding through SBIR and perhaps other mechanisms. I admit this passion is in part self-interest. Seed funding is hard to come by.

VCs and others are aligned to invest in businesses "close to a marketable product," but not, as it turns out, in potentially transformative but yet unproven ideas. Why should NSF SBIR fill that same niche, when true seed funding is remarkably scarce? Does the cited guidance to NSF technical reviewers hint at a presumption that small businesses are not capable of scientific innovation?

The requirement is well established that SBIR applicants must justify their proposals with a strategy toward commercialization (which already distinguishes SBIR from other NSF programs). It is a requirement that we in the small business community embrace. The guidance seems to go beyond that however. It is not merely asking for commercializability, but in essence preferencing later stage efforts over early-stage R&D, but doing so merely for small businesses, asking us to compete not to a higher bar, but on another track.

How different from the stance of the DoD :
Our appropriated funds are designated for research and development. By law, we cannot spend them for anything else.
What leads to such disparity by different agencies both authorized to fund innovative research by small businesses? Let us only hope in the end that innovation leads, not guidance.

Who wants to be average?

2009-09-03T08:46:00.004-05:00

The August 27th issue of The Economist leads with an article on the return of the corporate giant. Here is a pithy bit from the article:

You might suppose that the return of the mighty, now better equipped to crush the competition, is something to worry about. Not necessarily. Big is not always ugly just as small is not always beautiful. Most entrepreneurs dream of turning their start-ups into giants (or at least of selling them to giants for a fortune).

I'd like to parse that out a little bit. Let's do a little editing, shall we? Take the statistical sentence: most entrepreneurs. Hmmm. Let's, do let's take out that "most" and replace it with... average... or better yet run-of-the-mill. Yeah, that's the ticket:

Average, run-of-the-mill entrepreneurs follow the pattern that is often fed to them (like fattening of ducks for foie gras), accepting that the ultimate goal of all passion, innovation, and drive is TO EXIT from their dreams, eventually selling their start-ups to corporate giants.

Unusually, perhaps (but then, who wants to be average?), I am an entrepreneur to PURSUE those passions, drive, and innovations, rather than to escape from them. My motivation is transforming what is in the world into what might be. Funny, take that sentence: you won't notice any reference to small investment or large payout.

Sure, I'm interested in developing practical products and applications for my innovations, and indeed in profiting from them, but the profit motive is incidental to the innovations and their contribution to real-world needs. If my firm balloons into a giant, I only hope that it maintains its core of passion, drive, and innovation. I don't prejudge whether or not it might one day be sold to a giant or other investor. An exit just isn't top on my priorities.

A Matter of Stage

2009-08-14T08:58:00.008-05:00

The terms seed stage, early stage, and startup are bantied about as if their definitions were self-evident (or more likely as if their use were intended to evoke an emotional response without regard to the precision of their meaning). But the meaning of these terms in context is crucial to understanding the availability of funding for innovation, and just why SBIR and similar resources are so critical to the well-being of our economy.

The following definitions come from PriceWaterhouseCooper's MoneyTree™ report:

Seed/Start-Up Stage: The initial stage. The company has a concept or product under development, but is probably not fully operational. Usually in existence less than 18 months.
Early Stage: The company has a product or service in testing or pilot production. In some cases, the product may be commercially available. May or may not be generating revenues. Usually in business less than three years.
Expansion Stage: Product or service is in production and commercially available. The company demonstrates significant revenue growth, but may or may not be showing a profit. Usually in business more than three years.

I attended a luncheon yesterday ostensibly addressing "The State of Angel Investing." Oddly, the speaker, Joe Kremer, director of the Wisconsin Angel Network, insisted against all evidence to the contrary (and providing none of his own) that "Venture Capital is entering into more and more earlier stage deals."

Um... what? He provided a chart of the "Financing Continuum" (which to his credit is a very clear and useful resource -- a larger version of the chart can be found on p. 4 of the Wisconsin Technology Council's report "Wisconsin Portfolio"). If you look at Kremer's version, you'll note a line running through the middle of "Product Development" and toward the end of "Start-Up Funding". To the left of that line is what Kremer called "early stage". Venture Capital is almost entirely above that line.

"Do you mean that VCs are funding more deals below that line, because my understanding and experience say that VCs have no interest, 0% in funding pre-prototype R&D." Uh... well, I consider prototype a pretty early stage event, was his reply.

Down at the earliest level of funding is SBIR/STTR. It rivals only the Four Fs. In other words, without SBIR for seed stage funding, only the wealthy can afford to enter the realm of innovation. Anyone can have a great idea, regardless of their present financial status.

If founders, family, and friends are simply not able to provide the seed capital to develop that idea into a proof-of-concept then a prototype, and no other source of funding is available, that idea will die. Period!

SBIR provides a means for open competition of ideas to gain such funding that is simply not otherwise available: no where, no how.

It's all about seed capital!

Claiming stakes

2009-08-12T22:07:00.007-05:00

Worthy of note:

Growthology reports on an NVCA study that

"claims that VC-backed companies accounted for ten percent of employment in 2006 and some large share of recent job growth. Yet when you scroll down to the data tables, you see that they take year 2000 employment of a company that once received venture capital (e.g. Intel), then year 2006 employment in that company, and attribute the change to the fact that company once received venture capital. Voila! Are you telling me that the VC investors in Intel played a role in the company's job growth between 2000 and 2006".

NVCA has a penchant for staking claims on all the good that has ever been done by anyone once affiliated with a company that at some point in its life cycle had permitted itself to take some funding from an organization that at least had some association with a relative of someone who once walked in front of a building that was in part owned by a future or former venture capitalist.

Look! Let's make this clear: good ideas become innovations. Good businesses are built on the foundation of those innovations. Researchers and entrepreneurs provide the ideas that become those foundations. At best, venture capitalists provide some funding, insight, marketing, and business sense to contribute to the success of a venture based on the good ideas that emanate from a researcher or entrepreneur. It is possible for a symbiotic relationship to accrue, whereby a mutual respect permits innovators and VCs to collaborate on building great businesses. But it is in no way a foregone conclusion that a good idea requires VC funding to become a great business, nor is it in any way assured that the receipt of VC funding will positively impact such a company's potential success.

Period! Full stop!

Legislative Process & Authority

2009-08-12T09:32:00.001-05:00

The following is an extract from the OpenCongress pages on "how a bill becomes a law". This is relevant not only to HR 2965, which is currently in Conference Committee, but also importantly to the deceitful, harmful, and arguably unauthorized actions by the Conference Committee that was entrusted to reconcile the House & Senate versions of the bill that became HR 1, the American Recovery and Reinvestment Act (ARRA). Those actions excluded NIH from its statutory obligation to provide $229 million for SBIR/STTR from the stimulus funds alloted to the agency.

Authority of Conferees

The conference committee is sometimes popularly referred to as the "Third House of Congress". Although the managers on the part of each House meet together as one committee they are in effect two separate committees, each of which votes separately and acts by a majority vote. For this reason, the number of managers from each House is largely immaterial.

The House conferees are strictly limited in their consideration to matters in disagreement between the two Houses. Consequently, they may not strike out or amend any portion of the bill that was not amended by the other House. Furthermore, they may not insert new matter that is not germane to or that is beyond the scope of the differences between the two Houses. Where the Senate amendment revises a figure or an amount contained in the bill, the conferees are limited to the difference between the two numbers and may neither increase the greater nor decrease the smaller figure. Neither House may alone, by instructions, empower its managers to make a change in the text to which both Houses have agreed.

