The Small Businesses Leading In Defense Innovation

By Bill Marinelli

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A primary tenet of U.S. defense strategy is to overwhelm an opponent’s numerical advantage with technological superiority.

The Small Business Innovation Research and Technology Transfer programs were created by Congress precisely to speed the development of advanced technologies by small businesses to help provide that superiority.

Numerous studies by independent organizations, as well as the Defense Department itself, have consistently demonstrated the value of these programs in that mission. And Congress last year reauthorized the programs for three years, including some welcome reforms to ensure stronger oversight.

That reauthorization process was punctuated by a sharp debate about “multiple award winners” — the relatively few companies whose proposals have repeatedly been judged the most meritorious and have received numerous SBIR contracts.

These companies develop advanced capabilities as well as exploit synergies and efficiencies that arise when SBIR funding is used to mature emerging technologies for targeted uses, often in multiple stages and by multiple sponsoring organizations. The program was reauthorized only after mandating higher rates of technology transition for these companies to maintain their eligibility.

Yet there runs a persistent, misleading and somewhat self-serving narrative that ignores the fundamental reasons these programs were created. A July study republished by the Pentagon’s Defense Innovation Board, “Terraforming the Valley of Death,” reached the deeply flawed conclusion that some of the most successful participants in the programs are providing the least value because their direct revenue from singular SBIR-derived products is not higher.

But not everything that counts can be counted. The study systematically excluded numerous ways that these experienced firms have been directly responsible for transitioning new technologies to war­fighters, law enforcement and intelligence agencies.

Much of that hidden value appears in the form of advanced capability that is not commercially available or relevant, classified activities and technology that is inserted into prime contractors’ programs of record. The study ignores the role multiple award winners serve as technology incubators that make investments in classified capabilities, info-tech security, test facilities and production capabilities. They consistently make their technology and capability broadly available to the defense industrial base.

The incomplete narrative about multiple award winners is supported by some that propose that private capital should displace these companies and play a greater role in bringing advanced technology to the Defense Department.

But its own Office of Strategic Capital has shown that private capital has contributed very little to defense hardware.

And a September 2022 peer-reviewed assessment in the journal Research Policy titled “Evaluating the tail of the distribution: the economic contributions of frequently awarded government R&D recipients,” concluded that judging the impact of these companies simply by counting how many of their SBIR awards turn into a singular product fails to account for how these research efforts feed the larger innovation ecosystem.

“Our review of the top 10 highly awarded firms finds they are actively engaged in commercial activity,” wrote the authors, led by Dr. Maryann Feldman, a leading authority on entrepreneurship at Arizona State University who has led a series of studies on SBIR outcomes for the National Academies of Sciences, Engineering and Medicine.

“They also move on to form procurement relationships with the federal government,” the assessment continued, and “develop technologies that require significant research efforts and long-time horizons to realize commercial outcomes.”

At Physical Sciences, we maintain almost 60,000 square feet of manufacturing space directly supporting SBIR-developed technologies that range from high temperature composites for hypersonic systems to energy storage for unmanned systems and advanced detection technology for homeland security. These applications have limited revenue potential and special requirements that are not attractive to venture capital. But they provide key capabilities for national security that cannot be readily valued. Our company is not an outlier in this value proposition.

Unlike venture capital, the Defense Department invests to create technological superiority, not direct monetary return on investment. Limiting the number of Small Business Innovation Research Program awards to these innovative companies would cause serious damage to the innovation ecosystem. It would replace merit as the basis of awards for both SBIR and post-SBIR funding, undermining the original intent of Congress.

It would also invalidate the judgment of Defense Department science and technology and acquisition executives as well as prime contractors who have been adopting much of this technology.

Another, much bigger, engine of American innovation would also suffer. Constricting the eligibility of multiple award winners would also deprive funding for major research universities across the country — around which a number of these contractors are clustered — impairing the efficiencies that arise from early-stage collaboration between institutions of higher learning and small business. It would reduce the flow of advanced technology and talent to the industrial base from these institutions.

Congress should not let small business policy be driven by the misplaced frustrations of a few against long-standing inefficiencies in defense acquisition. ND

Bill Marinelli is chief executive of Physical Sciences, an employee-owned U.S.-based company that focuses on materials and electro-optical/infrared sensing systems and technologies.

Topics: Research and Development

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