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Int. J. Entrepreneurship and Innovation Management, Vol. 5, Nos. 1/2, 2005
Observations on collaborative practices and relative success of small technology-innovating firms supported by the US SBIR initiative Jacob V.R. Pretorius* Director of Product Development, Midé Technology Corporation, 200 Boston Ave, Suite 1000, Medford, MA, 02155, USA E-mail:
[email protected] *Corresponding author
Christopher. L. Magee Professor of the Practice of Mechanical Engineering and Engineering Systems and Director of the Center for Innovation in Product Development, Massachusetts Institute of Technology, Room E60-275, 77 Massachusetts Avenue, Cambridge, MA 02139, USA E-mail:
[email protected] Abstract: This paper investigates the nature of collaboration in eight small technology-innovating firms who participated in the US Government sponsored SBIR (Small Business Innovative Research) process in 1995/6. The research was performed in 2003 allowing sufficient time to assess the relative success of various practices by the firms following differentiated SBIR processes. Following expectations, all of the firms participated in extensive collaboration. However, in contrast to earlier work studying the same firms in 1998/9, it is found that a SBIR process initiative designed to encourage collaboration with other entities and to accelerate commercial success (‘Fast Track Process’) had no influence on whether the firm had commercial and employment growth success. It appears that much of the identified collaboration is due to the need of small firms to extend their understanding of the broader systems implications of the technology they are developing. The paper also describes some perceptions held by small firms about reasons not to collaborate. Keywords: collaboration; innovation; resource allocation; small business; technology; US small business innovative research initiative. Reference to this paper should be made as follows: Pretorius, J.V.R. and Magee, C.L. (2005) ‘Observations on collaborative practices and relative success of small technology-innovating firms supported by the US SBIR initiative’, Int. J. Entrepreneurship and Innovation Management, Vol. 5, Nos. 1/2, pp.4–19. Biographical notes: Jaco Pretorius is currently the Director of Product Development of Midé Technology Corporation. He joined Midé in 1997 as a Research Engineer and has been involved in numerous applications research projects. Since 2002 he has been in charge of Midé’s product development and production group. Before joining Midé, Mr. Pretorius worked at Kentron, a medium sized aerospace company in South Africa, where he was a Systems Engineer and Analyst. Mr. Pretorius received a MS from MIT in systems engineering and management and also holds a Bachelor’s degree in engineering from the University of Stellenbosch in his native South Africa.
Copyright © 2005 Inderscience Enterprises Ltd.
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Professor Christopher L. Magee has been with the Massachusetts Institute of Technology (MIT) since January 2002 as a Professor of the Practice in the Engineering Systems Division and Mechanical Engineering. He also directs a multidisciplinary research centre (Center for Innovation in Product Development). Before Dr Magee joined MIT, he had more than 35 years of experience at Ford Motor Company progressing through a series of technical and management positions to Executive Director of Programs and Advanced Engineering. Professor Magee is currently engaged in research and teaching relative to complex system design. Professor Magee is a member of the National Academy of Engineering, a fellow of ASM and SAE and a participant on major National Research Council Studies. Dr Magee is a native of Pittsburgh, PA and received his BS and PhD from Carnegie-Mellon University in that city. He later received an MBA from Michigan State University.