When a disagreement to an amendment in the nature of a substitute is committed to a conference committee, managers on the part of the House may propose a substitute that is a germane modification of the matter in disagreement, but the introduction of any language in that substitute presenting specific additional matter not committed to the conference committee by either House is not in order. Moreover, their report may not include matter not committed to the conference committee by either House. The report may not include a modification of any specific matter committed to the conference committee by either or both Houses if that modification is beyond the scope of that specific matter as committed to the conference committee.

Under a recent reassertion of a Senate rule, Senate conferees are bound to consider only those matters that bare a certain relevancy to a House or Senate provision in conference.

The managers on the part of the House are under specific guidelines when in conference on general appropriation bills. An amendment by the Senate to a general appropriation bill which would be in violation of the rules of the House, if such amendment had originated in the House, including an amendment changing existing law, providing appropriations not authorized by law, or providing reappropriations of unexpended balances, or an amendment by the Senate providing for an appropriation on a bill other than a general appropriation bill, may not be agreed to by the managers on the part of the House. However, the House may grant specific authority to agree to such an amendment by a separate vote on a motion to instruct on each specific amendment.

H.R. 2965 EAS

2009-08-11T22:46:00.004-05:00

As far as I can tell, S. 1233 is no longer under consideration. The current bill is H.R. 2965 as passed in the Senate (dubbed "Engrossed Amendment Senate"). This version of H.R. 2965 includes several alterations from the original House version, incorporating certain aspects of S. 1233 (as for example "Sec. 103 SBIR allocation increase" which appears in H.R. 2965 EAS, but not in the version "Received in Senate").

To see these differences visit the link above, and click "Show Changes". GovTrack is also covering the progress of H.R. 2965.

Those more experienced with how laws are made may have greater insight, but the best I can gather is that in order to constitute a Conference Committee, one of the bills needed to be passed by the other House of Congress. That was done, when the Senate voted on and passed H.R. 2965 on July 13. What remains are for the differences between these versions to be resolved, then it goes to the President for his signature.

Commercial Real Estate: expanding the office headquarters

2009-08-06T09:01:00.008-05:00

Worthy of note:

"At the moment transactions have dried up in the commercial-property market as owners try to avoid selling at a loss. Those owners are implicitly assuming that a rebound is imminent, yet the downturn may be prolonged."
--"Commercial Property: A concrete problem," The Economist, August 1, 2009

This is of particular relevance to me today, as I'm looking to obtain a new headquarters for my company. I'm increasing staff and need a larger space. Lease vs. buy is a relevant consideration. Because prices are somewhat depressed, it would seem a reasonable time to buy. But as the article cited points out, low prices may be around for a while:

"In Japan land prices are still nearly 60% below the peak they reached in 1991."

Granted, I'm not in a market that was among those severely overheated. Cost of living here is about 15% below the U.S. average. Asking prices for small commercial office space (2000-5000 sq. ft.) are around $45-60/ sq. ft. That said, the general principle is to compare rent vs. buy on similar properties. There's little point in locking up cash in real estate equity if you can rent a comparable space for less. It's just finding comparables that's the trouble.

The jury's still out. I'm leaning toward putting down an offer to purchase, knowing full well that it might not become much of an investment. But I'm prepared to walk away if I can't transact on my terms. I'm counting on the prospect that I will be needing office space for my business for the long haul; I'm betting on the success of my company, and the assumption that it'd be better to own the space than rent from some unknown landlord. But leasing remains an option.

The advice I've been given, from attorney and accountant, is to establish a separate LLC as holding company for any real estate purchase, then lease back the property to the main business under a triple-net lease. The key is establishing a reasonable fix on going lease rates in the area so as to neither overcharge nor undercharge in rent. That separates the office property from the core business, and permits additional investors in the real estate to be distinct from the ownership of the core business.

We'll see how it goes.

The Color of Money

2009-08-04T08:56:00.006-05:00

DefenseSolutions.gov is a relatively new website described as "The U.S. Department of Defense New Idea Portal". Thanks to the SBIR Coach, where I first read about this resource. This morning, I received an email notification of their latest update, removing some fulfilled requirements, and adding a few others.

Of note was the following statement regarding why some worthy endeavors were not funded:

... because DefenseSolutions.gov is a research-oriented endeavor, we could not fund some good ideas because they required little or no research to complete the associated development. This is a legal, "color" of money restraint. Our appropriated funds are designated for research and development. By law, we cannot spend them for anything else.

Whatever legal restraints exist on their funding ought naturally to be part of SBIR as well. Small Business... Innovation... Research. The argument I have been making all along is that SBIR represents a pot of funds for early stage research. Without a funding source for independent researchers, innovation suffers, simply because established researchers affiliated with established institutions, have established expectations and established assumptions, regarding established practice.

If SBIR fades as a resource for seed funding, what alternatives exist for independent researchers, entrepreneurs, and small businesses to pursue early stage R&D? Will organizations like the National Association of Seed and Venture Funds step up to the plate? Will agencies, like the DoD continue to provide alternative sources, like DefenseSolutions.gov? What other resources are out there?

First rule of warfare

2009-07-31T21:49:00.001-05:00

The first rule of engagement is to have your adversary amass forces on the wrong line of defense: have them defend the waterways, while you attack the armory; or watch them sandbag the city, while you take out their food supply by burning the fields in the countryside.

The battle lines are drawn. Let us not be seduced into thinking the skirmish over eligibility rules is the main conflict. I reiterate:

This is not about protecting the little guy!
This is about preserving SBIR as a source for seed-capital!

This is about retaining the ability of the United States to lead the world in innovation. There are precious few resources available to support early stage research & development, especially by those unaffiliated with a university or large corporation. Yet this is the work that truly pushes the envelope, that tests unproven theories, that alters not only the answers but the questions themselves.

This is principally about IDEAS! Profits and jobs are secondary. What opportunities, besides SBIR, are there for individuals to prove or falsify an idea, with the potential to transform a field or remedy a yet-unsolved quandary? The greatest beauty of SBIR is its ability to water those kernels, until they sprout or wither; and to render those that sprout into a test crop on a couple of acres.

The battle is here: will SBIR remain an open competition among innovative ideas, fought on their own merits and their potential to rapidly outgrow their government sponsors or not?

The real battle is about:

keeping award sizes appropriate (the Senate's proposal of capping Phase I at $150k and Phase II at $1m does that: the House proposals do not!)
ensuring the integrity of the merit-based open competition--no earmarks, or loopholes that will lead to them; no special preferences for groups (this is a competition of ideas to solve problems!);
retaining access to small awards for a large number of projects to get off the ground--no to free-reign for multiple sequential Phase IIs; no to jumbo awards; yes to increasing the allocation percentage (S.1233 calls for a very modest increase from 2.5% to 3.5% graduated over 10 years).

The issues are simple. Will the Conference Committee, tasked with hammering out a resolution between these widely divergent reauthorization bills, work to support and sustain innovation, or abdicate that responsibility? Only time shall tell.

Beer summit

2009-07-31T12:30:00.006-05:00

Of note: Obama Beer Summit Choices Make For A Happy Hour.

I confess Gates' choice of Red Stripe and Crowley's Blue Moon are more my speed than the President's Bud Light.

Now if only we could get the relevant parties in the House and Senate to sit down with high-tech small business leaders to hash out just what it is we're so concerned over regarding SBIR reauthorization. A sit-down honest, open discussion of policy would be far more beneficial than the closed door, shut out debate and discussion tactics that we've seen from Velázquez and friends these past couple years.

