The novel regime taking root in America is "hyper-representative" government, government that teems and pulses with the interests and opinions encompassed in the nation. .. Since 1970, the number of lobbying groups has exploded to 23,000. ... government's amazing openness. ... Administrators are now highly sensitive to - and often afraid of - even the tiniest group that might object to an initiative. .. The overall result is something philosophers of limited government like Frederick Hayek would endorse: a government that appreciates the complexity of society and therefore tends to stay out of things. [J Payne, The American Enterprise, Jan/Feb00] Before you cheer the restrictions of active government, be sure you are not simultaneously cheering subsidies like SBIR. Industrial policy. It is impossible to attach a single name to this clunker because, back in the early 80s, so many thinkers were aching to sell us on it. ... The collective brainstorm: The market cannot be trusted to allocate resources to the right industries, so we need to get the government involved in the process. ... The Carter administration characteristically never made up its mind about industrial policy, but Reagan forthrightly rejected the whole idea, and it went away after the economy began booming without it in 1983. [Dan Seligman, Forbes, Dec 27] Well, almost. SBIR survived the assault and lives today as another experiment in industrial policy. Is it working? Who knows? No credible result has ever been measured. Is it working better than doing nothing of the kind? Same no decision. Seligman lists the ten dumbest ideas for management of the economy: profit-taking, rent control, industrial policy, incomes policy, comparable worth, greed, the new industrial state, perestroika, collective bargaining, laws against ticket-scalping.   Lies, Damn Lies, and Innovations For as long as innovators have been around, they've lied. Lied about the possible obstacles to further innovation. Lied about the utility of their innovations. Lied about the economic advantages of their breakthroughs. Lied about the breakthroughs themselves - all in the service of promoting their innovative technologies. ... This impulse to misrepresent is natural. Innovators have it tough. There are no sure things. They must battle for "mind share". Especially when an innovation attacks an existing technology - as most do - it takes a lot of sizzle to get consumers to pay attention. And investors don't like to spend their money on losers. So every new technology must be a winner, which is how little lies grow up to be big ones. [GP Zachary, MIT Technology Review, Jan/Feb00] Government SBIR evaluators and deciders should be well aware of the scale of lying. The government technologists encourage it because the company's lies help the advocates compete internally for budget allocation. The deciders are the ones with the problem of ranking fantasies. They look for supporting evidence, like third-party validation. They're not so conservative that they pick only sure things (which would hardly be worth the money) or they wouldn't be in the R&D business at all. They want to fund innovative things that at least have realistic estimates attached to them. Go get some hard evidence instead of just waving your hands about the wonders of your gizmo. Cut out the bloated proverbs that say nothing while you fill a required block in the format (that the requirers have forgotten why it's there anyway). Tell your lie with some imagination. As the NASDAQ made a new high despite (or because of) the Microsoft monopoly finding, good news for SBIR-like companies. Cree Research made another new high; Cree is one of the very best examples of what SBIR can and should do. Another Triple Figure An astute reader noted that SDL wasn't the only SBIR firm to have triple digit stock price. Qualcomm in the 80s got about $1M SBIR from AF and Navy at a time when it tripled from 100 to 300 employees. Judging how much effect SBIR had 0n Qualcomm's fortunes would be an interesting exercise. On the theory that victory has a thousand fathers, AF and Navy should claim credit for Qualcomm's rise to a $34B market cap including a nine-fold gain in the past 12 months. Actually, SBIR's role in SDL isn't all that different from in Qualcomm. In the mid 90s SBIR put in few million as SDL rose from 200 to beyond SBIR's 500 limit. A Pittsburgh Incubator Henry and Tommy Wang, founders of Pittsburgh Direct Technology Inc., have partnered with Ned Renzi, a general partner at the Hazelwood-based CEO Venture Fund, to found iVenture Labs, an incubator that they hope will foster growth of other tech firms here. iVenture will offer Internet startups office space at Pittsburgh Direct's Oakland building as part of a total service package including: Web and software design expertise from the Wangs' company; legal services from Buchanan Ingersoll; on-site marketing assistance from Zer0 to 5ive; assistance in locating experienced CEOs; and access to venture capital. In exchange, the promising but unproven startups offer equity to iVenture's partners. "There's a big push in Silicon Valley to have incubators," said Jack Roseman, associate director of Carnegie Mellon University's Donald H. Jones Center for Entrepreneurship. "It makes sense (for investors to reside) in the same place as the investment." [Pittsburgh Business Times, Dec 20] Florida Tech Policy - Do Something. A state-funded task force plans to meet Dec. 17 in Fort Lauderdale to map out a legislative strategy to boost information technology businesses in Florida. The Information Service Technology Development Task Force, established by the Legislature this year, has been traveling around the state since it became fully staffed in October to increase awareness about its mission. The task force is expected to make recommendations to the Legislature in February and 2001 for policies to foster free-market development and the use of information technology in Florida. [Lisa R. Schoolcraft, Jacksonville Business Journal, Dec 13] Advice from federal SBIR experience: don't subsidize firms directly. Senate Arranging Deck Chairs (Dec 15) The Senate is arguing over how to arrange the deck chairs on a ship that is going nowhere. Chris Busch reports that Senator Enzi, SBC Chairman Senator Kit Bond (R-MO), and other SBC majority members (Senators Conrad Burns (R-MT), Mike Crapo (R-ID) and Olympia Snowe (R-ME)) have been working closely with the SBC minority members to reach a compromise on volunteer mentoring language. These negotiations are focusing on the definition of eligible associations to administer the program, and the assurance that volunteer mentoring be provided to small business concerns located throughout the entire country. If a compromise is reached, the legislation will be more beneficial to rural states. The have-not states are groping for a sharing formula for a handout, not for a national compoetitiveness formula. SBIR gave up on that long ago when it saw that the federal agencies refused to manage it for such a goal anyway. Now the have-nots feel free to grab without fear of endangering American competitiveness. Taking business risk is the job of private capital markets. The job of government is to minimize systemic risks. Tough luck if you lose money at the stock exchange, but it's government's job to make sure you aren't mugged on the way there." [DP Goldman, Forbes, Dec 13] It is equally NOT government's job to reduce business risk for new technology. Federal agencies (who are thinking at all about such choices) need to structure their SBIR programs to reduce only technical risk (the chance that it will not work) and NOT business risk (the chance that it will not sell). The co-investment, used by enlightened agencies as a market credibility clue and hated by the SBA's Office of Advocacy, allows a transition between technical risk and business risk. Tech Investment Competitiveness. Never mind the facts, the US government must have high-tech subsidy programs (like SBIR and ATP) to maintain national competitiveness. Baloney! The US leads the world in tech investment as a percent of GDP. 4.6% in 1198 and an estimated 6% in 1999, whereas our competitors highest is Sweden with 3.5%. Japan 2.6%, Germany 2.1%. [facst from Business Week, Dec 20] Well, SBIR is a mirage anyway since it adds nothing to high-tech investment Wake-Up Call for Subsidy Programs The Ag Department had a classic dreamy-eyed program that its IG says was nonsense. The Alternative Agricultural Research and Commercialization Corp.was created to finance new industrial uses of crops, a classic handout to rurual areas. But now USDA will be closing the program after the IG said it lost most of its money in bad investments - 75% of the $43M million in "investments". Investments - Hah! Investments in farm state votes. It's the same political payoff as SBIR "investments". A government agency is supposed to pick winning investments from among market failures. If the IGs of the departments took the same hard line with SBIR, that program would be in trouble also. Except, SBIR has the political protection of the Small Business Handout Committees of both House and Senate to keep alive the market-failure baloney. Congress Adjourns With No New SBIR. Since the have-not states could not find a compromise with the have states, SBIR re-authorization will have to wait until next year. Congress went home without acting on it. In a way, the advocates of a "merit-based" SBIR have only themselves to blame for the stalemate. They wanted and got a visibly big SBIR in 1992 but they then advocated that the agencies muddle without any demonstrable national benefit. For 15 years they have more excuses than investors and have taken the government's dollar for the government's business. So, if it is just going to be a handout to small business, it becomes a pie to be shared "equitably", which is an invitation to spread pieces around the table. So, the present beneficiaries who had captured the politics of SBIR will have to be shocked, shocked! at the silicon-envy of Nevada and Missouri. The brawl could get ungly despite all the money running around to be shared. Amid the glitter and glitz of the Las Vegas Hilton casino, the SBIR National Conference told the rookies about the lottery called SBIR proposing. The usual questions got the usual answers. DOD revealed that Fast Track is getting a bigger piece of Phase 2 awards at which the political SBIR pushers groaned.The Las Vegas Congresswoman set an SBIR conference record with a five minute luncheon speech. SBIR Challenges and Opportunities The National Research Council has finally published a report of its Feb 98 syymposium on SBIR.Many different speakers from Congress to participating companies opined on what is right and wrong with the approach and analysis. The critics and the cheerleaders got their say. No verdict excpet that it needs continuing study (what else do researchers recommend?). The NRC paraphrased well what all the speakers had to say plus the most important questions from the audience.   In Europe and Asia investors talk about risk, but their psyches propel them toward the comfort of guarantees. They are not prepared to lose 10 startups for a 100-fold appreciation in the one that makes it big. In the United States, where capital is usually risk-aware, it is often greedy and lacks staying power - two additional avenues to failure. ... To understand how important passion is to innovation, look at “technology transfer” through inanimate designs: In my experience, the people who are handed someone else’s invention have no stake in it; sooner or later they find an excuse to abandon it Michael Dertouzos, MIT Technology Review, Nov/Dec99] Government's attitude toward SBIR has the same "play-safe and you'll never get criticized" approach. Bucks Start Here Venture capitalists have been investing enormous sums -$7B in 1998 alone, much of it into new Internet and telecommunications companies. Will these heady days for startups continue? Yes, almost inevitably, say experts, citing two and a half years of record-breaking fundraising by leading venture capital firms.According to market research firm VentureOne, venture funds this year are set to meet or exceed 1998 levels, when they collected $15.7B from limited partners (the corporations, pension funds and wealthy individuals whose money they invest. That was more than double the 1996 figure of $7.7B. There is a considerable pent-up pipeline of investment money,saysPricewaterhouseCoopers analyst Larry Buchsman. Because it typically takes several years to spend a newly raised fund, the effects of surging commitments to venture funds that began in 1997 are starting to be felt as venture firms channel these windfalls into startup companies. Says Paul Zigman, a partner at Ampersand Ventures of Wellesley, Mass."It’s a good time for entrepreneurs." [Antonio Regalado, MIT Technology Review, Nov/Dec99]. Summit on Innovation: Federal Policy for the New Millennium The wonks will gather Nov 30-Dec 1 to discuss innovation. The White House's National Science and Technology Council wants the summit to furnish valuable public input as it develops Federal policy to enhance innovation into the new millennium. A gaggle of policy wonks have submitted papers that you can read by academics and associations. One paper, by the National Commission on Entreneurship recommends SBIR be re-authorized as a commercialization of technology vehicle with three changes: larger awards, multiple awardees required to provide data on past commercialization, and extension of DOD Fast Track to other agencies. Thinking About an Energy SBIR? DOE stats say that in 1999, 32 companies won a Phase II award for the first time out of 69 companies altogether (46%).In 1998, 40% of the companies that won Phase I awards, won DOE SBIR award for the first time, a number that has been about the same for nine years. For Phase II 56% won a DOE Phase II for the first time. DOE claims Phase III success in sales and funds raised to pursue commercialization in amounts of nearly $1B - three times the DOE investment - where 70% percent of Phase II projects got Phase III money. The average for Phase 1 in 1999 was 17% funded, a number that doesn't mean much since it measures how well DOE advertises its real objectives rather than, as the SBIR advocates like to spout, a keenly competitive program. Proposals are due Feb 29. Republicans Love Immigration (Aug 23) John McCain plans to introduce another bill for 175,000 visas to let US companies hire yet highly skilled foreign workers. The frenzy does what high-tech companies want - brain drain from other countries. Earlier this month, Demo Zoe Lofgren (Silicon Valley) introduced a bill to extend the stay to five years. Phil Gramm and (Rep) David Dreier (Southern California) introduced bills to up the intake to 200,000 annually. Alongside this frenzy of filing job vacancies, subsidy programs like SBIR still use a rationale of job creation. So, SBIR pretends to create jobs that have no takers and the immigration limit rises to accommodate it. Actually, SBIR adds no new jobs anyway since it just diverts money from one pocket to another within the federal R&D programs, and only the small business politicians pretend to believe the job creation mantra. The California Republicans find themselves in a particular intellectual bind since many Californians grouse about the evils of immigrants while enjoying the fruits of black-market service labor.   Innovation Is What's Keeping Prices--and Power--in Check. With mergers worth almost $3 trillion occurring in the U.S. and world economies this year and investment analysts using the word "oligopoly" to describe the concentration of giant firms in major industries, why don't we see more evidence of monopoly power and rising prices? In one word: innovation. If you want to understand the forces driving the economy, look at such companies as EMC and Dell Computer. And look at Cisco Systems and a host of small companies now experimenting with ways to construct the Internet. ... All those companies illustrate the principle that innovative companies are bringing lower prices to the economy. And large older firms, huddling together like cattle in a storm, are struggling to keep up with headlong change. Companies virtually unknown a decade ago have come to the fore on the strength of information management. Companies with new ideas attract capital. Take Dell Computer, the Austin, Texas-based company that innovated the simple idea of selling made-to-order computers by mail and Internet. Dell can do that because it farms out the manufacture of most parts--as does EMC--retaining design and quality control. That's not the way things were done when large corporations saw control of every part of their product as essential. ... Venture investors understand that the Internet is not a fad or a stock market bubble, but a long-term force of innovation for the economy. Such forces take time to evolve. ...the semiconductor industry changed the world and created enormous wealth. And now the Internet promises even more innovation and wealth creation. That's why innovation and not oligopoly is the force driving the world economy today. [James Flanigan , LA Times, Aug 22] What was the government's role in this innovation-driven revolution? Transparent securities markets, stable currency, enforceable laws, impartial courts - the things a government does well. NOT direct subsidy as in programs like ATP and SBIR - which a government does abominably. But nonetheless SBIR exists and will pass out $1B a year to "deserving" companies. If you have an interesting innovation worth lots of market pull, go find private backing - whatever the price. If you have vague dreams and some good scientists, go get a subsidy and then struggle to escape the trap of government succor.   