4 Takeaways on What Small Businesses Need from R&D

By Rebecca Pselos | MSGI Partner
President of Kite Tail Strategy 

This week the House Small Business Committee held a hearing on the Small Business Innovation and Research (SBIR) and Small Business Technology Transfer (STTR) programs.  These programs require reauthorization this year otherwise they expire in the fall.  Members and witnesses reinforced concerns that the U.S. is falling behind other countries when it comes to research and development and subsequent commercialization of new technologies.  SBIR/STTR provide a necessary path for the U.S. to support small businesses - our most innovative sector. The hearing highlighted four main recommendations for lawmakers to consider.  

1. Increase funding for small businesses. Less than 10 percent of federal research and development funding goes to small businesses; however, they are the most innovative sector.  Other countries, including the E.U. and China, are directing as much as 20 percent to small businesses.  In addition, other countries are targeting certain areas such as robotics, energy technology, and biomedical engineering.  Having SBIR/STTR prioritize funds for specifics areas has not occurred to date, but it may be time to do so to help the U.S. compete with other countries. 

2. More assistance for commercialization. Often referred to the Valley of Death, the transition from Phases 1 and 2 to commercialization (Phase 3) is challenging.  In theory, federal funding and venture capital complement each other - the first supporting research and the second supporting commercialization.  Venture capital requires a business to demonstrate commercial viability in order to justify an investment. A SBIR recipient has a difficult time demonstrating this when they finish Phase 1 and 2 making Phase 3 elusive for many. Again, this problem places the U.S. at a disadvantage compared to other countries that are assisting with commercialization.  Of note, Representative Houlahan referenced H.R. 652 - Research Advancing to Market Production (RAMP) for Innovators Act.  The bill provides commercialization services under the SBIR and STTR programs.

3. Support women-owned and minority-owned businesses. Minorities and women have a harder time accessing seed capital.  Women hold less than 20 percent of tech jobs and less than 5 percent of leadership positions in tech companies.  Part of this problem is that there is a significant funding gap from venture capital firms for women-owned businesses. 

4. Ease entry in the program, and make the program attractive.  Twenty-five percent of SBIR winners are new to the program.  This statistic generated several questions - how can the government encourage more businesses to partake in the program and should existing recipients be limited on the number of awards they can receive.  Witnesses strongly advocated for changes that address the fact that small businesses have limited resources and expertise to write award-winning application, even though they have extremely valuable ideas; manage the grants; and keep employees on payroll while they wait for Phase 2 funding, which can take up to 2 years.  Hurdles that make the program less attractive, especially when there is no guarantee of completing Phases 2 and 3.  Witnesses also explained why limiting the number of awards to individual businesses would be detrimental.

Senate Hearing Highlights Importance of Acquisition Workforce Training and Leveraging Small Businesses for Tech Contracts

By Rebecca Pselos | MSGI Partner 
President of Kite Tail Strategy 

This week the Subcommittee on Readiness, Senate Armed Services Committee held a hearing on acquisition reform to help inform the FY22 National Defense Authorization Act (NDAA). Witnesses were asked to comment on how to achieve a quicker acquisition system while reducing risks. Ms. Stacy Cummings performing the duties of Under Secretary of Defense for Acquisition and Sustainment (USD(A&S)), Department of Defense (DOD); Ms. Shelby Oakley, Director, Contracting and National Security Acquisitions, Government Accountability Office (GAO); and Dr. Raymond O’Toole, Acting Director, Operational Test and Evaluation, DOD (DOT&E) testified as the witnesses. 

Overall, the April 28th hearing highlighted 2021 procurement issues relevant to both defense and civilian agencies - quicker acquisitions, role of small businesses, emerging tech, and cybersecurity. In addition to DOD’s acquisition authorities and policy, the importance of traditional metrics of acquisitions success - cost and schedule - were mentioned. As were new factors to consider, such as value to the end-user and contribution to maintaining a competitive edge against U.S. competitors. DOD alluded to some authorities they’ll likely seek to change in this year’s NDAA - DoD’s Commercial Solutions Opening program and DOT&E authority. 

Ms. Cummings highlighted DoD’s Adaptive Acquisition Framework (AAF) as a recent reform to emphasize speed and agility. The framework established six acquisition pathways. Ms. Cummings added her office is working on improving data analytics to determine the success of the framework. GAO applauded the effort to measure success, but cautioned that the reform may be undermined if acquisitions are not based on sound business cases. Metrics should go beyond cost and schedule to include the value to the end user.    

Additionally, Ms. Cummings said that Defense Acquisition University (DAU) training will be revamped to align with the framework. Historically, the defense acquisition workforce has been taught a one-size fits all approach for acquisitions. The revised training will focus on different AAF pathways. I imagine DAU’s updated training will increase awareness of authorities benefiting non-traditional and small businesses and that awareness will spill over to civil agencies’ procurement shops.    

When asked about engaging with non-traditional and small businesses to leverage technology, Ms. Cummings provided two examples. DOD utilized recent contracting authorities to engage with these entities to respond to Covid-19. The authorities included Commercial Solutions Opening which accounted for roughly $7 billion in obligations related to the pandemic (just under half of the program’s total $16 billion in FY20 obligations). Under AAF, DOD has competed systems’ individual components among non-traditional and small businesses which then partner with Primes to integrate innovation.  

While GAO recognized that one of the key priorities of DOD’s new acquisition framework is to improve its ability to benefit from commercial innovation, GAO found the department has been challenged in developing and integrating innovative technologies into its weapon systems. GAO recommended DOD find the right balance of disruptive and incremental technology solutions and create an environment that attracts businesses that do not typically sell or develop solutions for DOD’s use. DOD will also need to address intellectual property and cybersecurity to fully take advantage of new technology. 

Dr. O’Toole agreed with GAO that focusing on incremental, open systems would allow DOD to speed up delivery for the warfighter. The approach would quickly field minimal viable capabilities which can be upgraded later. Moreover, the approach helps promote innovation and maintain a competitive edge against U.S. competitors. Dr. O’Toole went further to say the incremental approach needed to also be applied to testing. However, a larger concern he raised was cybersecurity. Of the programs DOT&E assessed in FY20, virally none were survivable against relevant cyber threats.