Women-owned high tech firms and external capital

2009-07-30T13:04:00.005-05:00

Of note: A recent study [summary, full report] by the Ewing Marion Kauffmann foundation highlights differences by gender of owners in the sources of financing and financial strategy for high-tech startups. I wonder what the results would be if gender were removed from the statistics, and replaced simply with the differences in source funding and financial strategy. Would the same differences in performance-related measures hold over time? The answer may rest in the full data set, but I've not the time to sleuth it just now.

Where's the bootstrap?

2009-07-30T09:39:00.007-05:00

There's an old principle that if you don't come to the table knowing what you want, someone is sure to sell you a bill of goods and convince you it's just what you need. The circle is self-perpetuating: If I've been sold that bill of goods, I just may come to believe it is indeed what I always wanted; and I'll go on to persuade others as well.

What I'm familiar with just seems right: sauerkraut on hot dogs; corned beef on rye; the home team, because they're mine, not because it makes any objective sense. If I'm told over and over that raising investment capital is how you build a business, it seems backed by generations of experience. I may be inclined to believe it.

But then, innovation requires challenging underlying assumptions, finding alternate routes to the same destination. The goal is to build a successful company. What is needed to get there? Sure, capital: you need money to purchase equipment; to pay for an office; to hire and retain staff. But as they say "it all pays the same".

Interestingly, however, it doesn't all cost the same. What is the trade-off for any given source of capital? SBIR provides funds in exchange for the sponsoring agency's royalty-free access to the resultant technology; Banks provide loans (well, mythically at least) in exchange for a percentage of interest to be paid on top of the principal; Angels & VCs offer funding in exchange for a percentage of ownership. Each has its place. Which makes most sense for your business needs, and most especially your long-term plans?

Matt Storms at AlphaTech Counsel has penned an article about a study on how companies with various sources of startup capital fare at their Initial Public Offering (IPO). Among the pithy bits that he relates [emphasis is mine]:

The average size IPO for venture capital backed companies was smaller than any other group of companies. The highest average size IPO came from companies that were neither angel investor nor venture capital backed; in fact, the average size IPO of this group of companies was more than 2.5 times that of venture backed firms.

VC & Angel backed enterprises were quicker to go public (and likely quicker to be sold off or shutter their doors as well--they do call it an "exit strategy" after all). So, if you want quick and small rewards, VC funding is the best bet. But, if you're planning for the long haul, accomplishing something lasting, and garnering the greatest gains, perhaps a bootstrap is for you. And do bear in mind: even a bootstrap may someday come to seek outside investors. While conventional wisdom advises to seek capital before you need it, the longer you delay (assuming you remain successful and viable), the more valuable your company will be, when you do eventually seek it, reducing the cost of that capital in terms of ownership.

Another extension... postponed

2009-07-29T22:06:00.011-05:00

Senators Mary Landrieu and Olympia Snowe, chair and ranking member respectively of the Senate Committee on Small Business & Entrepreneurship co-sponsored S. 1513, which passed the Senate last Friday by unanimous consent, to extend yet again SBIR and various other SBA programs until September 30, preventing an expiration on July 31, when the last Continuing Resolution runs out. That makes three CRs in a row, rather than concrete resolution of the continuing saga of SBIR reauthorization.

Rumor has it that the House passed the same today by voice vote. However, the information available on OpenCongress, GovTrack and Thomas and elsewhere show that it was offered for debate on the floor of the House, with commentary by Nydia Velazquez and Glenn Thompson, that a voice vote was initiated, but that due to a point of order raised by Rep. Thompson regarding a lack of quorom, further action was postponed (via publicinvestment.net).

***UPDATE***
There is confirmation that S.1513 was passed in the House by voice vote on 29 July 2009, keeping SBIR and some other SBA programs alive through the end of September.

Letting another NIH deadline slip

2009-07-29T14:21:00.006-05:00

I've been meaning to submit an SBIR Phase I proposal to the NIH for about a year now. I first let the August 2008 deadline slip, then December and April. The project continues to clarify. I had every intention of submitting a proposal this time around. But a few things stay my hand.

First, I'm in the midst of negotiating a DoD Phase II SBIR, which really must take precedence. Along with that, I'm planning three new full-time hires around the start of 2010. There are a great many administrative details to attend to, in addition to reviewing applications and scheduling interviews. I'm looking to move into larger office quarters to accomodate a larger staff.

I recently prepared and submitted two new Phase I proposals for different agencies. There are still several irons in the fire, pending review. Once I have that new staff in place, and the Phase II underway, I'll have more time and energy to dedicate to new projects.

That said, the NIH's reticence, indeed seeming disdain for small business research gives me pause. They have made it clear that they have little interest in funding research beyond the walls of academic institutions. If there were no SBIR mandate, I suspect there'd be little room in their R&D budget for truly small businesses. But why?

I bring some baggage with me, I admit. Academia dumped me unceremoniously as soon as I received my PhD. I was given my diploma, then ushered out the door. There's little place for the unrepentant interdisciplinarian within the walls of the ivory tower (at least there was little room for me). Nearly every independent review of my CV came back with the following remark: "You look like a researcher." I was told point blank that hiring committees are uninterested in research for a junior faculty position. "They want someone to teach 101 and 102 and 103. They'll look at your research after you're tenured."

After five years of seeking, 150 applications, a handful of interviews, and a semester of adjunct servitude at a private institution that refused to hire full-time adjuncts with benefits for full-time work, I finally struck out on my own. I see the great value in programs like SBIR to provide an alternate source of support for open and fair competition among dedicated, innovative scholars, whose ideas are just that bit out of the mainstream.

I guess we'll see what the coming SBIR reauthorization has to offer. I still have an NIH proposal in me. Just not this time around.

New Continuing Resolution

2009-07-27T15:12:00.005-05:00

Rumor has it that the Senate has passed yet another Continuing Resolution to extend SBIR, for another two months through September 30, 2009. The CR still has to pass in the House, which is expected in a vote tomorrow (Tuesday, August 28), to carry us through the recess.

Negotiations between the principal parties and staffers continues. Word is that negotiations are in good faith, and that a compromise between H.R. 2965 and S. 1233 will result before SBIR is allowed to expire. Let's just hope this is all done sooner than later, and better than worse, so we can all get back with clear heads to doing what we'd prefer to be doing: innovating!

Lost in the shuffle?

2009-07-27T13:29:00.004-05:00

I guess if it isn't health care reform... it may not matter in today's Washington, DC.

SBIR is not health care reform (though certainly there are health-care related topics and projects, I'm sure). Deadline for a pre-August resolution to be voted on in the House is tomorrow. What will we get? Anybody's guess.

Midas where my mouth is

2009-07-24T12:52:00.005-05:00

It's like I have the Midas touch, only it's not everything I touch turns to gold -- it only turns to gold after I sell it. A month ago, I wrote about Intuitive Surgical to illustrate a point about stratospheric price/earnings ratios, and the absence of rational pricing. I noted that while I believe in the company, I have little confidence in the stock market, where values are determined more by Ponzi-like expectations (othewise known as capital appreciation) than anything else.

I mentioned how a year ago I sold half my holdings in ISRG only to see it skyrocket 50% overnight (after I sold). Well, it happened again. On July 21st, I sold my remaining shares in the company, at about a 70% profit over my purchase price three years ago (but about half the price I sold shares for a year ago). A decent return, but not enough to buy a yacht. Funny thing happened (again!): it's now trading for about 30% more.

Now, my point is not to lament lost paper profits. At a P/E ratio currently of 44, it's less attractive to me now than it was a month ago at 35. Sure, I'd have been happier to lock in the extra profit. But that's the trick. How do you know when a mob of buyers will top up the price, or when a mob of sellers will trash it? If behavior were rational, then the potential for profits would be much reduced. It's like running with the bulls in Pamplona: it's hard to know just where those horns will be facing at any given time.