Websites from The Chicago Tribune GET TO THE GOVA free, virtual resource center for anyone exploring the Web for federal, state and local government information, GovSpot simplifies the search for the best government Web sites and documents, facts and figures, news and political information. FOR GEEKS ONLY It used to be you called someone a geek and wounded their pride. Call someone a geek today and you might as well call them an "Internet gazillionaire." Go figure. This site is brimming with tech news, chat areas, polls and software reviews. ECONOMIST JOKES Those crazy economists. Seems like someone these days is trying to make a joke about federal excise taxes or Adam Smith. Some of these jokes are funny, (We liked the Top 10 Reasons to Study Economics: No. 4--You get to say "trickle down" with a straight face) and some of them are . . . economist jokes. Tread carefully. THE NEXT VALLEY? There was a time when Silicon Valley was just a little batch of towns south of San Francisco. Then someone thought of a cool name for all those high-tech businesses. Folks in South Florida think it's time someone coins a cool phrase for all their tech industry corporations. Hence the name Internet Coast. If nothing else, visit the site to catch its nifty design and use of multimedia. NIMBBY - Not in My British Back Yard The Wellcome Trust, the world's wealthiest research charity, cannot build a $160M science park in the countryside near Cambridge England yesterday lost its controversial application Wellcome's head of genomics called the rejection a "national disaster" and that Britain risked losing its leading role in the mapping and decoding of the genes that provide the human blueprint. Wellcome saw its plans as a test of the Government's stated commitment to encourage the development of Britain's science research centres. [The Times, Aug 19] Cambridge pretends it is growing to rival Silicon Valley but national politics still controls local decisions despite the devolution moves for Scotland and Wales. Young Triangle companies raised far more outside funding than ever in the latest quarter. Simply put, it was a blowout quarter. The $135M raised by 19 privately owned Triangle businesses in the second quarter exceeds the amount raised in all of 1997 and is more than double the amount raised in the first three months of this year, according to data compiled by the accounting firm Pricewaterhouse Coopers. [Raleigh News & Observer, Aug 18] What kind of companies? SciQuest.com sells scientific products over the Internet; Protein Delivery, a biotechnology company; Koz.com, which sells its "community publishing systems" to the online versions of newspapers across the country;. BuildNet, which is developing an electronic commerce service that will link home builders and suppliers; Argomed, medical-devices; awaiting FDA approval of a device that would be used in a low-cost, minimally invasive procedure for treating an enlarged prostate; KV Labs, a network management software company; Orolgic, semiconductor company which expects to have a prototype microchip to show to prospective customers such as Cisco Systems and Nortel Networks; Touch Research, assembles networks of doctors to take part in clinical trials for drug companies; ReadyCom handheld wireless device to let people retrieve voice-mail messages as well as make limited calls. Says a proposal, Commercialization Strategy. XYZ Inc is extremely interested in developing a commercially viable [device] in order to offer its customers enhanced device performance and manufacturability. The potential of developing an analog to [competing device] is a valuable and useful technology for a variety of device applications including [agency interest]. Complete motherhood! If you were an agency SBIR decider, what would think of this company's attitude toward commercializing anything? NO, your objective is to differentiate yourself from your competition, not to join it. Iridium's Downfall: The Marketing Took A Back Seat to Science; Motorola and Partners Spent Billions in Satellite Links For a Phone Few Wanted. [Wall Street Journal, Aug 18] Although SBIR wastes only a few million per idea on unmarketable ideas, the principle is the same. The agencies spend on their knowledge needs and the company fails or becomes a ward of the government. And still that is what the SBTC wants for the future of SBIR. Oh no, of course, they don't frame it that way. They appeal to the motherhood that science begets prosperity while avoiding the niggling details on which science and why. The idea of a market partner as a validator, as practiced by BMDO and DOD's Fast Track, cuts out the science-is-fun projects. If you have a market partner, go to those places with the project. They understand. Have-Not States Have Plenty Pity those have-not states for not getting SBIR? Save it. They are already getting more federal dollars per tax dollar paid than the other states. New Mexico $1.94, West Virginia $1.69, Mississippi, North Dakota, Montana (recognize them from Congressional SBIR hearings?) high on the list. Supported by New Jersey at $0.68. [Source: Tax Foundation, , Aug 18] A Little Politics Can't Hurt. To combat their poor performance, high-tech leaders in Chicago recently established their own political action committee, called Tecpromote, to focus attention on Illinois technology companies. Tom Thornton, who, along with Mark Glennon, started the political action committee (PAC) in July. Thornton, who also is president of the Illinois Coalition, a non-profit group that promotes development of the state's high-tech economy, said while there are many non-profit technology organizations dealing with a variety of issues surrounding the industry, those organizations are prohibited by government campaign finance laws from contributing to political candidates. Tecpromote, an acronym for technology, entrepreneurship and capital formation promotions, will be "focused on issues that impact technology companies in Illinois," said Thornton. "We will be contributing to federal and state candidates who focus on Illinois technology issues," said Glennon, who also founded the Illinois Venture Capital Conference that sponsors an annual gathering of early-stage companies seeking investors. Those issues include sharing federal funding of research; protecting intellectual property rights; prohibiting shareholders from suing unsuccessful start-up companies; creating tax incentives for employers to train IT workers; and the minimizing of e-commerce regulations and taxes. [Chicago Tribune, Aug 17]   A Buy American Program Europe has been discovering America for 500 years, but in the latest chapter, European corporate giants are discovering U.S. high-technology companies, and buying dozens of them. In the action unfolding this year, the biggest trans-Atlantic deal was the $56B acquisition of AirTouch Communications Inc. by Britain's Vodafone Group PLC. But that was hardly the only deal of note. In the first half of 1999 alone, there were 93 other acquisitions of U.S. technology firms by European buyers, up 34% from a year earlier, according to a survey by London-based Broadview International, a unit of U.S. investment bank Broadview Associates. The total value of European acquisitions of U.S. technology companies during the first half of this year reached $72B, nearly triple the first half of 1998. And there are signs that the buying spree may pick up momentum. ... "The European companies realize that they need the technology to compete. It's faster and cheaper just to buy it," says Joseph Quinlan, senior international economist at Morgan Stanley Dean Witter Inc. .. And most of the new targets are young companies, which makes the $72B that foreign companies spent on U.S. acquisitions during the first half even more impressive, says Victor Basta, London-based managing director at Broadview. ... Looking ahead, some investment banks in Europe believe the acquisition activity is headed for explosive growth. ... the U.S. is likely to remain the world's investment destination of choice for some time to come. And even though some foreign portfolio investors are having second thoughts about America's sky-high stock market, when it comes to building or buying companies, the U.S. is still prized. [Bernard Wysocki Jr, Wall Street Journal, Aug 16] Which raises a policy dilemma for SBIR. If SBIR funds good companies, the chances rise that they will be bought out by foreign money, or at least attract foreign investment. That makes the nativists howl and since one surface rationale for SBIR was to help American companies, SBIR success would lead to an unwished result. Congress even asked GAO specifically to see whether foreign interests were benefitting. One the other hand, such an attitude hurts everyone by denying the reality of global markets. Unhappily, since SBIR has become a mere policial program with little economic justification, the pressure will rise to retreat from economic or global competition into a dream-world of funding sweet science. The federal agencies would love it since it would remove any pressure to act like economic creatures.   To a degree that is probably unprecedented in the history of business, many of these entrepreneurs are indeed getting the cash. "If you come out here and show you're not an idiot, and maybe even show you are, it's pretty easy to raise money," says Richard Kimball, a partner in Technology Crossover Ventures. "It'd be embarrassing if you couldn't get funding." That's an exaggeration, but not by much. According to the research firm VentureOne, venture capitalists invested $3.8B in Internet-related companies in the second quarter, nearly triple the $1.4B invested in the second quarter of 1998 and greater than the $3.29B invested during all of 1997. "It's a remarkable trend," says VentureOne President David Witherow. "There has never been a better time to be an entrepreneur." Nor has there been a better time to be a venture capitalist. [David Streitfeld, Washington Post, Aug 15] With all that capital is running around loose out there, what is a free-market government's role in subsidizing high-tech companies? Dosing the sick with placebos? Quack medicine for the benefit of the doctors? Or partly funding only the high risk phase of a high-payoff new technology that could compete (not necessarily win) for VC if a big technical unknown could be clarified? Anything else is a handout to the uncompetitive or just government doing the normal R&D it would have done anyway.   "What is going on in Wyoming?" Why is Wyoming becoming so successful with SBIR awards?" Phase 1 SBIR and STTR awards and associated years: 1994 - 0; 1995 - 3; 1996 - 4; 1997 - 5; 1998 - 8 and thus far in 1999 - 12. Here is what I think we are doing right. Wyoming citizens recognized we had an economic development problem. Options were developed and a bold solution was put into legislation - the Wyoming Business Council. The Council recognized in the absence of venture capital a tool was needed to spur innovation and a structure was needed to assist idea people through to commercialization. SBIR became the tool and an alliance with the University of Wyoming became the structure. Chris Busch became the human in the structure. His efforts to publicize the program and assist are the major reasons we are getting a good share of federal R&D money. Also, the Business Council's Phase 0 program is contributing to our success. Phase 0 is a competitive program with normally two awards per month. The amount awarded is $5,000 to provide businesses the capital to devote the time and expertise to write the Phase 1 application. Success in SBIR is not the end goal, job creation and raising per capita income is. [Tucker Fagan, Wyoming Business Council, quoted in Chris Busch's newsletter] If you were advising the federal government, what would you do for and say to Wyoming? Your answer applies equally to the "have-not" states. You could say the official Constitutional position: "You have improved your apparent competitiveness in SBIR's national program. Which is good for you but of no interest to the federal government which conducts a national competition for the best innovations in the best entrepreneurial companies. The federal government, of course, cannot consider where any proposal came from." But, alas, politics does. The federal officials troop showingly to those empty states to satisfy Congressional members with little prospect that anything of great interest to the agency will ever result. Because although the states brag of their goals for high-tech commerce, and the companies enjoy the temporary funding, the companies are quite unlikely to parlay any federal funding into big business gains without a cluster of like companies and industries and world-class universities in the area. But our small state representation in the Senate protects the interests of the emptiest states. Fortunately, the only practical waste is the travel by federal officials; the actual awards remain merit-based. Actually, the feds may as well throw awards to the small states' companies since most of the "merit-based" awards they do make have just as little commercial prospect. On the other hand, look at Fairfield, Iowa. few places have been as dramatically transformed by the Internet economy as this small town of 10,000. What changed Fairfield to what some locals call "Silicorn Valley"? The arrival of a wave of technically savvy sophisticates bent on creating their idea of a postindustrial idyll amid the fields of corn and soybeans. The emergence of Fairfield as a high tech hub of sorts has its roots in the 1960s, when a large number of urbanites were drawn to new religions often derived from Asian mystical beliefs. One of the most successful and enduring of these movements, Transcendental Meditation (TM), grew large and wealthy enough to seek out a more substantial base of operations to replace its small, crowded headquarters in Santa Barbara, California. Since then, an entire generation of new businesses--most of them information based--has created an aura of prosperity in once-struggling Fairfield. Almost all of the new businesses have been founded by the TM crowd, whom the natives call "Rus"--pronounced "rooz," as in "gurus" ... David Neff, a banker with Iowa State Bank & Trust, estimates the Rus have created up to 1,500 jobs in high tech businesses ranging from telecommunications companies to Internet providers to PC-oriented magazines. Neff sees the phenomenon being replicated in other places, including Cedar Rapids and Iowa City. Even as many other rural communities continue to lose population, these hot spots are becoming increasingly attractive to people fleeing larger metropolises. [Forbes ASAP, Aug 99] What Iowa had and Montana does not yet have is an established community that can harness the communication idea of the Net. Diverse hard-science labs, however high their science quality, don't make the same kind of fertile ground. NVCA Speaks, Boosters Howl. Who might have a better view of how SBIR could become an smart investor than The National Venture Capital Association? "Don't touch our SBIR," howl the advocates. NVCA wrote the House Science Committee to recommend some SBIR improvements in what it calls a successful program: bigger Phase 1 awards, business plans for Phase 2 proposals, accountability for multiple Phase 2 winners, more DOD-style Fast Track, and the controversial studying of some radical ideas like limits of total SBIR for any company and direct Phase 2s. NVCA takes the view that investment should produce investment-like results. The advocates' umbrage derives from their disdain for treating SBIR as an economic program; they prefer to keep their dreamy-eyed rationalization of long term (and therefore unprovable) benefits of doing run-of-the-mill research. A broadcast e-mail alert from SBTC urges everyone to the the Small Business Committee to object to NVCA's proposals without ever saying why. Of course, write the SB Committees which have no responsibility for smart investment of R&D dollars, only service to small business interests. House Science takes a different view of invasions of its science-turf by set-asides for worthy other goals. 2% here and 2% there plus earmarks for home institutions, and pretty soon science becomes a cash cow for political payoffs. NVCA's proposals make a lot of sense for an economic SBIR.   Software Takeover. The Business Software Alliance says software will overtake autos as the largest manufacturing segment of the US economy this year. Software sales were $140B and employed 800,000 people with a $13B trade surplus. Not long ago, just Cisco had a higher market cap than the big three automakers combined. Thus confirms Nelson's dictum that "Government needs software but software doesn't need government." Never mind, the federal agencies will still spend SBIR on risk-free software projects that belong in procurement of services and the companies will boast of their success. [facts from IEEE Spectrum, Aug 99] More Info-Tech Research. Congress seems ready to climb on the bandwagon and pony up more info-tech research money. HR 2086 wants to double current funding to $4.8 billion over the next five years for IT research at the six agencies under the Science Committee's jurisdiction. That leaves out all the info-tech stuff at DOD. Now if only the Republicans can talk about this in a way that doesn't have them talking out of both sides of their mouths at the same time about shrinking government while increasing government's role in an already booming sector. Ah well, when it comes to passing out money, party and philosophy take a back seat to vote-buying. Wanna bet there are a lot of earmarks to home universities to help lubricate the passage?