1 Introduction Small, technology based companies are an important topic of research because of their significant influence on the economy. Schumpeter highlights the individual entrepreneur as the driving force behind technological change and economic development: “. . . the function of the entrepreneur is to reform or revolutionise the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganising an industry and so on.” (Scherer and Perlman, 1992)
Acs, Carlsson and Karlsson (1999) emphasise the importance of small businesses in comparative economic performance. They argue that some of the recent differences between Europe and the USA economically are due to the emphasis placed on small businesses in the USA. For instance, from 1960 to 1984, Europe and the US economies followed each other closely: GNP grew at nearly identical rates during this period (3.3% EC, 3.1% US). From 1960 to 1975, the unemployment rate in US was 5% and in the EC below 3%. This rate increased to 10% for both in 1982, where it stayed in Europe, but dropped to 5% in the USA. To explain this divergent behaviour, these authors argue that the main influence was the number of businesses formed during the period: the number of US corporations and partnerships doubled from 1960 to 1983, while it stagnated in Europe. Other authors (Christensen, 1997; Henderson and Clark, 1990; Takayami and Watanabe, 2002; Utterback, 1994) note that most breakthrough technology developments are created by outsiders and by small firms. This is in part because the smaller firms can afford to take the risk and partly because larger, well-established enterprises are ‘optimised’ around their existing business (Henderson and Clark, 1990; Takayami and Watanabe, 2002). Thus, one might conclude that smaller firms are more effective at cross-fertilisation (Goldberg, 2000) while larger firms may be more adept at incremental improvement. Despite the social importance of the successful outcomes, invention and innovation that involve significantly different and new technical approaches is possibly the most risky of all development efforts. Pure scientific research accepts a very low percentage of success and is mostly performed by universities with governmental funding. Product
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development should and most often is built on well-developed, well-understood and predictable technologies (Ulrich and Eppinger, 2004). Technological invention has the risks attendant to each of these other areas but in combined fashion in the sense that the technology is often not well understood or modelled for the applications and the price of failure is often the end of a company. With this small margin for failure, the allocation of resources in small commercial entities developing innovative technologies is a particularly important factor determining success or failure of projects. A viewpoint held here is that resource allocation decisions must consider the implementation of the technology from a broad systems viewpoint as well as the device invention. Because of the limited resources available to a small enterprise, effective collaboration is needed to address such broader system issues. Moreover, the need for a wide scope for collaboration is related directly to the inherent nature of technological invention and innovation. Uncertainty is required in order to have an opportunity for success. However, that uncertainty also introduces risks throughout the system and addressing those that will have a substantial influence on the outcome of the project early in the process is important. However, expertise available in important parts of the system is not generally available within a single small firm and thus collaboration is essential. Few studies have been performed on the development process of small technology-driven firms partly because small firms do not easily reveal data about their business practices. We found the Small Business Innovative Research (SBIR) programme sponsored by the US Federal government an available and useful source of information on such firms.
2 Description of the SBIR programme In 1982, the US Congress established SBIR to strengthen the research and development role of small companies in the USA.1 Ten federal agencies, including the Departments of Agriculture, Commerce, Defense, Energy, Education, Health and Human Services, Transportation, the Environmental Protection Agency, the National Aeronautics and Aerospace Agency and the National Science Foundation participate in the program and are required to set aside 2–3% of their research budget for it. The largest of these agencies, the Department of Defense, spends over US $500 million a year on the SBIR programme. Each year the agencies publish at least one proposal solicitation in which topics that require new innovative, high-risk research are identified. Small companies, defined as having less than 500 employees, are invited to propose new approaches to the problems that the agencies face. The agencies then receive on an average of 20 proposals per solicitation. The average success rate is one funded proposal per every ten written.1 Each agency has an individual process for selecting the topics for solicitation of proposals. Most start with different engineers and scientists inside the agency proposing problem areas in which they would like to see research performed and proceed through prioritisation phases. As the SBIR programme is funded at the agency level, scientists and engineers in the individual laboratories have an incentive to use SBIR to fund independent work in an area in which they are responsible for progress. The SBIR programme has a three stage funding process. These are a Phase I feasibility study, a Phase II prototype development and Phase III procurement.
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2.1 Phase I The Phase I feasibility study receives funding between US $60 k and 100 k and lasts 6–9 months. The purpose is to determine the technical feasibility of the approach proposed to solve the problem. The company assesses technical feasibility by developing a model or a prototype or both. The programme structure dictates that the Phase I effort focuses on the goal of obtaining Phase II funding. Thus, the company’s goal during Phase I is to generate enough evidence of the feasibility of the approach as well as interest inside the funding agency so that it will be a) invited to submit a Phase II proposal and the Phase II proposal will receive favourable reviews.
