A Wrinkle in the Innovation Universe
FedInvent Reports for June 28 through July 7, 2022
Hello from FedInvent,
First, the links to the FedInvent reports for the last two weeks:
A Wrinkle in the Federal Innovation Universe
It has been an interesting couple of weeks on the federal research and development front. Congress is deciding about the structure and operation of the Small Business Administration's Small Business Innovative Research grant program. The CHIPS/USICA bills focused on the semiconductor industry and semiconductor R&D are in jeopardy, and the Secretary of the Air Force is changing course, looking for more operational technology and less experimental technology.
Rand Paul Is Not Happy With America's Seed Fund
The Small Business Administration likes to refer to its Small Business Innovative Research (SBIR) program as America's Seed Fund. The programs fund a diverse portfolio of startups and small businesses across technology areas and markets to stimulate technological innovation, meet Federal research and development (R&D) needs, and increase commercialization to transition R&D into impact. For founders who can make it through the funding process, an SBIR grant provides funding to the firm without the funder asking or taking equity. Funding can reach as much as $3 million over three years.
The Small Business Innovative Research (SBIR) Grants and the Small Business Technology Transfer (STTR) program is on the radar of Senator Rand Paul. According to the Wall Street Journal, "Senator Paul accuses companies going after these grants of gaming the system to get funding for research that largely can't be commercialized, crowding out businesses with potentially more innovative technology." Senator Paul wants to shut down the "SBIR Mills," companies that have built a business around applying for and receiving grants instead of building and commercializing new technology. The Senator wants to cap the number of awards one company can receive annually as part of the process of reauthorizing the program.
Making foundational changes to the program may be easier said than done.
Meet Dr. SBIR
Dr. SBIR is a distinguished academic and tenured professor of computer science. He is a cybersecurity expert. As a side hustle, he runs an advisory company. The staff includes the professor, one of his Ph.D. advisees who is now a principal at one of the top cybersecurity advisory companies where he works full time, and whoever is the Entrepreneur-in-Resident at the university where Dr. SBIR works.
Dr. SBIR is brilliant. He is an expert on moving target defense, advanced persistent threats (APTs), cybersecurity, buffer overloads, zero-day exploits, and the people that buy them. He can wax poetic on vulnerabilities on space ships, autonomous vehicles, IoT sensors, digital assistants, and fighter jet maintenance equipment. He has patents for innovative ways to protect systems without taking a performance hit, a highly desirable capability when some cybersecurity protocols can cause a 30-50% performance hit when you turn them on.
Dr. SBIR is the guy that companies call when they realize they've been seriously hacked and don't know what to do next. He writes impressive papers that are insightful and make you wonder why you didn't think of that. He's an expert on Sitting Duck Risk, the risk that comes from standardizing the configuration and security standards across an entire enterprise. The whole system is a sitting duck — once hackers get into one server, they traverse the system to all of the servers. He evangelizes with senior leaders in government and industry on making their systems more resilient.
Dr. SBIR is a grant-writing machine. Dr. SBIR wins A LOT of SBIR grants. He's particularly adept at writing grant proposals that don't violate the rule that says you can't have more than one grant for the same work from different agencies. He's got the section on how he's going to commercialize his technology down to a science.
Dr. SBIR's grant portfolio includes wins from just about every federal agency that has cybersecurity problems or wants to implement leading-edge technology without exposing national defense secrets. He's received grants from a Who's Who of federal research organizations. Dr. SBIR also holds a top-secret clearance which adds to the scope of projects where he can apply for funding.
He's great at cybersecurity and writing grants. He's terrible at commercializing his ideas. He doesn't like the drudgery of product planning and writing end-user license agreements or contracts, even with the Entrepreneur-in-Residence egging him on. Developing a pitch deck to raise money is below his pay grade. Dr. SBIR is good at scary slide decks but not so good at pitch decks that ask for money from investors who, in turn, ask how and when they'll get their money back. Federal agencies don't ask for a return on their money. Curiously, he hates selling and asking for money from people who will use his technology.
Dr. SBIR is a busy man with little time left to grow a business. Between teaching, going to cool conferences in exotic places where big companies pay for his travel, and cushy hotels so he can give talks with colorful PowerPoint slides that scare the crap out of his audience, he is a busy man. He needs time to head over to his condo on the ocean for some quality reading, thinking, and sunset-watching time.
It's unclear what Dr. SBIR's federal clients do with the reports and experimental capabilities he develops as part of these grants. Maybe the agencies want his advice, and a grant is an easy way to get him to think about and solve their most vexing problems. Maybe they want to see what he has to say in his grants. He always has good ideas. His grant proposals meet all of the government's requirements. But if the goal of handing out SBIR grants to Dr. SBIR's company is to bring technology to market and commercialize new capabilities, it's not happening. Senator Paul and America's Seed Fund have a challenge on their hands.
The National Security Risk Posed By China
Another issue Senator Paul has with the SBIR grant program is vetting the companies that receive the funding to ensure that the firms that are getting taxpayer funding aren't posing a national security risk. Senator Paul believes the SBIR grants, "lack protections against ties between the SBIR program awardees and China." Among Congress' concerns is that the firms receiving U.S. funding are not also receiving investments from Chinese firms who will have an interest in the innovations this funding creates. It's a legitimate concern.
