U.S. News: Tech-Incubator Programs Under Fire

"A pair of federal programs meant to help the Pentagon and others tap U.S. small-business innovation face an overhaul or outright extinction as Congress feuds over allegations their funds are being abused by their recipients and by China.

The Small Business Innovation Research program and the affiliated Small Business Technology Transfer program are set to expire at the end of September if legislators don't renew them. Federal agencies have made more than $60 billion in awards through the programs over four decades.

Sen. Rand Paul of Kentucky, the top Republican on the Senate small-business committee, has pledged to block the programs' reauthorization unless Congress mandates a revamp. His Democratic counterparts see some of his proposals as counterproductive to fostering innovation, so negotiations are dragging on, according to aides.

The wrangling is part of a broader debate in Washington, Silicon Valley and elsewhere about the best way for the U.S. to strengthen its defense-industrial base against China, which is determined to access U.S. innovation. Many critical technologies are now being developed by tech startups and other nontraditional defense contractors.

The small-business programs have benefited many now-established technology companies, including Qualcomm Inc., a semiconductor giant, and DNA-testing firm 23andMe Inc.

The lawmakers' differences over the programs are already having an impact. The Defense Department, which is the SBIR program's biggest participating agency, recently canceled a coming round of award solicitations because of uncertainty over the program's future.

In a June letter to six House and Senate committees reviewed by The Wall Street Journal, two Pentagon undersecretaries said failure to renew the programs means that many war-fighting needs won't be addressed. They said, "Any lapse could result in thousands of small businesses being forced to lay off workers, or drive them to other sources of funding, to include foreign investment." The Pentagon said in a 2019 report that by 2018 it saw a 22:1 return on investment from SBIR and STTR contracts made between 1995 and 2012.

The current legislative fight over the small-business funds centers on companies that have excelled at winning many awards, which generally total $50,000 to $750,000. Mr. Paul refers to these firms as "SBIR mills." He accuses them of gaming the system to get funding for research that largely can't be commercialized, crowding out businesses with potentially more innovative technology. He wants to cap the number of awards one company can receive annually.

"We need to stop funneling taxpayer money to these same firms over and over again," Mr. Paul said.

Mr. Paul, along with fellow committee Republican Sen. Joni Ernst of Iowa, have urged Congress to require government agencies to vet companies seeking SBIR funding to prevent exploitation by adversaries such as China. A Pentagon study in 2021 found instances of SBIR recipients taking Chinese investment or working with Chinese entities linked to defense industries, the Journal reported in May.

Sen. Ben Cardin (D., Md.) and Rep. Nydia Velazquez (D., N.Y.), who lead the Senate and House small-business committees, said in statements that they are open to discussing the national security concerns. In meetings, however, they have opposed targeting the multiple award recipients so broadly, saying those companies provide invaluable research and technology, according to people involved in the discussions.

"Our primary objective is avoiding a program shutdown, and the harm it would cause," Ms. Velazquez said. "Failure to reauthorize these programs would hurt American small businesses, innovation and national defense."

During negotiations, Mr. Paul's aides have cited public data showing that more than 200 businesses received over 100 SBIR awards each, with some getting more than 900 awards, according to some of the people involved in the negotiations.

Ben Van Roo, a defense entrepreneur who has received SBIR and STTR money and who has been consulting with lawmakers on the programs, argued for awards caps in a June blog post titled "Are a Few Dozen SBIR Mills Sucking the Air Out of Small Business Innovation?"

He cited Nasdaq-listed Luna Innovations Inc., a maker of fiber-optic and other technologies, which he said has received $165 million from 1,200 Defense Department SBIR contracts from 2009 to 2021, representing 30% of its revenue over that time.

Luna said the company "has sold or spun off many of the SBIR-developed technologies to entities that could further commercialize those technologies." A separate division of the company, which conducted most of the SBIR work, was sold to a private group this year, and SBIR work now accounts for less than 5% of Luna revenue, a spokeswoman said.

Under the SBIR program, the government expects to award $3.9 billion in funding in the fiscal year ending Sept. 30.

The Air Force told the Senate Small-Business Committee that it agrees with the Office of the Secretary of Defense's opposition to Mr. Paul's proposal for an awards cap and instead supports its colleagues' recommendation to use a tiered benchmark process to measure recipients' commercialization success, according to a June document reviewed by the Journal.

Sen. Paul and his Democratic counterparts have been trading proposals on a benchmarking system, according to the people involved in the negotiations." [1]

1. U.S. News: Tech-Incubator Programs Under Fire
O'Keeffe, Kate. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 08 July 2022: A.4.