Buy low/sell high for sure... but real profits beat paper ones any day! I put my money where my mouth is: I've been selling stock holdings, and plan to shift much of it into an office building for my business. My business is the one I most wish to invest in.

Worthy of Note (23 July 2009)

2009-07-23T08:02:00.004-05:00

A refreshingly clear statement:

"Money is a form of government debt..."

"A special report on the euro area: Soft centre," The Economist, 13 June 2009.

Shared via AddThis

A bunch of fools

2009-07-22T08:09:00.011-05:00

SBIR reauthorization has moved into high-gear negotiations between the principals of the Senate Committee on Small Business & Entrepreneurship, the House ~~Large Venture Capital~~ Small Business Committee, the House ~~Only-Universities-Do~~ Science & Technology Commitee. The aim is to reconcile the disparate legislation represented by H.R. 2965 and S. 1233.

Apparently, both sides are "negotiating in good faith." Though, from this blogger's perspective, the proof will be in the pudding. Compromise is the only game we have to play at this point. Rather, it's the only game we have to observe from the sidelines, rooting, cheering, and booing as we see fit.

Looking ahead, the issue remains: how can we as a nation, as a people, best support and sustain innovation? I worry at a closed system that sets up unnecessary and counterproductive hurdles to new ideas, shutting out the outsider rather than establishing a meritocracy of ideas. There is a dangerous set of assumptions out there that: the best (indeed the only quality) science is conducted at universities and guided by peer-review; and that investment from large Venture Capital firms can serve as a meaningful proxy for the value of innovative ideas. Both assumptions are verifiably and patently false!

Let me illustrate from the world of science:

If you want to go into research, you need to get into the best school as an undergraduate, serving under the best adviser.
If you fail at that--when you're eighteen and fresh out of high school--you'll have greater difficulty getting accepted at a top ranked graduate school to serve under a big-name researcher in the field.
If you fail at that, you'll be hard pressed to obtain a high-quality post-doc.
Without a high-profile post-doctoral appointment, you'll have trouble getting a respectable research appointment... etc. etc.

Every step of the way, it is easier to move further from the goal. And funny that, because the goal is not (or at least ought not to be) getting into the right school, or serving under the right person, but rather conducting high-quality research, to achieve a breakthrough.

The Wright brothers weren't established ornithologists. They didn't study under the biggest names in aeronautics. They made and repaired bicycles! But they had a dream, and a vision, and the dedication to see it through. Innovation comes from great ideas, being pursued to their logical extremes, often against all odds, and subject to an enormous amount of persistence and perseverance on the part of the innovators.

It does not spring miraculously from following all the rules, fitting in, standing in line! "Innovation has no peers--by definition!" Which leads us to the question: how best can we stimulate and sustain innovation?

A year and a half ago, I attended a workshop at the University of Wisconsin-Madison on starting a high-tech business. It was there that I first learned about SBIR. But it was also there that I first heard a description of the "four Fs" of startup investing:

Founders
Family
Friends
and Fools

This, coming from an Angel Investor who was lead instructor. Fools? There's that aphorism: A fool and his money are easily parted.

Perhaps the biggest hurdle faced by research entrepreneurs is the view that early-stage investment in the form of seed-capital is a fool's errand. Indeed, the three decades of SBIR success, the tens of thousands of patents, the hundreds of thousands of jobs created, the thousands of companies that got their start from SBIR alone, all attest to the wisdom of seed-stage investing (when done well, which SBIR does).

The question is: if we weaken the ability of SBIR to provide seed capital to sprout a field of ideas (Phase I), remove the wilted seedlings and prune back the weaker branches (Phase II), then transition to harvest (Phase III), what will replace the resource? Will those large venture capital firms that have spent millions of dollars lobbying for nearly unfettered access to ownership and control of SBIR-eligible firms step up to the plate and prove the wisdom of folly? And if they did, would that be the best resource for research entrepreneurs?

It's funny that the argument most popular among those Representatives railroading through a change in eligibility rules has it that the proposed change is intended to make it easier for small businesses to obtain funding, and to allow small businesses rather than Washington bureaucrats to make decisions regarding the source of their funding, whereas the opposite is the likely result. Reality is, if the changes pass into law--furthering the trend toward later stage growth businesses, rather than continuing to support early-stage ideas--fewer high-tech small businesses will have any chance whatsoever, and those that do will more often be forced to take venture capital investment (which has been described as the most expensive money you will ever take, because of the hefty equity stake VCs require for their investments).

What a pity that would be!

A glimmer

2009-07-18T14:26:00.004-05:00

One tiny beacon of hope in all this is that the purpose of an informal conference committee might be to allow those Representatives who railroaded through H.R. 2965 to simply wipe their hands clean of the compromise. They can go back to their puppet-masters at BIO and NVCA and declare they did their part, regardless of what compromise occurs.

Is that how politics works? I couldn't say. But it does offer a glimmer of hope that the staffers (who, in their defense, are mostly dedicated and well-intentioned though unsung public servants) might be better able to rise above the fray (and the worry over campaign contributions) to hammer out a compromise solution that will serve the interests of the United States, the economy, and the innovative small businesses the program was designed to support.

As ever, only time will tell.

Worthy of Note (17 July 2009)

2009-07-17T15:56:00.006-05:00

From the SBTC:

Now that both the Senate and House have passed this bill [SBIR reauthorization bills H.R. 2965 & S. 1233], it goes to conference committee, a joint Senate-House committee that will work out a compromise bill that both chambers can agree on. There are two types of conferences: a formal conference, where Senators and Representatives from the committees with jurisdiction over this legislation will be selected to meet and work out the details of the bill, or an informal conference, which is usually conducted by staff. It has been indicated that an informal conference is most likely to occur.

Worthy of Note (16 July 2009)

2009-07-16T07:30:00.004-05:00

Posted on Politics in Minnesota [via Wisconsin Technology Network] is a story about a small development-stage biotech firm, VitalMedix, leaving Minnesota for Wisconsin, purportedly to gain a more favorable investment climate, since Wisconsin offers tax incentives to Angel Investors: Legislator says company's exodus shows need for 'angel investor' tax credit.

Russ Feingold's statement on S. 1233

2009-07-15T14:22:00.001-05:00

SENATE PASSES FEINGOLD’S SMALL BUSINESS PRIORITIES, PART OF E4 INITIATIVE
Feingold Helps Prioritize Federal Funding for Small Business Research and Development of Energy, Water, Domestic Security and Transportation Projects

For Immediate Release – July 14, 2009 Contact: Zach Lowe or Katie Rowley – (202) 224-8657

Washington, D.C. – Last night the U.S. Senate passed an amendment by U.S. Senators Russ Feingold (D-WI) and Tom Coburn (R-OK) to prioritize federal funding for energy, water quality, domestic security and transportation projects – top national priorities where Wisconsin has a strategic advantage. Feingold’s amendment, an important piece of his E4 Initiative launched last year to help fuel job creation and spur economic development, was included in legislation reauthorizing the Small Business Innovation Research Act (SBIR) that the Senate approved. Wisconsin has numerous small businesses, universities and other research institutions that have strengths in these critical national priorities. With Feingold’s amendment, Wisconsin will be well positioned to compete for resources to further these national priorities, while creating jobs and stimulating the economy.

“I am pleased the Senate passed my amendment to help guide federal funding to research and development projects that address our nation’s needs,” Feingold said. “By prioritizing energy, water, domestic security and transportation projects, federal funds will help stimulate small business innovation and job creation, particularly in areas where Wisconsin is a national leader. Not only will this help get people back to work in the short term, it will also address some urgent domestic challenges facing our country.”