 

SBIR Seen from the Empty Quarter. The Senate Committee on Small Business held a SBIR "Roundtable" discussion on 4 Aug 99 [which] focused on the geographic distribution of SBIR awards to qualified businesses and discussed proposals to encourage greater participation by companies located in states that have received a disproportionately small share of SBIR awards. Approximately 30 attendees joined the roundtable discussion, and included participants from IA, ID, ME, MS, ND, SD and WY. In addition, about five participants from Missouri via teleconference. An archive of the proceedings probably will be available for viewing at a Committee website. Senator Mike Enzi (R-WY) included compliments for Wyoming's technology businesses and the Wyoming SBIR Initiative. He highlighted the activities Asherman Medical Products, Cody, WY, and displayed and described its "Asherman Chest Seal," one of the company's primary products. Senator Enzi also focused on the SBIR achievements of Wyoming Sawmills, Inc., in developing laminated wood products. Senator Enzi was present for all but a few minutes of the 2-hour Roundtable session, the only Senator to do so. We are grateful for his support for Wyoming's technology-based small businesses, and for the SBIR Program. Senator Carl Levin (D-MI) made a statement that focused on his mentoring bill (S.1435). Senator Conrad Burns (R-MT) attended the Roundtable and made a statement. The Roundtable included a discussion of "barriers" to SBIR competition in underperforming states, and proposals to increase participation. There was significant focus on the need for state-based SBIR outreach activities, and a review of SBIR outreach activities ongoing in rural states represented at the roundtable. Report by Chris Busch, U. of Wyoming Research Office. Talking about geography and SBIR is OK as long it is just talk. Acting to earmark SBIRs would admit that it is no longer a national merit competition but rather a political distribution of the national government's R&D. The advocates of any such distribution should bear the burden of proof that the forced distribution serves the national interest better than leaving SBIR a purely national competition. Those advocates would have a hard time finding reputable economic research that points to such a policy. Perhaps every dollar of such subsidy should be matched by a dollar of water and grazing and timber subsidy shifted from Montana to Massachusetts. A skeptic could argue that none of the subsidies, neither SBIR nor grazing, adds to the national income.