2.2 Phase II The Phase II funding consists of US $750 k covering 2 years of effort focused on developing a working prototype. Phase II’s are funded based on the technical merit and the potential for commercial success of the approach.1 The proposal thus concentrates on describing work to mitigate the technical risk and tackling all the issues surrounding the feasibility of the approach. A desired output of Phase II is that it ends with a clear, defined commercial plan that is capable of being implemented. The small firm is thus encouraged to consider the commercialisation of the innovation during the Phase II proposal. A section of the proposal is dedicated to the potential markets, the benefit for both the private and government sector and the approach that the company will follow to ensure that the venture is a success. Nonetheless, Phase II efforts can be divided into two types of research efforts: those that focus on the commercial market and those that pursue fundamental science. The success of a Phase II SBIR is evaluated on either of these two metrics by the government who recognises merit in those that make a commercial success as well as those that deliver fundamental scientific benefits to the sponsoring agency (Audretsch et al., 2000). In addition, the level of expertise of the evaluation relative to commercial success may be questionable given the lack of experience in such endeavours by many government managers, engineers and scientists.
2.3 Phase III Phase III involves private sector or federal agency funding (outside of the SBIR programme) to commercialise the technology. During this phase, the funding agency can sponsor the development of a production facility with the exclusive goal of producing the technology application that was developed in the previous two phases. The sponsoring agency may also proceed to procure the product that is manufactured based on the technological development.2 While the small business entity is ultimately responsible for the commercial marketing and sale of the technology or product developed under SBIR, the government encourages commercialisation efforts. In this role, the government agency is responsible for making all reasonable effort to ensure that any government follow up actions to research, develop or produce technology developed under SBIR are accomplished. This is often through sole-source contracts with the same small business that originally worked on developing the technology.3
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To particularly encourage research into approaches with commercial potential, the US Department of Defense (DOD) founded the Fast Track programme that is described in more detail in the following section.
2.3.1 Phase II Fast-Track In 1996, the DoD instituted the Fast-Track approach to SBIR under which proposals with funds matching the Phase II funding are given a significantly larger probability to obtain Phase II funding. The matching funds can be obtained from any outside investor meeting specific criteria.1 A proposal for a programme that obtains outside investments will receive:
interim funding of up to $50,000 between phases I and II
evaluation under a separate, expedited process
a phase II contract, subject to certain technical criteria.
A reasonable assumption behind the Fast-Track process is that third party investors serve as an important filter to assess whether programmes have significant commercial potential. The research reported here explores whether this Fast-Track programme helps create more effective collaboration networks. The research starts from a previous study of the efficacy of the Fast-Track programme.
3 Research design A 1996 study conducted by the National Research Counsel entitled ‘An assessment of the Department of Defense Fast Track Initiative’ (Wessner, 2000) examines the effects of the Fast-Track programme. A part of this study was a deeper examination of the performance of 14 companies in New England (Scott, 2000). In the research reported here, eight of the original companies studied by Scott were contacted and each completed a follow-up questionnaire and interview into the strategies, processes and ultimate success of the project and company. During this work, the emphasis was on the processes that the companies followed to identify challenges and problems, how they evaluate these different problems and particularly how they utilised collaboration in approaching such problems. The aim was to identify differences in this process between companies and establish reasons for why these differences exist. One issue explored was whether Fast-Track and Non-Fast-Track companies could be differentiated by their differences in collaboration networks, which might ‘explain’ the higher success of Fast-Track companies indicated previously (Audretsch et al., 2000; Scott, 2000; Wessner, 2000). Since fast track companies had to collaborate with at least one third party during Phase I of their project in order to secure external funding, more substantial collaborative networks of fast track companies might be expected. Further research was aimed at determining similarities among the company strategies and quantification of success. Four Fast-Track (FT) and four Non-Fast-Track (NFT) companies that were subjects of the previous research agreed to participate. Table 1 shows selected size data of the companies when the project studied was performed as well as the notation used for companies that received Fast-Track sponsorship (FT) and for companies that received their funding through the normal process (NFT).