In addition to funding priorities, Feingold’s E4 SBIR legislation calls for a boost in total federal spending for the SBIR program. The SBIR legislation passed by the Senate increases the funding allocation for the program from 2.5 percent to 3.5 percent, while also increasing the cap on Phase I and Phase II awards. Since the SBIR program was created in 1982 to promote small business innovation, more than 94,660 projects have been funded totaling more than $20.7 billion. The Senate bill reauthorizes the SBIR program through 2017.

“Increasing funding for the SBIR program and reauthorizing it for another eight years is great news,” Feingold said. “While we still have more work to do ensure there is adequate funding for the SBIR program, the bill passed by the Senate today is a step in the right direction. Small businesses are the engines that drive our economy and I will continue to work to ensure they receive the resources they need.”

Feingold introduced the Strengthening Our Economy Through Small Business Innovation Act to boost funding for the Small Business Innovation Research (SBIR) grant program on September 8, 2008. This E4 victory comes on the heels of another Feingold E4 provision that was signed into law that boosts job growth and helps businesses and homeowners go green by expanding the types of projects that are eligible for the Qualified Energy Conservation Bond (QECB) program.

More information about Feingold’s E4 initiative is available at http://feingold.senate.gov/e4.

The fight begins: S. 1233 passes by unanimous consent

2009-07-14T09:27:00.004-05:00

Last night, the U.S. Senate passed S. 1233 ("the SBIR/STTR Reauthorization Act of 2009") with a single amendment by unanimous consent.

The amendment was offered by Sen. Thomas Coburn (R-OK) and co-sponsored by Sen. Russell Feingold (D-WI), to include the following changes:

The expiration date was changed from 2023 to 2017.
Preference ("to the extent that such projects relate to the mission of the Federal agency") is established for "projects relating to security, energy, transportation, or improving the security and quality of the water supply of the United States ."
A "science-based and statistically driven" annual report is required, to evaluate the effectiveness of the program.
Open and fair competition is reinforced with the requiremen that all funds "must be awarded pursuant to competitive and merit-based selection procedures.''

This is a good bill.

Now how to reconcile the House's disaster of H.R. 2965 with the Senate's S. 1233? THAT is the question!

Baseball Bats & Tennis Courts

2009-07-11T08:22:00.015-05:00

Yesterday, my friend and colleague Fred Patterson, "the SBIR Coach" sent out an email with article links regarding SBIR reauthorization. The odd and infuriating thing about those articles was that nearly every one of them plied disinformation. Some were bizarre in their reporting, making free with the details. It's as if an historian talked about Ben Franklin being caught at a red light on his way to the airport. Some were honest mistakes. Others were intentional, like the repeated argument that changes were intended to "modernize" SBIR to make it easier for small companies to raise capital.

Here again is the link to the floor discussion on the "structured rule" of H.R. 2965. You can read many of the political arguments there. Bear in mind however that the voices heard represent only those which were allowed by the two chairs presiding: Jared Polis and Virginia Foxx. Moderate voices like Ed Markey's were not heard. We heard opposition mostly or entirely from Republicans, making it seem like a partisan tussle. Unfortunately, some of those Republicans used their spare minutes to bash the Democrats, rather than address the issues, reinforcing that false impression. Representative Donald Manzullo from Illinois was a refreshing exception, making clear that reasoned opposition came from members of both parties, singling out proposed amendments by Democrat Ed Markey and Republican John Gingrey.

But I want to clarify the issue here:

This is not about protecting the little guy!
This is about preserving SBIR as a source for seed-capital!

Imagine this: Barry Bonds meets Serena Williams at Wimbledon. Barry represents VCs; Serena stands in for innovative small businesses. Barry brings a bat. What's the deal?

Some will see a big bully with an unfair advantage. But the issue is certainly not that Serena Williams couldn't take Barry in a tennis match. The problem is that he's brought a baseball bat on a tennis court! There's no question whether Barry could knock that little yellow ball out of the ballpark. It's not that VCs are big and burly, that they're unfair competition. It's that they're playing a different game!

GET OFF THE TENNIS COURT WITH YOUR BAT, YOU MORON!

SBIR was created to provide seed capital for promising early-stage ideas. That's Phase I. Bring us an idea that hasn't yet been tried, to solve some problem in the world that wants resolution. We'll give you a small pot of cash to fund one or two researchers for 6 months to a year, to test the feasibility of that idea. And while you're at it, give us a commercialization plan: what's your market? Don't worry, it doesn't have to be big, it just has to be realistic, large enough to get you independent of federal dollars in a couple years.

If your idea proves feasible, we'll give you a medium-sized pot of cash for a couple years to fund the development of your idea into a prototype. That's Phase II. If your prototype delivers on what it promises we'll help you along to get your prototype in the hands of end-users who need it. We'll acquire it if we need it, and we'll encourage you to find strategic partners and investors to make it commercially viable. That's Phase III. It's a system that has worked for three decades.

You see the pattern here? SBIR is for seeding ideas, proving out their feasibility, developing prototype solutions, and culminating in commercialization. That's not new. That's the way it's been. Many of the changes proposed by H.R. 2965 are not modernization, they are destroying a valuable resource. VCs follow another model, say the rules of baseball vs. the rules of tennis. They're both worthy sports. It's just baseball doesn't belong on a tennis court.

VCs want big markets, rapid growth, and a clear and short-fused exit strategy. If your idea will save 200 lives a year, and garner $3m in annual sales, no VC or large corporation will touch it. That's why we need small businesses as well. That's why we need seed-capital. VCs invest in companies; SBIR invests in ideas (at least it had before H.R. 2965). That's the issue!

Here's the fact: A higher percentage of independently-held SBIR firms commercialize their SBIR-sponsored products than VC-held firms do. [Venture Funding and the NIH SBIR Program, National Research Council of the National Academies of Science, June 2009: Figure 6-1, p. 49.]

If SBIR is transformed in the way that H.R. 2965 intends, the last vestige of reliable seed-funding for promising ideas in the United States will have dried up. Mark my words: if this becomes law, the U.S. will lose a great many research entrepreneurs to foreign countries that are more amenable to innovative ideas, and fewer foreign innovators will be migrating to America, choosing more welcoming destinations.

Parody of Debate and Discussion

2009-07-10T16:28:00.003-05:00

Posted on GovTrack is the transcript from the farcical floor discussion of H.R. 2965.
Don't read it if you have a weak stomach.

Flying the bird

2009-07-09T23:25:00.004-05:00

Yesterday morning, my main hard drive failed. Booted up and [gebleep gebleep] Disk Drive 0 not detected. After a long talk with tech support, it would seem that the hard drive is simply dead to my computer. Fortunately, I had had the forethought to back up all my important business and research files before my vacation last week. So, I lost only a couple days worth of work. I suppose it's more like three and half days if you count the time I spent yesterday and today reinstalling all the software and restoring backups. Frustrating, but not catastrophic.

Since I recently joined the Microsoft Partners Program and signed up for the Microsoft Action Pack Subscription (MAPS) the business now has 10 licenses for a whole slew of MS software for about $300 year! I took the opportunity to upgrade the computer from Windows XP to Vista. I gave up on my earlier plans to migrate to Linux, at least for now. Sometimes, running a business means making a judgment call re: priorities. I might like to see a marketplace where software providers are more fairly diversified. But I've been seduced by the fact that Windows is far better supported for plug-and-play functionality. For now, I can't justify the effort to make the change.

