With a looming reauthorization deadline later this year, Congress has a chance to renew and improve a government funding program that can be critical to startups engaging in costly R&D. The Small Business Innovation Research (SBIR) program and its companion program, the Small Business Technology Transfer (STTR) Program are critical sources of non-dilutive funding for startups engaged in R&D with a goal of commercialization. Reauthorization before the September deadline is crucial — but so is reform, as the program remains out of reach for many startups.
The SBIR program was established in 1977 as part of America’s Seed Fund. Eligible companies must be small — with awardees having no more than 500 employees, including its affiliates — and must be majority-owned by U.S. citizens or permanent residents. VC-backed small businesses are eligible for some awards, so long as they are non-majority VC-owned or controlled, though an exception for companies with majority-VC ownership exists when that VC also “qualifies as a small business concern that is more than 50 percent directly owned and controlled by individuals who are citizens or permanent resident aliens of the United States.” VC ownership can also trigger affiliation rules and can push applicants/awardees over the 500-employee threshold.
The SBIR awards grants in three phases. The first phase supports startups as they assess the feasibility and commercial potential of their R&D effort. The second provides funds to continue those efforts. The final phase is not a monetary award and instead supports startups as they commercialize their R&D effort. Eleven federal agencies participate in the SBIR program (six for STTR), each with its primary areas of support, funding amounts, and designation as a granting agency or contracting agency. Applicants may face differing experiences concerning topics–open or closed.
In 2022, Congress undertook efforts to overhaul and reauthorize the SBIR program. While the effort implemented a number of programmatic modifications and extended the program for three years, it still faces widespread critiques, particularly from small companies. This September, Congress gets another bite at the reauthorization apple, and with that comes the opportunity to implement meaningful reform to the program so more startups can benefit from having the government as a first customer.
Areas for reform include:
Permanency. The SBIR program should be made permanent. Awardees undertake R&D efforts that not only drive innovation but meet government objectives. The continuous reauthorization cycle prevents applicants from having the certainty they need when considering possible government funding.
Greater representation — including geographic representation — of recipients. In FY2019, women received just 11 percent of phase one awards and 10 percent of phase 2 awards. Socially and economically disadvantaged businesses received 8 percent and 6 percent respectively.
In the same year, the top ten states represented received roughly two-thirds of the total awards and funding. Whereas the bottom ten states represented received less than 1 percent of the total awards and funding. In FY2023, California recipients received 19.5 percent (1228) of all SBIR awards and Massachusetts followed up with almost 10 percent (612). Whereas, North and South Dakota received 4 and 7 awards respectively, Mississippi 2 awards, and Alaska 3 awards.
The SBA and participating agencies must do more and better-targeted outreach so that startups from diverse backgrounds and more regions of the country are aware of the program and how to complete the process. This could include further support for Small Business Development Centers (SBDCs) and the Federal and State Technology Partnership program. Policymakers should also work to ensure diverse backgrounds amongst evaluators to address homophily.
More robust feedback. Many early-stage founders cannot afford to hire a grant writer to help them through the SBIR process. Applicants are often turned down for not using the correct language or for minor errors, but without a better understanding of where they are going wrong, their potential for success suffers. SBDCs could again play a role here in helping founders fix errors in their submissions, but only when adequate feedback is provided.
One founder in Engine’s network who has been unable to secure an SBIR award noted, “the feedback we’ve received has been vague and unhelpful — despite our applications aligning exactly with the project criteria outlined in the grant descriptions. It’s so confusing, the feedback is not actionable.”
Consider applicants’ non-scientific backgrounds. Founders who hold PhDs often struggle less with the SBIR process, as many already have a background in the grant process. The reality is that many startup founders do not have formal advanced education, but they are leading innovative companies that could significantly benefit government interests. When evaluating applicants’ backgrounds and proposals, application requirements should be tailored to suit those from various backgrounds so that academics are not overly favored.
Constanza Gomez, founder of Sortile, told us, “[w]e tried for the Small Business Innovation Research (SBIR) program twice, and will probably try again at some point. Just about everyone I talked to hires consultants — who take about 10 percent of the grant — and right now, I can’t commit to that. The feedback that we got from our SBIR application was that it was written as if we were pitching to an investor or a venture capitalist. This makes sense because that is about 95 percent of how we raise money. This made it difficult to find ways to improve as it was not the content or innovation that was the issue but rather the framing of it.”
Moreover, agencies should take steps to ensure that reviewers have the experience relevant to the specific proposals they are evaluating, including by ensuring that reviewers are similarly not limited to academic backgrounds.
Streamlined application process. The SBIR application process can be cumbersome, difficult to follow, and time-consuming. Which is then often followed by a lengthy wait to find out if an award is secured. Many startups do not survive beyond five years, often due to a lack of funding. The long timeline and convoluted process means many companies don’t even bother applying. Moreover, a streamlined, shorter application and decision process would encourage more very early-stage companies to apply, in addition to founders who typically face considerable barriers to funding.
More support so more startups can move to phase three. Policymakers should commit resources to helping more startups cross the valley of death and move to government production contracts and commercialization. Just a fraction of SBIR recipients end up receiving a phase three award. Policymakers should look to programs like the Strategic Funding Increase and Tactical Funding Increase at the Air Force, which are public-private funding matching initiatives that aid in commercialization.
As Jamie Gull, the founder and CEO of Talyn told us, government agencies must “work on bridging the funding gap between Phase II SBIR and something bigger. That gap between early-stage funding and getting out into the market and selling a product is what we call ‘the valley of death.’ For companies like mine, a million-dollar SBIR is great, but it’s not going to get you through that valley.”
More open topic solicitations. Many agencies solicit applications for awards about very specific topics, but this isn’t conducive to the innovation ecosystem. Startups are solving societal problems that may not have even been identified yet. As we’ve said in the past, shifting to “open topics (whichthe Air Force and National Science Foundation have begun doing), allows small businesses and startups to come to the government with their ideas and novel technologies outside of narrow parameters, allowing more innovative companies to compete, and possibly better innovation to arise.”
Clarify the affiliation rule for VC-backed startups. As mentioned, small businesses must meet size standards in order to qualify for an SBIR award. But VC-backed startups risk exceeding size restraints due to the affiliation rule. Policymakers should clarify that venture backing does not affiliate a startup with their funders’ portfolio companies.
Where are we now?
Both the House and Senate have held hearings on the future of the SBIR program and how the program can be reformed. Sen. Joni Ernst (R-Iowa) has introduced the INNOVATE Act to reauthorize the program. While the bill includes some reforms to the program, it eliminates efforts to strengthen the diversity of award recipients and fails to include some of the suggestions included here.
Without Congressional action, the SBIR program will expire at the end of September. It is crucial policymakers engage with startups as they work through the reform process. Startups drive U.S. innovation — the SBIR and STTR programs should support their needs.
Engine is a non-profit technology policy, research, and advocacy organization that bridges the gap between policymakers and startups. Engine works with government and a community of thousands of high-technology, growth-oriented startups across the nation to support the development of technology entrepreneurship through economic research, policy analysis, and advocacy on local and national issues.
