Monday, December 20, 2010

Camouflage! An Innovative but Crappy Use for SBIR Reauthorization

Just when you thought you’d seen everything. The lengths our limping quackers will go to make their Lame Duck session productive is absolutely stunning. But you’ve got to give them credit for innovation.

I use GovTrack to keep me informed of activities on bills in process with regard to SBIR. One I was tracking was H.R.2965 – the House version of SBIR Reauthorization. When it showed action last week, I eagerly went to see what was up. The Title hadn’t changed. But the bill’s Text had changed – to the repeal of “Don’t Ask, Don’t Tell”! Huh?

I made some quick inquiries, and was given a quick brief on the tactic being employed – using H.R.2965 as camouflage because it was far enough along in the process to avoid having to be further discussed by either chamber and could be immediately voted upon. The title of the bill wasn’t changed, just the text. We know our legislators don’t read the bills they vote on. It was to be a sneak attack. And, it worked.

I was asked to not rattle the cage yet, as some behind-the-scenes action was simultaneously happening with the Senate’s version (S.1233) along with discussions with BIO that just might get things settled, and we were to “stay out of the way”. OK. I’m a good soldier. I put the “pen” down and waited.

Last night Rick Shindell published an SBIR Insider about this monkey business. As they used to say: READ ALL ABOUT IT: SBIR Insider of December 19, 2010. The cat’s out of the bag, so I got out the pen.

I know this is how things get done in Washington, but I don’t have to like it. Resorting to camouflage and subterfuge to sneak things by is just wrong. I don’t care what the issue is. Not that this is anything new to us -- the NIH's sneaky ARRA SBIR exclusion is a case in point.

Frankly, I’m fed up with political posturing, pouting, pontificating, and prevaricating. No one tells the truth about anything. They tell the politically expedient story and use perception management to make it seem like the truth.

Yes, I have mixed emotions. On the one hand I’m delighted to see the guts ripped out of H.R.2965. It was a bad bill. But I know one thing for sure. The deliberate use of SBIR’s name for unrelated political expediency was distasteful. The crappy tactic of not changing the title when the bill has been totally changed should be illegal, but the Congress makes its own rules, and holds itself to a different standard, both legal and ethical.

I guess I wouldn’t make a good politician. I know how to play the SBIR game, and I think I’ve played it well. But this game is another story. To have used a small business bill in this way is flat out dishonest. No one asked me, but I’m telling!

Now what? Will this be another instance of Huggem-Muggem? Now that they've used us for their own nefarious purposes, will SBIR be summarily cast aside and handed off to the next Congress to start over?

Or will the Senate, the House, BIO, NVCA, SBTC, and the NSBA all agree to do what's best for small business and emerge yet this session with an SBIR Reauthorization compromise we can all live with?

Will the egos of our legislators, especially those in the House, be soothed to where they’ll act responsibly instead of selfishly? Will Nydia put her purse away? Will pigs fly?

Don't let my disgust with the process and those who would use it for their own selfish purposes make you think I've given up. I'm basically an optimist. And a realist.

Maybe pigs really will fly. Stay tuned.

Wednesday, December 8, 2010

Stakeholder Value from SBIR? Think Assets not Revenues!

A client recently asked me to help him with a presentation that involved a chart that depicted the value derived by “stakeholders” in an SBIR project. The chart only considered the distribution of the funds provided by the grant. That made me think about the whole issue of stakeholder value in SBIR-funded ventures.

Unfortunately, for most awardees, SBIR has little to do with market share or even market definition. It’s basically a Technology-Push facilitator. The Agencies define technology priorities or projects they’d like done. The small businesses propose a project to develop the technology to proof of concept. That’s not the same thing as a product. And most Agencies would never be the customer and buy the result of an SBIR project. They’re strictly being seed investors.

Even for DOD, who does buy things for deployment, the resulting SBIR-developed technology innovation is not usable until it’s integrated into a solution they can actually deploy. They don’t buy technology, they buy complete and fieldable systems. That frequently requires integration and collaboration with a Prime contractor. The DOD market is what the Prime serves. It’s up to the small business to figure out who to team with to enable that integration. Their market is not the final customer of the solution – it’s the Prime. Their challenge is how to make money from what gets developed as a result of the SBIR funding.