The Endless Frontier The federal government's share of R&D support declined to 30%, the lowest percentage on record. ... Still, 988,000 scientists and engineers were engaged in US R&D work, as against 808,000 in 1985... Total UD R&D spending hit $220B another record-setter ... industry performs 75% of R&D and 85% of that is privately funded ... [Teddi Lauren, editor Photonics Spectra, Aug 99] If R&D is a national health thermometer, we must be doing well, with private industry carrying the main load. The end of the Cold War ended the myth that government has to carry R&D. The upside for new-tech is that there are lots of people interested in new-tech and you don't need a government handout to survive if you have a competitive technology

 

Procurement or Investment? Bob Weiss (CEO of Physical Sciences Inc, a biiiiig SBIR user) divides SBIR into procurement and investment and then analyzes how to handle the two views of SBIR. He duly notes that, It makes little sense to apply commercial evaluation criteria to procurement-driven research topics. He also draws a stark contrast in arguing that agencies who provide seed capital would not be serving "agency needs". But that is a false choice! Agencies can have both, although few are even trying. Congress and the SBIR advocates want to dub SBIR a VC fund because it sounds good without actually thinking and acting like a VC. SBIR needs a clearer goal than seeming to be being all things to all people that actually delivers practically nothing that wouldn't have happened anyway. Any agency can take a view that a big technical advance that progresses through the marketplace is as much in its interest as serving immediate and predictable "needs". There are a lot of new technical ideas that fit into the mold of a decent new technology that can come to first useful maturity in a few years. The Weisses define an SBIR world where time to maturity is either months or decades. Unfortunately, the agencies are unlikely to act in their interests. They are more likely to act in the career interests of the intermediate managers who have little incentive to act in an agency-wide interest, let alone a government-wide interest. A new micro-electronics heat-conducting substrate would do as much for DOD and NASA as a better model of an ejection seat. Yet the ejection seat wins a lot of SBIR money because it appears to deliver a predictable and measurable "advance" within the job evaluation period of the manager. Weiss's paper can be had from the political lobby for SBIR, the Small Business Technology Coalition.

Seed Corn for What? The Aug 4 Senate hearing on SBIR focussed on getting more SBIR into the have-not areas. Good politics and questionable economics. If SBIR is a seed corn program, why is it not being sown in the most fertile ground? Putting SBIR everywhere for reasons of equity, is like broadcasting seed corn across the whole country without regard to fertility. The have-not areas are unlikely to do anything more than eat the seed corn. Such a discussion shows that the government cannot decide what SBIR is for. It wants economic growth in places that cannot exploit technical success by research companies. Wishful political thinking in North Dakota, Wyoming, and Mississippi. Charles Wessner of NAS noted that SBIR isn't enough, that companies who succeed pick and up and move to where they find a cluster. Wessner echoes the teaching of competition guru Michael Porter who expounds on the idea of clusters as the hothouse of competitive industries. But it is a message that politicians intent on distributing wealth don't want to hear. No witnesses were called to report on research into how high-tech economic areas grow and whether government money from programs like SBIR make any difference. There is a general feeling that SBIR does good without ever analyzing whether such feeling has any basis in reality. And the advocates are doing well at impeding any realistic evaluation. Meanwhile, the agencies are doing their best to appropriate SBIR to their immediate programs with little attention to any external benefit. Not to worry, as long as the Senate has two members from every empty state, those states will get a piece of almost every pie.

 

In many ways, though, spotting the "next big thing" is growing harder than ever before. The Commerce Department reports that since 1995, 35 percent of GDP growth has come from the tech sector. That's where most of the key breakthroughs are typically located -- on a piece of silicon the size of your fingernail. Not exactly easy to find. Intimidated? Don't be. The truth is, you can learn enough about the evolution of technology to give yourself an edge over the next guy. The more you know, and the earlier you know it, the better off you are, notes Michael Murphy, editor of the California Technology Stock Letter. .. After talking with a number of analysts, futurists, money managers and engineers, we've developed some pretty good ideas about what probably lies ahead. ... When you look back at the major technological breakthroughs of the last hundred years or so, a clear pattern emerges, in which hoards of overeager but ultimately under-resourced companies jump on the latest trend. An investment in Kaypro, Commodore, Seiko Epson or Tandy, for example, would not have helped you much back in 1985, even if you fully understood the future significance of the PC. As it turned out, the box wasn't as important for making money as the operating system or the microprocessor chip. "The biggest single misunderstanding of investing is that people think they have to get in real early, at the IPO or before," says Roger McNamee, general partner in Integral Capital Partners, which provided venture capital for Intuit, Rambus, Inktomi and Healtheon. "There's a tendency to think that just because you've identified a cool technology you're going to make money. Sure, there are obvious advantages to getting there early and holding forever, but the real trick is to find out who the long-term winners are and know enough to buy when others sell." [Smart Money, July 20] If you are proposing an SBIR to a commercially minded agency, you look a lot smarter if you talk about trends and the future than if you just throw out some wild guess on how big the market is around your technology (which may never penetrate that market anyway). You're competing in a world where anybody can make a big claim that the government is not in a good position to refute even if it wanted to. If, for example, you are proposing to NSF, those academics will buy almost any business claim you make that coincides with their own inflated estimate of their specialty. To get past that ignorance to have your claims become a discriminator, you have to convince them that you really know and that wild guesses are just that. Sometimes, it is even worse. Companies report that NSF reviewers simply inserted their own pre-knowledge (which was often wrong) and didn't read the proposal. BMDO leaps that barrier by expecting you to find third-party business validation (and by not using academics as reviewers).