I had quite a bit to install and reinstall. On top of trying out the latest offerings by Microsoft, I'm giving the new IBM Lotus Symphony a whirl. IBM doesn't include email and calendaring as part of their free offerings though. I've been using Thunderbird, but thought I might give Outlook a chance again. I started using Thunderbird about the same time I quit using Microsoft Office. But I've realized migrating my emails would be a near herculean feat. I'm not convinced it'd be worth it. Outlook may be more broadly integrated (I noticed even Quicken 2009 offers a "Sync with Outlook" box-though I haven't the slightest idea what it does).

For now, I think I'll stick with Thunderbird, with the Lightning add-on for calendaring. I've experienced some odd problems now and again with saving and editing events... but they're transient and minor. One reason I had left Outlook was that it was such a memory hog, slowing everything down. My guess is Thunderbird is still sleeker in that regard. And it works. What more could you need?

Paul Ryan statement on H.R. 2965

2009-07-09T10:34:00.006-05:00

Rep. Paul Ryan (WI-1) has issued a statement following the passing of the flawed H.R. 2965, including the following remark:

I was troubled by the Majority’s rejection of a commonsense improvement that would have gone further in support of small businesses. Legitimate concerns were raised on the impact on venture capital ownership restrictions, and I was eager to support an amendment to address this issue introduced by Representative Ed Markey, my Democratic colleague from Massachusetts. Unfortunately, the Speaker did not allow a vote on this provision.

Huff and puff and...

2009-07-08T17:18:00.006-05:00

The great strength and value of the Small Business Innovation Research program (SBIR) has always been its ability to seed promising ideas that otherwise might never get off the ground. The innovations that have resulted from SBIR seed funding have saved lives, have saved money, and have provided the federal government and the economy at large with an enormous and incomparable return on investment. This return has taken the form of high-quality and enduring jobs, and transformative innovations that have reached the marketplace where they can benefit the general public as well as the sponsoring agencies.

The overwhelming majority of these innovations have been achieved by independently held small businesses with little to no venture investment. If you don't believe it, the Small Business Technology Council and Anne Eskesen's Innovation Development Institute have compiled extensive statistics on the matter.

The argument that venture capital involvement can be used as a proxy for validity of a small company's viability is a false one. VC investment strongly favors only those companies that are poised for rapid and significant growth. Both the tortoise and the hare finish the race, sometimes in ways you might not expect. Growth and expansion are not the best measures of innovation or value to society.

How many Boston Markets, Circuit Cities, and Starbucks have we seen over-expand and grow too rapidly, resulting not in benefit to society but in the rapid loss of millions of jobs, despite a few shareholders making millions. Winning the lottery provides rapid and significant ROI as well, but its beneficiaries are few, and their largess often smaller. If the principal focus is on short-term financial gain, innovation often suffers. According to the prominent Venture Capitalist Marc Andreesen: "When companies are acquired quickly, innovation slows down."

The greatest threat posed by H.R. 2965 is not its weakening of the eligibility rules, to remove all restrictions to VC participation. If their participation in the end supports the aim of stimulating innovation, creating jobs, and benefiting society, there should be little to complain of. But that's a big "if". The greatest threat is that the proven effective three-tiered system (Phase I: feasibility; Phase II: development; Phase III: commercialization) will be dismantled and discarded.

H.R. 2965 does far more than alter eligibility requirements (perhaps the least of its vices). It raises the caps for funding far beyond what can be justified by inflation (are wages really 250% higher today than a decade ago?), without increasing the pool of funds (by means of raising the allocation percentage of existing expenditures). $10 million can be 100 awards at $100k or five at $2 million each. The math is pretty simple. The net effect of this change will be an immediate and lasting reduction in the number of awards issued (meaning fewer promising ideas will get the chance to move ahead).

But it's worse than that: H.R. 2965 mealy-mouths a requirement for Phase I, opening the door for "justifications" to bypass the crucial feasibility phase, and the bill explicitly authorizes concurrent Phase I/Phase II awards, as well as perpetual consecutive Phase II awards. This means discarding the requirement to prove feasibility before garnering larger awards (as proposed to be on the order of $2 million), and removing any oversight that might enforce that the ideas funded hold commercial viability beyond perpetual government subsidy.

This is not about protecting small businesses from the Big Bad Wolf. Entrepreneurs can hold our own. It's about safeguarding that American taxpayer dollars will be well spent, that the investments made to stimulate innovation will be sufficiently diversified to ensure that in the end the American taxpayer is the greatest beneficiary. What a refreshing change from recent policy that would be!

Appropriate names

2009-07-07T20:50:00.009-05:00

I've mused at how Bernie Madoff has an appropriate surname, having made off with so many people's cash.

Now, I come to reflect on just how appropriate a name Slaughter is for the chairwoman of the House Rules committee, which just flagged the railroad through the station. Get this, absolutely no debate, no opposition to the leadership of the House Committee on Shafting Small Businesses and the House Committee for Remanding Science and Technology to the Sole Discretion of Universities and Profit-Takers. It figures that the Honorable Louise M. Slaughter hails from New York, the only state in the Union which receives more seed funding from VCs than from SBIR!

I just don't get it, really I don't. Government of the people, by the people, for the people only permits the wealthy and the established to participate. New ideas need not apply! Innovation? Check it at the door, unless it can guarantee our friends here a hefty ROI in short order. Who do these people work for, anyway? How can no debate serve anyone's best interest? How can legislators honestly expect to arrive at the best resolution to contentious matters without open discussion of the issues? I begin to believe that isn't their motivation. Then, what is?

Victor's justice! I am so ashamed of this government! Not even the decency of open debate! Really, I thought only countries like Iran and Venezuela permitted such stifling of democracy.

Marc Andreesen: "...innovation slows down"

2009-07-07T08:17:00.009-05:00

Claire Cain Miller of The New York Times has been covering the new venture by Marc Andreesen & Ben Horowitz. Today's installment includes the remarkable quote:

When companies are acquired quickly, innovation slows down, Mr. Andreessen said.

Isn't that what we've been arguing all along? Isn't that the linchpin in the case against a VC takeover of the Small Business Innovation Research program (SBIR)? Small, independently held businesses are the most innovative around!

SBIR represents the last great opportunity for seed funding. Even with the "secret plan" of Andreesen Horowitz (as Claire Cain Miller puts it), it is clear that the overwhelming majority of us will not benefit from their largess. Why? As her article from yesterday put it:

Almost all of the companies in which they invest will be in Silicon Valley, they said.

So, what's new about that? While I would heartily welcome the participation of Venture Capital in seeding promising ideas, taking a minority stake in companies and entrepreneurs proving out their ideas (pre-prototype, pre-growth), it seems unlikely that VCs will suddenly branch out from their tiny coastal enclaves, doling out largess to sponsor yet-unproven ideas.

In the meantime, SBIR remains the only game in town (that is, unless the leadership of the House Small Business Committee and House Science & Technology Committee succeeds in railroading through HR 2965 without amendment). That remains to be seen.

Hope for SBIR in the House

2009-07-06T11:27:00.005-05:00

Rep. Ed Markey of Massachusetts has submitted an amendment to H.R. 2965 which:

Allows NIH to direct up to 15% of its SBIR budget to majority venture owned businesses and allows every other agency to direct up to 5% of its SBIR budget to majority venture owned businesses instead of allowing majority venture owned businesses unfettered access to all SBIR funding.
Increases Phase I and Phase II award sizes from $100,000 to $150,000 and Phase II award sizes from $750,000 to $1,000,000 instead of $100,000 to $250,000 and $750,000 to $2,000,000 as proposed by H.R. 2965.