A grant revenue distribution diagram depicts how the money invested in the SBIR project by the Agency gets divided up among the project’s participants. That’s not what’s important. It’s all consumed by the project, so it isn’t an asset. What’s more, it shouldn’t be looked at as strictly working capital. Yes, it pays the bills, but only for this project.

A company that looks at its SBIR awards as invested capital, and considers its return on invested capital (ROIC) is more appropriately considering the asset value of the money received.

What’s important from an asset perspective is how the results of the project turn into a strategic advantage for capturing market share. That rarely has anything to do with the Federal Agency that provided the SBIR seed funding. It has to do with the strength of the intellectual property position, and the ability of the company to make the deals necessary to leverage that IP position into cash. Figuring out with whom to make the deals and how that deal is structured is where the value lies. In the final analysis that has virtually nothing to do with how the SBIR award revenues were distributed.

Unfortunately, the SBIR Program was never designed to even deal with this. It was strictly to be a way to give a small technology business a fair chance to get the seed funding. As SBIR was conceived by Roland Tibbetts back in the late ‘70s and implemented in the early ’80s, commercialization was NOT intended to be an Agency concern. While it did successfully open the door to small businesses, not including direct support for end-use deployment was probably short sighted, as, arguably, there’s no other good way to determine return on investment (ROI).

The current reauthorization legislation is attempting to remedy this by providing some requirements for the agencies to fund Phase III and gather data on what SBIR funded companies do with the technology that gets developed. As it currently stands, virtually no consistent or reliable data on SBIR commercialization activities exists, other than ad hoc anecdotal reports.

Marketing and market research of technologies which have some IP protection are clearly keys to figuring out how to make money from what’s been developed. Business success is most quickly (and sometimes ONLY) achieved when selling to a Market-Pull. But, the Agencies are quite specific about allowable costs in SBIR projects, and marketing, market research, and patent prosecution are explicitly NOT allowed to be included in SBIR budgets.

This is a classic Catch-22. The ROI of an SBIR project is measured on what money the company can make from selling the developed technology, but they’re not allowed to use SBIR money to figure out how to do that. What other money do they have? And the reauthorization’s inclusion of required Agency commercialization support may not be able to overcome this without significant paradigm modifications to what the government allows its money to be used for, as it’s the Federal Acquisition Regulations that define allowability of costs.

So, for “stakeholders” in an SBIR related venture, there’s nothing to be gleaned by simply looking at award revenue distribution.

Who are the “stakeholders” in a venture anyhow? I see them as everyone who has something to gain or lose by associating with the venture. This includes the venture’s founders, owners, employees, suppliers (of all goods and services including consultants), investors (who may or may not be owners), subcontractors, and customers. It may also include those who are building a “culture” (e.g., a professional association) where the venture plays a supportive role.

A “Stakeholder Value from SBIR” chart is, therefore, much more complex than a simple revenue from the grant depiction.

Sadly, there are many “SBIR companies” out there incapable of thinking strategically from a market-driven perspective. They do nothing more than win SBIR awards, proudly looking at the Phase I/II grant/contract revenue as their “bottom line” end game. These “lifestyle companies” (some call them "SBIR Mills") are, for the most part, not sustainable in the long term and doomed to eventual failure. They don’t start out that way, but find that making that transition to commercialization is not automatic.

Phase III is not an entitlement. It requires an entirely different focus and talent for execution not attainable by the founders or technically oriented staff. So, to survive, they stay in their comfort zone – winning SBIR awards. For them, ROI is moot.

Value is characterized by, among other things, ROI expectations. Who has them? How do we measure them for the companies and their stakeholders – including their investors? For the Agencies? For the Taxpayer? Lots of questions.

How we frame the answers may determine whether the SBIR program flourishes and grows as an innovation driver, languishes as an “entitlement”, or even survives. Any thoughts?