Why is New Hampshire #1 and Vermont #5 while Montana is #49 and Wyoming #50 in high-tech jobs as a percentage of all jobs? Aren't they all empty, have-not states that need help from SBIR? Is there a flaw in the logic or assumptions of the Western SBIR alliance? Stats from the Progressive Policy Institute.

 

The Missiles Are Coming. Forecasters edge ever closer to a rain if missiles from rogue states and even possibly a few "civilized" states. Just this weekend the lead story in The Economist (July 31) and an open briefing by the head of DIA to an international conference of futurists shout "it's coming". With Republicans holding Congress, the likely response is to spend more money at BMDO (spending money is what legislatures do best). A likely further consequence is that BMDO's SBIR will continue to rise with perhaps a conversion from the devotion to new technology through the private markets to more conventional military spending on support services. The SBIR manager at BMDO will have a hard time holding back the screaming hungry managers of ordinary BMDO programs from raiding the SBIR treasury to fund stuff that has no earthly future beyond the last SBIR dollar spent on it. If you are proposing Phase 2s particularly to BMDO you will do well to help the SBIR manager project the story that your dual-use technology will indeed progress through the private markets to produce technology that the developers four years from now can take advantage of.

Mentoring for Have-Nots Two Senators, Levin and Kerry, neither from a classic have-not state, are floating a bill (S1435) to have SBIR winners mentor small businesses in "low participation areas" - any geographical area that gets disproportionately few SBIRs (disproportionate to what?) from an annual pot of $1M at the SBA. "One or more" awards would be made to administer the program to organizations that "represent small business concerns participating in SBIR or STTR programs". In other words SBA gets $1M, keeps 10-20% for overhead, passes the rest to an "organization" which keeps 10-20% for overhead and hands out the rest to SBIR winners to help "student" businesses. The $1M would have to be appropriated annually, not come from the SBIR set-aside. So far, no earmarks have been inserted for any state or any mentoring organization. Stand by, though, for politics. Perhaps, the have-many companies in Kerry's Massachusetts will help the have-not companies in Levin's Michigan in what could be seen as a slap or a handout for Michigan's aggressive MERRA which has been helping potential SBIR companies for 15 years. Such a fund adds dinky money to SBIR for the handholding that have-nots want without invading the set-aside percentage. And it appeals to have-not politicians' sense of "fairness" to their constituents. They feed the myth that a little government subsidy to R&D companies will build a new Silicon Valley almost anywhere. What's more likely is that it subsidizes life-style companies in life-style places which have little prospect of economic multiplication of the subsidy.

 

``This tax credit enhances and encourages the development of new technologies and products,'' [Sen Orrin] Hatch said Thursday in urging his Senate colleagues' support. ``Innovation predominantly derives from the private sector research and development, which is encouraged by the tax cut.'' [San Jose Mercury, Jul 30] To like the R&D tax credit you need two prerequisites: taxable profits and a taste for targeted tax breaks. Corporate America simultaneously asks government to get out of business while asking for favorable tax treatment. SBIR companies who are either profitless or whose R&D is funded by the government can ignore the R&D tax credit and hope instead for government intrusion in the form of subsidy. Déjà vu. WASHINGTON, 1982. .. President Reagan's "trickle down" economic policy continued Friday when Congress approved legislation allocating $300M in tax-free funding to the nation's rich. Under the terms, the richest 0.05% of American citizens will receive funding first. "Everyone knows the old saying, 'When the rich get richer, the poor get richer as well," said Reagan. "Thank God," said Pierre duPont 47, heir to the chemical fortune, "At last dozens of American like me won't have to endure the awful inconveniences we suffered under Carter." [The Onion, a not exactly conventional newspaper, 1982]

A Danish consultant observed about the American government attitude toward globalization that only 7% of Senators have a passport.

No Newt Means Less Science. Without Newt Gingrich's plan for more government funded science, the politics are eating science funding away to funbd other priorities, like veteran's medical. NASA science faces $1B cut; NSF $260M below President's request, especially in info-tech. The idea that government is the cutting edge of sci-tech has been eroded by the spectacular business success of high-tech firms and by the anti-government forces within the Republican Party. [facts from Wall Street Journal, Jul 30] Yes, if science funding drops, SBIR will drop automatically with it.

Fusion SBIR Companies Rejoice.
(Jul 29) The House paid off General Atomic and Princeton University by adding $250M of fusion research to the Energy Dept. Plus an Illinois lab in the Speaker's district got $18M. But SBIR will get 2.5% of that money although not necessarily in fusion awards that have little commercial value. Oh sure, the proposers promise the sun but it is a negligible chance of success multiplied by a monumental payoff if it works. That becomes a bad bet for an SBIR program intent on commercializing within some reasonable time. Unless you love any R&D with any promise of any future. Odds are that some small fusion labs will get the SBIR money. [facts from Wall Street Journal, July 28] Now if the Republican "conservatives" can just convert one dollar of surplus to one dollar of tax cut plus one dollar of defense plus one dollar of payoffs. Such arithmetic worked for Reagan!

Who Does How Much US R&D?Preliminary 1998 estimates show industry R&D spending increased in real terms 7.7% over 1997 to $143.7B, or 65.1% of the total. Federal support increased 0.8 percent to $66.6B, for a record low of 30.2% of the total. "Nearly all ($140.8B) of the industry R&D funds will be devoted to R&D performed by industry itself, with the remainder directed toward academic R&D ($1.8B) and R&D performed by other nonprofit organizations ($1.0B)," Payson said. Industry, including industry-administered federally funded research and development centers (FFRDCs), is expected to perform 75.1 percent of the nation's total R&D in 1998. Of this, 85% will come from industry's own funds; federal funding will account for the remaining 15% (down from an all-time high of 32% in 1987). Most R&D spending (61.8 %, or $136.4 B) is for development. Applied research accounts for 22.6%, or $49.8; basic research for 15.6 %, or $34.4 B. NSF Report on national R&D]

If SBIR wants something useful and appropriate for government to do, it could focus on high-tech incubators because, The most difficult part of starting a small business is, of course, starting. But a growing network of business ``incubators'' has sprung up to provide a warm and cozy place for infant firms to gain strength and face the world. Incubators give entrepreneurs a place to set up shop, usually for below-market rent, and get free or discount access to a variety of services. Often there is a stringent review process for admission to an incubator, and a one- to four-year deadline by which the company must graduate and operate on its own. A recent study showed that 87 percent of incubator graduates survive for five or more years, while nationally only about half of all small businesses make it to four years. This success rate has led more universities, municipalities and even private companies to get into the business of helping others get into business. there are nearly 600 incubators in the country, compared with just 12 in 1980. [Washington Post] If SBIR is for infancy, and not for regular R&D, then incubator companies would be a good place to find investments. On the other hand, if as is currently practiced in many agencies SBIR is for regular R&D contracting, incubators are irrelevant.

 

The spike in venture-capital investments by Southeast corporations is part of a nationwide trend that has been accelerating over the past few years, with technology giants such as Microsoft, Intel and Oracle investing significant amounts of money in so-called corporate venturing arms. Last year 146 companies had discrete venture programs, up from 69 in 1992, according to Venture One, a San Francisco-based research firm. Corporate investments, through both formal and informal programs, have more than doubled every year since 1996, when the total stood at $150M, according to Venture Economics Information Services, a Newark, N.J., research firm. In the first quarter of 1999, more than $400 million in corporate funds was invested in start-ups, on pace to eclipse the $750M invested in all of 1998. -- THE BOTTOM LINE: This is actually the third wave of corporate venturing, and if there was a lesson from the first two, it was that big business didn't always make money in these deals. But that lesson seems to have been forgotten. The last wave swept through the mid-1980s, when corporations tried to capitalize on the first information-technology boom with start-up investments. But the boom didn't last long. [Karen Lundegaard and Carrick Mollenkamp, Wall Street Journal Florida Regional, July 14] Meanwhile In SeattleThese days, the hardest part of rounding up financing for a privately held Seattle Internet concern isn't landing investors, he says. "The hardest part of financing is agonizing about who to let in." In fact, so much capital is pouring into the Puget Sound region, looking for a profitable place to land, that some in the industry are uneasy. On the one hand, the ready cash is great for the area's Internet start-ups, which no longer have to go door to door with hat in hand. But on the other, entrepreneurs are faced with unexpected pressures over how much of their companies to parcel out -- and to whom. Plus, the competition is getting fierce among investors, who now must strive to convince Internet entrepreneurs that their money is better than the other guys'. Many smaller venture-capital firms and individuals are finding themselves shut out of the most promising deals.[Steven D. Jones and Rachel Zimmerman, Wall Street Journal Northwest Regional, July 14]

Soaring high-tech investment has significantly increased the level of sustainable growth by changing how businesses operate and boosting productivity. [Business Week, July 12] So, what is government to do when there is nothing that needs doing? Continue any ongoing programs regardless of their present irrelevancy.