The A123 Systems situation is a case in point. A123 Systems is the bankrupt American battery maker that was a centerpiece of the Obama administration's loan program for electric vehicles. The company's founders were the beneficiaries of federal R&D funding while at the Massachusetts Institute of Technology (MIT). That funding led to new patented battery technology. A123 used its patents and technology to apply for federal loans to build capabilities to commercialize its technology. Unfortunately, the company was the victim of bad timing, an electric vehicle market that wasn't ready for prime time, and coming face-to-face with running a business in a new industry. The U.S. unit of Wanxiang Group, China's largest auto parts manufacturer at the time, bought A123 Systems and its technology at auction. A business in China owns the taxpayer-funded battery technology.
Senator Paul has a reason for concern here. Startups are always on the hunt for funding. But unfortunately, it's not always clear who is behind an investor offering critical funding in exchange for equity.
Pass the CHIPS
Congress is working on getting a bill to help the American domestic semiconductor remain competitive in a global market. An increasingly urgent agenda in light of supply chain issues resulted in the lack of $1 microchips halting production of $60,000 vehicles by domestic manufacturers. There are two semiconductor bills — CHIPS and USICA. Here's the rundown.
Creating Helpful Incentives to Produce Semiconductors for America Act or the CHIPS for America Act is the Republican version of the semiconductor bill. (American government loves a good acronym.) The CHIPS bill instructs the National Institute of Standards and Technology (NIST) to make research and development investments to accelerate the design, development, and manufacturability of next-generation microelectronics. The CHIPS Act also calls for the creation of a new Manufacturing USA institute for semiconductor manufacturing.
Under CHIPS, Commerce will also establish a program to match state and local government incentives offered to private entities to build fabrication facilities, FABS, for semiconductor manufacturing. This program will provide matching funds to Intel to build a new fab in Ohio. Intel's plans are now on hold, awaiting congressional action.
The Commerce will also assess the capabilities of the U.S. industrial base to support the national defense in light of the global nature of supply chains and interdependencies between the industrial bases of the U.S. and foreign countries with respect to the manufacture and design of semiconductors. There is a legitimate national security concern about the ability of the U.S. can secure special-purpose semiconductors for military and defense applications.
United States Innovation and Competition Act of 2021 (USICA) passed the Senate on June 8, 2021, over a year ago. Among the R&D-focused elements of the bill are:
(1) funding for FY2022-FY2026 to support U.S. semiconductor manufacturing, research and development, and supply chain security;
(2) funding for wireless supply chain innovation; and
(3) establishing a Directorate for Technology and Innovation in the National Science Foundation.
The USICA is 2,376 pages long. The bill includes $52 million for the research, design, and manufacturing of semiconductors. There is a lot in the bill.
Getting a semiconductor bill passed and to the President will be a challenge. Congress is only working from July 11 through about August 8. Then it's time for the members to head home for the midterm elections. There may be a few guest appearances of our elected representative to pass a continuing resolution or two to keep the government open. Majority Leader Chuck Schumer just tested positive for COVID, luckily with mild symptoms, but his illness will undoubtedly slow things down. And Mitch McConnell has told his colleagues they can't have a reconciliation bill, the resurrection of Build Back Better, and the semiconductor bill. This stand-off has led many of the prognosticators on the Hill to believe this bill isn't going anywhere.
Meanwhile, Over at the Department of Defense
The Department of Defense canceled a coming round of SBIR solicitations because of uncertainty over the program's future. But don't despair. The end of the government fiscal year is September 30, 2022. So there will probably be plenty of grants made before the current program expires to spend all that year-end government money.
Air Force Secretary Frank Kendall has criticized Advanced Battle Management System as not inadequately "focused on achieving and fielding specific, measurable improvements in operational outcomes." The Advanced Battle Management System (ABMS) is the U.S. Air Force's latest effort to create a next-generation command and control (C2) system. ABMS proposes using cloud environments and new communications methods to allow Air Force and Space Force systems to share data seamlessly using artificial intelligence to enable faster decision-making. Dr. Kendall appears to be moving away from the "R" part of R&D and moving to the development phase. Hopefully, the Air Force will find some beneficial technology among the hundreds of SBIR grants it gave out through its Pitch Day events.
Before We Go
The FedInvent team is putting together a year-to-date round-up of the federal innovation ecosphere pipeline. We're busy refining funding sources, counting inventors and entities that benefit from taxpayer R&D funding and unearthing more and more patents and patent applications where taxpayer money led to new inventions. We're hoping to start rolling out our findings soon.
Thanks for reading FedInvent.
The FedInvent Team
FedInvent tells the stories of inventors, investigators, and innovators. Wayfinder Digital's FedInvent Project follows the federal innovation ecosphere, taxpayer money, and the inventions it pays for. FedInvent is a work in progress. Please reach out if you have questions or suggestions. You can reach us at email@example.com.
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