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Table 1 Company
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Classification of companies by type of Phase II funding Award
1995 # employees
2002 sales in US $M
Year established
A
FT
B
FT
20
35
1982
7
1.75
1997
C D
FT
8
1.75
1994
FT
155
15
1940
E F
NFT
18
1.75
1982
NFT
260
400
1956
G
NFT
3
0.75
1989
H
NFT
8
35
1991
As the nature of the project and company are relevant to understanding the results, a short description is given here.of each company/project is given in Appendix I.
4 Research approach The research was conducted in two phases: a written questionnaire and an interview. More details on the questionnaire as well as more extensive coverage of the results from the questionnaire and interviews is given elsewhere (Pretorius, 2003). In both phases, the issues addressed were:
the benefits of the SBIR project to the company
the points of resistance or hurdles that the company experienced during the project
the collaboration of the company with other entities
the final outcome of the SBIR effort.
The initial written questionnaire was sent to each of the companies. The research programmes that were at the centre of the questionnaire were completed in 1997 and the research was performed in 2003. It was therefore necessary to allow the responders to recall broad and general issues first and this was largely accomplished by the questionnaire. In addition, half of the companies no longer employed the original Principal Investigator (PI). In these cases the questionnaire was completed by either the president of the company or by a senior member of the original research team. After the respondents had recalled the specifics of the research programmes under assessment, an interview was conducted. The interview was aimed at revealing the details of the companies’ methodology for identifying and evaluating obstacles, allocating resources and utilising collaboration. These questions were open ended and allowed the respondents to go beyond the specifics of the particular Phase II SBIR’s of interest. Thus, the collaboration observations reported here represent broader experience than the eight projects first identified.
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The respondents were encouraged to discuss the details of the technology and programme selection process, the funds application process and the application research process. Follow up questions dealt with the obstacles that were apparent in programmes and how the firms deal with them and how they view and use collaboration.
5 Results 5.1 Firm growth and success since receiving SBIR Figure 1 shows the employment of all eight companies relative to 1995 employment with time up to 2003. It is seen that most of the companies maintained their relative size after receiving the Phase I SBIR under study. The only exceptions to this were companies B (FT) and H (NFT). Company B’s growth was due to commercialisation of another project that was significantly different and disconnected from the Phase II SBIR under study. Company H was successful in commercialising another, earlier funded SBIR. This led to their rapid growth in 2001–2002. The downsizing of the economy had a significant influence on their market and the company was forced to reduce size in 2003. Comparing the top and bottom of Figure 1 shows no other important differences in employment growth between FT and NFT companies through 2003. Table 2 shows for each of the companies the time projected for commercialisation, the actual time and the eventual outcome of the Phase II’s. Company E (NFT) is the only firm that achieved commercial revenue by 2003 from the technologies developed in the projects studied here. In 2003, company F (NFT) was in the process of selling the rights to the manufacturing of the technology, although no contract had been signed. Half of the remaining companies were able to use the technologies developed for the SBIR elsewhere. Of interest is the time it took for the companies to receive commercial success. In the study by Scott (2000), all the FT companies projected commercialisation in less than 3 years with four several estimating 1 year to commercial sales. The NFT companies all projected that it would take less than 5 years to commercialise their technologies, with six predicting only 2 years. Differences in projections of this kind were a key element of the prior conclusion (Audretsch et al., 2000; Scott, 2000; Wessner, 2000) about the effectiveness of Fast-Track. In our follow-up, we were able to determine that the first (and thus far only) commercial sales were attained 8 years after the initial SBIR. Most of the companies are currently still in the process of attempting to commercialise their original technologies in one way or another. Moreover, this research shows that FT firms show no superiority in time to commercialisation (indeed in this sampling did measurably worse). This finding and that on employment growth comparisons between FT and NFT companies were unanticipated due to strong previous conclusions (Audretsch et al., 2000; Scott, 2000; Wessner, 2000) about the superior success of FT firms.
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Figure 1
Number of employees per year relative to 1995, the year that the companies first applied for the phase I SBIR. Fast track recipients are depicted on top and non-fast track at the bottom
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Table 2
Actual and projected results from the eight different SBIRs
Company
Award
A
FT