It happens all the time. A scientist seeking to commercialize a promising laboratory discovery or technological innovation finds he lacks the financing, connections and business savvy to get his invention to the marketplace and his company out of the start-up phase. Providing crucial support and guidance for fledgling high-tech companies is the mission of Emerging Technology Partners (ETP), a private, for-profit venture management firm based in Birmingham. "There's a bright future for high-tech growth in Birmingham," declares ETP CEO G. Michael Alder. "With UAB taking the lead, the quality of technology being generated here is tremendous. But the infrastructure to help translate that into new companies and economic growth has lagged a bit behind. ... ETP was capitalized with $4.6 million over four years. Of that total, 85% comes from the Economic Development Partnership of Alabama (EDPA), a privately-funded group that works in conjunction with state and local economic development organizations to market Alabama and attract new industry. The remaining 15% of ETP's support comes equally from UAB, the University of Alabama and Auburn University. The University of South Alabama and the University of Alabama at Huntsville are considering providing additional support, according to Alder. ... the biggest problem in nurturing Birmingham's high-tech cluster remains attracting sufficient venture capital. While the area's venture capital pool has grown to about $100 million, more is needed to ensure that the potential that exists here has every opportunity to develop, he says. Toward that end, ETP will soon begin operating its own venture capital fund, Paradigm Venture Partners. Having already secured $6 million of a planned $10 million capitalization, Paradigm's investment decisions will be made by committee, with ETP managing day-to-day operations. With 100% of profits to be distributed to investors, Alder hopes to generate a 35%-40% annual return. [Mark Kelly, Birmingham Business Journal, July 19] All good news. The private sector is doing what SBIR was set up to do in the absence of such activity. Thus SBIR can close down. Oh, right! A government handout program will stop when the need disappears. Fat chance. The beneficiaries will find a way to argue for even more government subsidy.

 

Investments continue to pour into traditional VC funds at an ever increasing rate. VC firms are competing with each other instead of sharing deals and are offering more money than what is being asked for to get a higher percentage of ownership. There were 700 VC-backed deals reported last year and it's estimated that 4-5 times that number were backed by angels. Established high-tech companies are also competing in the same arena, starting their own VC funds and forming spin-off companies. Photonics is hot but biotech is not and the Internet is going to be a disaster. The quality of business plans is up, making evaluation by investors more difficult. My own observations: raising money is a very binary process. An amateur won't be able to get past the receptionist at a VC firm, and yet VCs are willing to throw money at you if you have a good business plan with a viable business model. This feeding frenzy in the photonics industry, as in the Internet industry, has also resulted in many half-baked ideas getting funded by inexperienced angels and third tier VCs. We can expect many failures in our industry a couple of years down the road. [Milton Chang, Laser Focus World, July 99] Since money is not lacking for good business plans, what is government's role with programs like SBIR? Funding hopeless business plans? Teaching business plan writing? The agencies have mostly answered that question by ignoring business plans and funding whatever technology appeals to them for whatever reason. An almost complete disconnect from any market pull. Two exceptions are BMDO and DOD Fast Track which fund business plans that have thrid party validation AND technology useful to the government.

 

If you can do it, you are one. A reader wrote to the IEEE in high dudgeon that a book reviewer falsely claimed to be a software engineer because her training in English and the classics weren't engineering. He never says whether he can program better than she. She said she was self-taught as could be anyone else with some reasonable grounding in something since software has "always been a self-taught, maverick operation". Is she right? Do we need years of university prep to call ourselves software engineers? Or is that just a job protection racket for professors? Send us money, someone else's money. The IEEE's official policy is "doubling of the federal investment in R&D over the next 12 years, including support for applied research, engineering and pre-competitive technology, as well as provisions to ensure that R&D funds are expended effectively." Is that an admission that their craft cannot support itself even though its members have influential positions in their employing firms?

When the government judges the commercial potential of an SBIR proposal, it should start taking into account how well the company is positioning itself for e-commerce. Forrester predicts a rise from today's $8B to $108B by 2003. The Economist opines that: For evidence of how far most companies will have to go in developing their Internet strategies, look no further than their corporate websites. A few pioneers - such as Charles Schwab and Dell - have successfully transferred many of their core activities to the web, and some others may be trying their hand at a few web transactions, with an eye on developing their site an an extra distribution channel later. But more often than not, those websites are stodgily designed billboards, known in the business as "brochureware", which do little more than provide customers and suppliers with some fairly basic information about the company and its products. Most managers know perfectly well they will have to do better. [The Economist, A Survey of Business and the Internet, June 26]

The reaper did what the Republicans could not - dislodge George Brown from his seat on the House Science Committee. Brown, the oldest member of the House of Representatives, died at age 79.

The Senate is considering the idea of forcing each SBIR agency to hand over $4000 to the SBA for every award, Phase 1 and Phase 2 to help small businesses in SBIR competition. SBA would pick someone to administer this technical assistance program. Not the best idea I ever heard for spending federal R&D money. It is forcing down the throats of the federal agencies a non R&D handout to small business that the agencies rejected when given such a chance in the 1992 legislation. It was Wellstone's idea in 1992 and sounds like he hasn't given up trying to get a break for the Minnesota firm he has in mind for the contract. Picture, if you can, the SBA's teaching companies how to be competitive R&D companies. It's robbing Peter to pay the mob outside the city gates who haven't even asked for a handout. It's SBA's raiding the agencies for operating money; if Congress wants to increase SBA's appropriation do so directly. What should an agency do to keep its R&D money? Fewer Phase 1s for more money which cuts the number of new ideas explored from new companies. BMDO, for example, which limits Phase 1 to about $65K could move to $100K for a third fewer awards and thus retain about $2.5M that would otherwise go to SBA for this social program. Where is the evidence that SBIR is getting too few new companies proposing? If an agency wants new ideas, it has only to advertise so buy what it says and what it does.

 

Adapt or Die says Clayton Christensen in The Innovator's Dilemma. He and George Gilder name five industries in trouble from disruptive innovation - the kind SBIR should be fostering if it is to have any impact. Telecom optical nets will wipe packet switching and AT&T. Financial Services e-business is on the rampage. Education corporate internet teaching will wipe B-schools. Retailing e-commerce wipes Sears. Health Care (a favorite industry for SBIR proposers to misinterpret) nurses with diagnostic machines and a computer challenge doctors. Microprocessors cheap chips threaten Intel. [Business Week, July 26]

If you're proposing SBIR to a commercially aware agency (some actually are), you want to project a vision of disruptive innovation as your excuse for government support. With the right vision you maybe able to leapfrog conventional economic arguments that would fail for a drop-in substitute with a minor competitive advantage. (Oh, your competitive advantage is probably less than you think and you are either misstating it or ignoring it.)

SBIR Stocks Rocketing
(Jul 16) A few SBIR-winning firms have seen their stocks rocket onto high ground. SDL is 15 times its low at a $2B market cap. American Xtal which has a germanium mining deal with China and two new strong buy recommendations is six times its low of last September. ATMI is three times its September low on a brightening picture for the semiconductor industry that it serves. Note that ATMI is the only public firm in the top 25 SBIR winners named by GAO. Kopin the 2.5 times its low despite still never making a profit after seven years as a public firm even though its technology wins attaboys from the techies. Ibis is five times its low as revenues have recently shot up. Cree Researchis in the stratosphere at a $1B+ market cap and splitting its shares again. Embrex, the egg innoculator, has doubled in the past two months. SatCon has doubled in two months on improving news of revenues and products. Ortel has doubled in two months. Emcore is four times its September low. AstroPower and ViaSat have doubled. In contrast, Irvine Sensors and Spire, two big SBIR users are in the same going-nowhere mode they have been in for years. If the government would use a hypothetical return calculation on SBIR investment of an equity value of just these public companies, it could claim that it has sensibly managed SBIR as pseudo-VC fund instead of a mere handout. Fat chance - neither the agencies nor the SBA thinks that way.

Fast Track Update DOD has updated its Fast Track report. Phase 2 awards went to 105 of 113 qualified proposers and have brought in $39M to match DOD's $82M. Most (70%) go to first time proposers who get a sweet 4:1 match. A few double and triple winners, plus one eight time winner Digital Systems Resources all partnered by Navy mainline programs. Smells like DSR and the Navy have found a nice arrangement for R&D that taps the SBIR pot for what the Navy might well have done anyway. Maybe it needs a reality check on the degree of technical innovation.

Since It Ain't Broke
(Jul 14) The House SB Committee praised SBIR in its findings and introduced HR2392 to continue SBIR until 2007 while making a couple of minor adjustments reporting, third phase assistance, and rights to data issues. Progress on H.R. 2392 can be tracked on the Thomas Legislative Information by searching on the bill number. No added money, no shift from the 1992 commercialization emphasis, no admin money, no regional earmarks, no penalties for multi-winners, no big changes of any kind. It is also silent on whether SBIR has increased small business participation n federal R&D and whether any such increase helped federal R&D - as was one of the prime objectives in 1982. Scuttlebutt has it that the Senate will do the same simple reauthorization.