This is a good amendment to an otherwise destructive bill. SBIR must be reauthorized for the sake of innovation, for the sake of small businesses, for the sake of job creation, for the sake of our national economic well-being. H.R. 2965 as submitted without amendment would transform the more than quarter-century proven success of SBIR into a neo-SBIR, far less inclined to support seed funding for truly innovative businesses, and far more likely to subsidize the risk mitigation interests of large venture capital firms, and the tiny portfolio of companies they own. Markey's proposal allows for a reasonable accommodation of VC-majority ownership without gutting the strengths of SBIR.

Most importantly:

SBIR must be retained in Phase I for early-stage seed funding, to support pre-prototype feasibility studies--Phase I should be sacrosanct; This issue is not directly addressed in Markey's amendment. H.R. 2965 allows for dangerous precedents in weakening the status of Phase I.
Increases to allocations should reflect inflation and the higher cost of doing business today, but not raised so high as to severely reduce the number of awards under the program.
The SBIR allocation as a percentage of agencies' budgets should reflect the value of SBIR for the greater economy, principally it's ability to create and sustain high-quality employment. In this light, a significant increase (at least a doubling or tripling of the current 2.5%) could be easily justified.

Fed prizes for innovation

2009-06-27T21:31:00.009-05:00

The Office of Science and Technology Policy (OSTP) blog posted a challenge today to propose ideas for government sponsored competitions, á la the X Prize Foundation. Among their reasons for considering this approach was that it might allow the government to: "Attract new entrants such as small entrepreneurial firms."

Um... doesn't SBIR do that? Don't get me wrong: it's an interesting proposal, and certainly worth consideration as part of the arsenal the government uses to stimulate innovation. But... I'm not sure I see how this would attract "small entrepreneurial firms," at least those without another significant source of funding.

Science and R&D take time, and effort, and creativity, and persistence, and a willingness to endure lots and lots of failure before arriving at a novel solution to a long-standing problem. Thing is, small entrepreneurial firms still need to make payroll. At present, there are two ways to be an innovative entrepreneur:

Be independently wealthy, and therefore afford the leisure to pursue your passions.
Obtain funding from an outside source to cover the essentials (mortgage and utilities and food) long enough to make a breakthrough that's self-sustaining.

At present, what outside sources of funding are available to sustain the majority of us who fall into category 2? Well, let's see, there's Angel Investors and Venture Capital. The latter of these is constitutionally allergic to early-stage pre-prototype research, preferring a significant ROI in general by about the fifth year; the former of these is marginally more open to it, seeking an exit at around 7 years, but represents a vanishingly small pot of funds, and therefore is accessible to only a very few firms.

Then, there's SBIR! Now, just why would we think that shifting the focus of SBIR away from early-stage seed funding would be good for innovation?

And just why is OSTP Director John Holdren writing to the Chair of the Senate Small Business Committee to argue against increasing the allocation percentage for SBIR by contending President Obama "is committed to increasing federal investment in R&D ... which will increase the total funding available to the SBIR/STTR programs" and that the current pathetically low allocation of 2.5% of extramural R&D funding from qualifying agencies to small businesses (which incidentally account for the overwhelming majority of new jobs created in this country) therefore provides "a sufficient floor for agencies to invest in innovation from small businesses”?

Is that where the Administration thinks innovative entrepreneurs belong: on the floor?

Supply + Demand + Invisible Hand

2009-06-27T11:42:00.001-05:00

At the risk of perverting Adam Smith's metaphor, the Invisible Hand seems quite an apt image for that force of economics that distorts the surface of things.

If only Supply vs. Demand were a complete picture! This is how one might view the world: Merchant Abe has a supply of 100 units of Quagmire Oil, a very useful substance for releasing oneself from quagmires. One unit suffices for a single use. There are 200 residents in Abe's village of Borbor, who are prone to getting enmired, thus a market is born.

The first week, Abe charges 2 Boreals per unit. He sells out in a day to 100 patrons. He gets a fresh supply the following week, and raises his rates to 3 Boreals. Of the initial 100 units, 50 remain, so eager buyers have diminished to 150. Still he sells out in a day.

The next week, he brings 200 units to market, but only sells 75. The following week, he has competition, and a total of 400 units are for sale. Suddenly, the price drops to 1 Boreal per unit, and supplies stock up. Voilá, an economic theory.

But, see this:

ECONOMISTS tend to think that an industry divided between hundreds of players, each with a tiny market share, should be fiercely competitive, with prices cut to the bone. But economic theory struggles to explain the bizarre world of fund management, where the market is fragmented but fees stay stubbornly high.
-- "Competitive failure," The Economist, June 18, 2009

The only surprise here is that this sort of social and economic complexity would surprise anyone. Perhaps economists would benefit from talking to psychologists and sociologists. Perhaps the world would become a clearer place, or at least a less perplexing one if we encouraged the cross-fertilization of ideas across multiple disciplines, calling on a wealth of methodologies, backgrounds, and approaches. Therein lies true innovation.

Truth is, there are pernicious pockets of irrational pricing that pervade the market, which have seemingly less to do with any supply vs. demand calculations, and more to do with established expectations. One would be inclined to suspect that cost is relative to worth, and that worth is easily calculated by supply vs. demand. How much is it worth? is a question we often ask, wishing to buy and sell at a fair market price.

The greater the supply or lower the demand, the lower the worth; the lower the supply or greater the demand, the higher worth. But, we've seen how that tack was not sufficient to determine appropriate pricing of housing markets across the world (or for that matter appropriate pricing of company shares). Why? Because we all began to expect the value to be justified by the prices others were willing to pay. It became less what do I need? What's it worth to me? and more:

Alright, so I need a house... and this one's sufficient, but that family bought a bigger house, sold it in two years for a handsome profit, and moved to an even bigger one. Gosh, I'd sure like to do that.

And so... a market is born. Only, it was never sustainable. When I was living in Santa Barbara, looking at house prices with multiples of 12, 15, or even more of average household income, I scratched my head, and decided to sit out the market for a while. The old rule of thumb I learned was a house should cost on average 2-3 x a household's annual gross income. Our current house in Wisconsin is 1-2 times current earnings. And we're happy. Sure the weather is nicer year round in SB than here. But now I can afford to visit when the weather gets rough.

More importantly, in Santa Barbara, renting was cheaper, MUCH cheaper. The cost to buy a comparable property carried a premium of at least 40-60%. The calculation is a rather simple one, but so few people did it. But it's not just house prices.

How do we explain that two professors at the same university, with the same experience, teaching the same load of classes, to the same number of students, who each pay the same tuition, can receive widely divergent salaries based on nothing more than their discipline? The argument is that an economist or engineer or lawyer for instance can make far more "in industry" than, say a sociologist or historian, and thus their wages must be higher to compete for talent. But why? They're not working in industry now are they?

Here's a bid for the free market. If people are simply unwilling to pay the higher prices for goods, or houses, or in wages, the market will revert. The article cited above continues:

If enough investors focus on cost, not performance, the fund-management industry will have to give them a better deal.

I've made a similar argument about wages. When I taught adjunct at Chapman University in Orange, California--a private university where tuition is around $30,000 a year--I was appalled that they could offer a PhD a mere $15,000 gross a year to teach 80 students per term, call it part-time employment, and refuse to offer any benefits whatsoever (including an office to fulfill their requirement of office hours). Even more appalling was that, a week after I resigned, being willing to endure those conditions for only one term, two instructors were hired to fill my shoes, one for each of my two classes.

The point is, so long as people are willing to accept the expectations they've been given, the more those expectations are reinforced. If they cue up (providing supply) to receive low wages, low wages will continue. If they cue up to buy overpriced goods, or services, or houses, the prices will continue to rise. That is... until they can no longer. That's the free market. It will correct itself, if we permit it to.