 

Cloning Silicon Valley?A new economic study bolsters what many have thought to be true region's economic health that those lacking high-tech industry are facing stagnation -- and those with it are emerging as leading industrial centers in the United States. And the poster child for this trend is Santa Clara County, which leads the nation's 315 metro regions in high-tech output, according to the study issued Tuesday by the Milken Institute, a Santa Monica think tank. The report's basic point -- that high tech is driving the economy -- may sound obvious to many in Silicon Valley. But it is believed to be the first study to measure and compare how much economic ``output'' can be attributed to high-tech industries in each of the nation's metropolitan regions. ... such output has a large effect on a region's overall growth, contributing an added 20 cents in economic production output for every $1 in high tech, according to the report. ... DeVol also warned that clusters of high-tech industry could also sow the seeds of their own demise. He noted that if quality of life and cost of living were adversely impacted by uncontrolled growth, it could cause problems in attracting skilled labor and sustaining new companies. Indeed, it noted that cities with strong tech sectors like San Jose may actually suffer more than the nation at large when a recession does finally arrive.... ``Cloning Silicon Valley will be impossible because the proper DNA sequence is locked away somewhere on Sand Hill Road,'' the report said. [Jonathan Rabinovitz, San Jose Mercury, Jul 14] The top high-tech metro areas, ranked by concentration of production: 1. Rochester, Minn. 2. San Jose, Calif. 3. Albuquerque, N.M. 4. Lubbock, Texas 5. Cedar Rapids, Iowa 6. Boulder-Longmont, Colo. 7. Boise City, Idaho 8. Kalamazoo-Battle Creek, Mich. 9. Richland-Kennewick-Pasco, Wash. 10. Middlesex-Somerset- Hunterdon, N.J. 11. Seattle-Bellevue-Everett, Wash. 12. Melbourne-Titusville-Palm Bay, Fla. 13. Raleigh-Durham- Chapel Hill, N.C.

 

Staff Writer Missouri officials hope a $20 million capital seed fund signed into law this week will spark an outpouring of university research into the commercial market and kick-start venture capital investment in the state. The fund, fueled by state tax credits, will invest in early stage technology research that has the potential to be licensed to private companies or become the foundation of a company itself. "There is a definite need for seed capital, not only in the state but here in Kansas City as well," said Dale Eltiste, executive director of the Center for Business Innovation, an independent business incubator affiliated with the University of Missouri-Kansas City. "What you find is that once you have the seed capital and you can start funding some young, promising companies, you will find venture capital will follow," Eltiste said. [Bu Suzanne King, Kansas City Business Journal, Jul 12] A nice sounding theory for legislatures but the long experience is that it will not work that way. If capital isn't finding opportunities in MO, it's because the opportunities don't exist. Capital will find any profitable enough opportunity. When politics enters, it usually for a non-capital reason - the appearance of job creation. An extreme of the syndrome can be found almost everywhere - even the frozen North where Canada's Northwest Territories has a VC fund that explicitly says it wants to create jobs. [Apply at Roland Bailey Yellowknife, NT] Bring your furriest parka and smelliest mosquito repellant.

 

A Congressional View of SBIR While the smiling and platitudes gush from the Small Business Committees, the House Science Committee has a different view - SBIR has to be evaluated and produce an economic return. Naturally, Science wants accountability since the science programs pay the SBIR bill while Small Business committees get a free ride to hand out other people's money. The minority ranking member George Brown (CA) and the staff counsel Jim Turner published an article in Issues in Science and Technology, Summer 99, which starts with the observation that the program's growth has been largely at the expense of other federal R&D support for small business - shunting. And most accusingly most SBIR awards aimed at the commercial marketplace do not lead to major commercial successes and most SBIR wards aimed at government needs do not result in federal procurement contracts. Now that's not as serious as it sounds. VCs don't expect a majority of their investments to pan out well either, but they do expect the few big ones to pay off BIG TIME. SBIR cannot make that claim. The authors' want SBIR to be re-cast to produce winners or to be ended as a failed experiment. They do base their claims on an observation that the world of small business has changed dramatically since 1982 and that the linear model of development never applied anyway. They offer several program changes that the Small Business Committee will probably ignore as the present beneficiaries howl for continuation of a "successful" program. Unfortunately, Brown and Turner focussed their fire on the companies' failure to commercialize, a visible target, but ignored the real culprit - the federal agencies who pass out the awards.

NEW ENTREPRENEURS appear vital to healthy economic growth. A pioneering 10-country study, led by researchers at Babson College and London Business School, finds that "variation in rates in entrepreneurship may account for as much as one-third of the variation in economic growth." Among the Group of Seven economies and three others, the proportion of adults involved in efforts to start businesses is highest in the U.S. (8.4%), Canada (6.8%) and Israel (5.4%), the report says. That same measure lags far behind in France (1.8%), Japan (1.6%) and Finland (1.4%). Indeed, Finland relies on one big telecom company, Nokia Corp., for more than one-third of its domestic growth. A further finding: "Entrepreneurial societies have and accept higher levels of income disparity." An estimated 40% of would-be entrepreneurs actually launch their businesses within a year. [Wall Street Journal, June 24]

The Politics of Positive Speaking Writing an SBIR Proposal (or any other persuasive document)? Take some advice from the Republican advisors (even though the hard core Repubs don't want to). Capture voter attention by communicating a shared value. "After years of hard work, the independence that comes from financial security ought to be the one thing you can count on."
Talk about the benefits to the voter. "It's the right thing to do. Workers should have the confidence that the money they pay into Social Security is only used for Social Security."
Make it personally relevant and emotionally powerful. "Congress should take the appropriate steps to ensure that Social Security will be there when you need it."
Use "Power Adjectives." Able, American, Bright, Honest, Patriotic, Ready, Reliable.
Avoid "Puffspeak."Access, Cash flow, Feedback, Pertaining to, Inoperative, Infrastructure, (Nelson's no-nos start with Enhancement and Involving)
[Sources: Wirthlin Worldwide, MediaPower Group Inc., Wall Street Journal, Jun 23]
Or use Nelson's Rules of picture nouns and action verbs, economics with numbers, competitive advantage, and a strategic vision.

 

Empower America, which counts Senate Majority Leader Trent Lott and former House Speaker Newt Gingrich as members, also is releasing today its ``10 commandments of Internet policy,'' which advocates, among other items, more school choice and accountability, fast and affordable Internet access, more visas for foreign skilled workers, fewer encryption and export controls, and tort reform in the areas of securities litigation and liability for Y2K computer glitches. [San Jose Mercury, June 23] Ten Commandments! What a diabolical mix of religion and technology. Can't the Repubs ever leave religion out of the secular government founded by the Constitution? To emphasize the technology part, Empower America named a VC (Floyd Kvamme) as chairman. Floyd had better watch his right flank for the political and moral attitudes of founders Jack Kemp and Bill Bennett. Each has some good things to say that unfortunately get warped when mixed with the hard Republican right of DeLay and Barr who take no prisoners.

 

Who said, Gee-whiz technical announcements don't count for anything until you have a product at the right price point? An SBIR awardee? YES, Neal Hunter, CEO of Cree Research whose stock is up to a market cap of $1B. Why so high? The promise of blue lasers keeps creeping closer. From the first blue laser in 1995, the race is on between Nichia and Cree for the blue laser market. At a P/E of 95, a lot of American investors are betting on Cree which got its start with BMDO and Navy SBIR in 1988 for its core material - silicon carbide. Now all Volkswagen dashboards are backlit with Cree LEDs. [non-SBIR facts from Forbes, Jun 14] OK, Roscoe Bartlett, if the SiC money had gone to any qualified researcher in 1988 instead of to the entrepreneurs at Cree, would we have any such firm competing at the top of the world market? Pick any of the top 25 SBIR winners except ATMI and answer the question. Oh no, those 25 have had their hands on a lot of hot new innovations over 15 years - SO THEY CLAIMED - yet all expect ATMI are still struggling research houses dependent in large measure for government research money, an average of 43% of revenues still from SBIR.

US R&D Report. The dominance of the United States as a source of technology for other economies is declining, with reduced shares in practically every foreign market. Moreover, technology acquired by U.S. domestic companies through imports has more than tripled over the last two decades. This trend is symptomatic of the relentless globalization of R&D capability. ... Unfortunately, the current economic structure of the U.S. economy consists of a small "high-tech" sector that develops new technology, a larger sector that attempts to compete largely by absorbing technology, and the remainder that does little of either. This situation will be increasingly inadequate to sustain desirable rates of growth. ... A commonly used indicator of the amount of R&D undertaken by a high-tech industry is its R&D intensity (R&D-to-sales ratio). In the United States, relatively few industries have the high R&D-to-sales ratios (in the 8-12 percent range) that will allow continued world class innovation. These industries together only account for about 7 percent of GDP. At the same time, the composition of U.S. private-sector R&D is shifting toward shorter-term objectives, at the expense of next-generation research. [Greg Tassey (NIST Economist), "R&D Trends in the U.S. Economy: Strategies and Policy Implications, June 1999] Tassey's report does have a high platitude content with much genuflection to conventional wisdom and a bias to more R&D spending by both private and public money. Still, it should be required reading for techno-economic policy wonks. Tassey uses one of the SBIR assumptions - a false-choice between next-generation research and short-term development. SBIR can straddle the gap when intelligently directed. There are many chances, like Theseus Logic's Null Convention Logic, to get a next generation technology started and expect early investment within two years of Phase 1 SBIR. But if the government never tries, then the false-choicers will dominate every discussion and every agency will have to defend itself against a charge of ignoring the future by investing in short-range objectives for its SBIR. Tassey does cite Congressman George Brown "[We have] a clumsy and unsophisticated set of tools for evaluating the best of human innovation and thinking. We also need to be conducting outcomes assessments for our science and engineering activities and we need to collect the data needed to make these assessments," which is a message to SBIR as well.

If you are going to propose SBIR on the basis of commercial potential, you want a story that sounds like the story that Autonomous Technologies had (but didn't yet know it in 1992) on laser eye surgery. But if the government is smart, it won't let you just blather on about your dreams, it will look for third party validation in the form of investment. If, however, the government doesn't want to pick the most likely winners, then any story will do for an agency following Roscoe Bartlett's line of using SBIR to fund research.

subsidies prevent market forces from weeding out less adept farmers [John Carey, Business Week, Jun 28] What do SBIR subsidies do for/to high tech business? How might the government assure that the subsidy does NOT encourage the inept entrepreneur from wasting SBIR money just because a federal agency wants a non-market product or service?

 

SBA-Think How does the SBA advocate SBIR? A nice mix of convenient theory and wishing. Dan Hill's Congressional testimony shows how SBA pretends that SBIR is saving the nation. Appealing to some mythical equity he notes that the private sector has 16% of research in small firms but only 9% in government. So what? [That's the argument for anti-discrimination quotas.] He cites no basis for any equality. He says that employment rose twice as fast in small firms as in large ones. Again, so what? America is shifting its industrial organization in an information age but it has no implications for government contracting that would not flow naturally from government management of its own work. And if employment is growing, why does the government need to do anything? Ominously, he did not say what percent of federal R&D goes to small business on the same basis as the 2.7% of 1982 and 2.9% of 1992. We should suspect that the agencies have effectively merely substituted performers of R&D and that SBIR has added nothing to the work going to small business. But that ugly fact of no gain has been ignored in all the SBIR self-congratulations. On the other hand, the SBIR program suffers no harm from such puffery. The politicians will NOT vote against it because, regardless of any economic truth, it looks like they are giving something valuable to small business. And it costs them nothing. Learn to Play It's the only game in town. With the federal agencies shifting their small business R&D into SBIR, and Congress unlikely to ever end the pretense, you will have to learn SBIR if you want federal R&D money. Congress with SBIR takes the same political posture as with drugs, "Who wants to be against small business or for drugs?" Even if SBIR gains nothing and drugs are an individual's choice (like guns?), the polls keep the Members voting for SBIR and against drugs. For motherhood and against sin (unless the sin is widespread guns). SBIR will stay and the only political debate will be between the researchers (agencies and present beneficiaries) and the commercializers (a paltry few agencies and companies). The winner will be ... nobody. The 15-year muddle will continue and the agencies will push all their small business into SBIR. Learn to play! And get what the politicians are handing out.

 

Roscoe Loves Research (Jun 18) Roscoe Bartlett championed research in SBIR and he was seconded by Massachusetts's Capuano in a House Science Committee hearing. What started as an examination of commercialization in SBIR, after Chair Connie Morella said that in 1982 and 1992 commercialization was the Numero Uno rationalization for SBIR, turned into more of a debate about whether it should just be for research and let commercialization flow however it will. Bartlett chairs the House SB Subcommittee that oversees SBIR which is jealously protected by present beneficiaries. The Chair at one point congratulated DOD, represented by Tim Foreman of SADBU, for the outreach and flexibility (and not wanting administrative funds to do those things). Witnesses were GAO, DOD, NAS, and a professor (Bob Archibald) who has researched SBIR for NASA and DOD. Sounds like the House is heading for a debate on what SBIR is for between the commercializers and the researchers. In that debate, only the commercializers can promise more return for the money than the government puts in. The researchers can only do the same research that the government would fund if there were no SBIR - no net gain - an ugly reality that Bartlett and the agencies would like to gloss over by talking about the virtues of research in general. They would also like to ignore the fact that small companies are no better at research than large institutions and therefore deserve no special program. Small business has an advantage over large institutions only in finding a market niche for a disruptive innovation and if any program is to extract benefit from funding small business it should focus on what the small business does best, not what it just does no better than any other group. GAO Finds ... 1) The 25 biggest SBIR winners have enjoyed $900M over the life of SBIR 1983-1997 and that money was on average 43% of the companies' revenues. Two of the top 25 went public and one was already public. Only one, ATMI, has any market value to brag about - $600M+. 2) The agencies all have their own ways of measuring commercialization and using it for deciding who wins awards. One agency essentially said it didn't want to decide what is important and waffled while awaiting Congressional guidance. (3) SBA is doing a database that reports results, not just awards made (a mere input number good only for politics). The new Tech-Net should be up and running this year but access to real numbers will probably be limited to the government people. Making them available to the public means either revealing company financial data or puffery by the company. The GAO report "Evaluation of SBIR Can Be Strengthened" RCED-99-114 gave the House Science Committee answers it wanted before considering SBIR re-authorization. The Energy Department, showing little energy, said it needed clarification from Congress on how to use commercialization history of a company. DOD looked for no such guidance and has charged into commercialization history as an indicator with a statistical scheme that ranks the company's commercialization when it applies for an award. On balance, GAO's report does little for dealing with commercialization as a prime SBIR objective because it is not, and never has been, crystal clear to the federal agencies just what SBIR's overriding goal is. Only the program advocates know what the goal is - more dollars for their companies.

Welcome to small company status. The Russell 2000 index of smaller stocks will now include W R Grace the former giant chemical maker. Political historians will remember Grace's chairman's preaching to the government from his Reagan-appointed Grace Commission about waste, fraud, and abuse. It was a classic case of waste being someone else's program. It wanted to downsize government in accord with the prevailing Conservative ideology by eliminating programs that did not help American business. Less business tax, less intrusive regulation, no unfunded mandates, no SBA, no Energy Department (which actually wouldn't be such a horrible idea), the whole Conservative litany. Nevertheless, in the middle of such talk, Reagan signed the SBIR law in 1982.

DOD Gets It
(Jun 14) The latest DOD SBIR solicitation carries some good news. DOD is starting to get it. Four of the five solicitors advertise post Phase 2 matching that will give more money to those projects that can attract non-SBIR money. DOD thus is on a trajectory that started with SDIO's (BMDO) doing that in 1992, followed by department-wide Fast Track in 1996. Army says 1:1 match for only $100K in a pilot program. Navy says 1:4 match for Navy acquisition money only. DARPA 1:1. SOCOM (a tiny program) 1:4. These steps are a start and may grow into something useful in a post Cold-War world. Because they convert SBIR into an investment program, as was first intended in 1982, they will be good for the high-tech small business community. Much better than simple contract R&D which adds nothing to the small business world. The credit for prodding the DOD into a more expansive view of SBIR goes to SBIR policy overseer Jon Baron and the two Clintonian Assistant Secretaries of Defense for Acquisition Paul Kaminski and Jacques Gansler. Note that this does NOT add any SBIR money to the pool; it merely invests it smarter.

Tom Donlan, [Barrons, Jun 7] says, Trustbusters say they are working to increase competition, but their usual method is to tilt the playing field in favor of less-competent competitors. In addition, government intervention often stifles the development of new competitors. Is SBIR doing the same in the name of fostering innovation? Deliberately or unwittingly accepting less innovative proposals from less entrepreneurial companies to keep the most disruptive innovation at bay? If you had a big innovation turned down and you saw NASA and the Army funding ordinary math modeling, what would you think of government's attitude toward innovation? If the government praises small commercial spin off from a few SBIR winners while resisting any economic analysis of the whole program, would you believe that it has any intention of fostering the most innovative or efficient competitors?

 

BMDO picked 8 STTR Phase 1 winners in 8 companies out of a batch of 90 proposals with an average amount of $75K. Not many in a tiny program that is more mirage than program. Note the gap between a 9% acceptance rate for STTR and a 25% for SBIR. Why? The economics of proposing somehow changed? Too many universities having their proposing costs covered by government grants? With a small pot of money, the BMDO manager has little flexibility to do the most good. As a result, awards are few. If you have a really good BMDO STTR idea, save it for SBIR where BMDO has full flexibility to treat it right.

Evenings as Well Another counter-indicator that says SBIR is not solving a problem of any real capital shortage in small companies: the NASDAQ will start trading evenings as well to keep up with the demand for stock trade. Technology has not only obsoleted the trading floor (which no longer exists on the Australian exchange), it also obsoleted the factory mentality of 10-4 five days a week.

Harvard, Princeton, and SBIR. What they have in common is a 12% selection rate. Princeton accepted a record-low 10.8% of the 14,874 high school seniors who applied for admission this fall. Harvard 11.3% of 18,160, the second-highest in its history. Still Harvard sends out 50,000 letters to promising high schoolers. [Business Week, J