Don't buy when the prices are too dear: whether it's a house, or an accountant or attorney. And don't take less than you or your company is worth. Simple lessons, but they all come down to one enormously powerful ability we all possess: the power to say no! Use it, but use it wisely.

SBIR Patent expenses

2009-06-26T22:57:00.003-05:00

I had been under the impression that patent expenses were disallowed under SBIR. The spreadsheet my new accountant has asked me to populate for calculating my overhead rate however included a line item for commercial patent expenses. I was curious, so I did a search for "SBIR patent costs". It turned up the following:

As recommended by the DoD SBIR Process Action Team and approved by the Under Secretary of Defense (Acquisition and Technology), patent searches and applications may be included in the statements of work for Phase II contracts. (Patent searches and applications may be included in the proposed statement of work or as part of indirect cost.) It should be noted that obtaining a patent will probably take a number of years. In the case where a cost reimbursable contract has been awarded for the effort, the contract may need to remain open until the patent is granted in order for the associated cost be recovered. If the statement of work does not contain authorization for the direct charging of patent effort, the Contracting Officer may want to add a clause that the patent cost is an allowable indirect cost. The Government obtains rights to the patent in accordance with 52.227-11, Patent Rights--Retention by the Contractor (Short Form). This clause will assure that the contractor will at least receive partial compensation for the incurred patent cost.

That's a good thing to know. I'll be sure to follow up on it, and ask to include the relevant clause in my contract.

The railroad runs on time

2009-06-24T11:40:00.002-05:00

Today, members of the House Science & Technology Committee met (briefly) to markup H.R. 2965, the SBIR Reauthorization consolidation bill of H.R. 2767, H.R. 2772, H.R. 2769, and H.R. 2747. Apparently, nothing useful came of the meeting. Rather, it seems to have been a mere station stop as the railroad of the House SBIR Reauthorization picks up steam.

There is a willful disregard for the interests of constituents, small businesses, and the needs of society for innovation and job creation, as representatives fall over each other to fawn on the narrow interests of risk mitigation for the NVCA and BIO. Money talks, when reason can't.

One suggestion has it that the motivation behind a short fuse for SBIR Reauthorization may have something to do with the desire to extract every last cent of contributions for re-election campaigns. In the words of Rick Shindell's June 14th SBIR Insider:

As for only a two year extension, try this: BIO and NVCA have spent tons of $$$ in lobbying this issue and supporting election campaigns, in no small part for the SBIR VC change. Money will be needed in the 2010 "off year" elections as well as 2012 and the House knows it can depend on NVCA and BIO to do their share if the House will again support the VC issue for the next SBIR reauthorization. If you have a better explanation of why the SBC wants only a two year reauthorization, let me know.

The efforts on the House side are distasteful coming from committees whose purview and interests are ostensibly supporting Small Businesses and Science, Technology, and Innovation. Why do they repeatedly shut out the voice of small innovative businesses? Or, when they do permit them, why do they insist on drowning them out with NVCA and BIO representation? Perhaps the committees should be renamed The House Committee on Shafting Small Businesses and The House Committee for Remanding Science and Technology to the Sole Discretion of Universities and Profit-Takers.

Evaluation Without Representation!

Academia ≠ Innovation

2009-06-23T10:04:00.004-05:00

I have just become aware of a little tidbit of academic ~~freedom~~ that to my mind serves as a remarkably salient reminder of why academia is not the most conducive environment for innovation.

The principle on which I rest this pronouncement is a belief that innovation most often arises from an admixture of ideas from various fields, cross-fertilizing to result in some new knowledge. When chemists began to think about biological systems, and biologists wondered at organic chemistry, voilá Biochemistry arose!

But academia is quite often structured in such a way that scholars are herded and confined like calves for veal, or blindered like racehorses, their freedom of movement allowed only within pre-established lanes. Think not outside the box!

Apparently some recent court cases have called into question academics' freedom of speech "outside of your field of scholarship." Members of the Faculty Senate at the University of California-Davis for instance were recently notified:

...university policies on academic freedom ... only protect speech and behavior in your area of demonstrated academic scholarship.

Are they serious? Absolutely astonishing!

And yet... arising from this same culture of veal-calf confinement is the whining complaint that the Senate's version of the SBIR reauthorization bill (S.1233) threatens the great strength of academic-led innovation because it allows for a microscopic increase (at .1%/year for 10 years!) of the allocation of federal R&D funding from 2.5% to 3.5%! The basis of their complaint is that raising the allocation for small business innovation necessarily reduces the pot of funds available elsewhere.

This letter by the "Ad Hoc Group for Medical Research" currently circulating bemoans:

...a mandatory increase in the SBIR allocation across agencies will necessarily result in funding cuts for the peer-reviewed research conducted by other organizations.

They go on to argue disingenously:

Rather than increasing support for one type of research at the expense of all others, we urge Congress to work with the Obama Administration to increase funding for all research, thereby increasing the total investment in SBIR.

Why golly, 96.5% isn't enough for you? Funny, it seems that 97.5% hasn't been enough either. You see, the very same group that pretends to support increased funding across the board for all research, lauded the $10.4 billion allocation to NIH in the American Recovery and Reinvestment Act (ARRA), calling for an additional $2.1 billion in FY 2010, yet remained provocatively and conspicuously silent on the underhanded and counterproductive exclusion of SBIR and STTR from those expenditures. How can you argue with a straight-face that increasing funding across the board benefits all parties, yet remain silent when there is increased support for one type of research at the expense of another?

More importantly benefit should be measured in terms of the potential of results to solve realworld problems and to succeed in the marketplace, where they might actually reach their intended recipients. Else the benefit is merely hypothetical, locked in a petri dish on a shelf, or in a paper published and presented then forgotten. Research, even basic research, should have a more lofty goal than perpetuo sui. Federal expenditures should be directed at practical applications with commercial viability, not merely at propelling the careers of academics and funding their students and postdocs (many of whom at the end of the day will find the opportunities lacking and the playing field all but level for those without connections or money).

If those academic institutions provided sufficient opportunities for all the worthy and innovative researchers, there'd be little need or incentive for the rest of us to launch our own ventures. But as they do not, and as they provide no evidence of moving in that direction, SBIR remains one of the very few resources available to foster and support an open marketplace of ideas, based not on paper credentials and affiliations, but on the strength of the proposed research and its potential viability in the commercial domain.

SBIR allows but a tiny fraction as a percentage of federal R&D already on the books to be set-aside for open competition among the most innovative small businesses in the land. The requirements for SBIR firms are more stringent than for academic institutions (expecting commercial potential as well as technical merit) for far fewer dollars. SBIR firms enter Phase I on probation, allowed a mere six months funding to prove the feasibility of their proposed efforts before being invited to compete for further funding.

In many cases, these proposals are evaluated not by our peers, but under the biased gaze of those very academics who would rather retain all available funds for fellow academics. To coin a phrase, this isn't peer-review but Evaluation Without Representation! What I'd like to hear are the justifications that academic institutions (and large corporations and government labs) have any right to such uncontested access to taxpayers' money! And where others are permitted to compete, that they should retain the right and authority to decide where those funds should go. Why do they fear an open and fair competition of ideas?

What are we protecting here? What do we value as a nation and a people? What is the best means for expending federal R&D dollars? I would propose it is through programs like SBIR, focused on ensuring that innovative researchers are allowed to compete for the means to support their efforts to remedy existing failures, with an eye toward the commericial viability of their results. This is transparency; this is the path to job creation, to innovation, to economic well-being. What is the alternative?