Reauthorizing and Reforming the Small Business Innovation Research Program Is Essential for U.S. National Security

Congress created SBIR because of its view that small businesses are the principal drivers of innovation. Small businesses are agile and can be closer to the cutting edge of new technologies than larger defense primes or traditional contractors. This makes them invaluable contributors to federal missions that require speed, ingenuity, and novel approaches. CSIS’s panel event on SBIR on September 9 explored the success stories of three small businesses that work for the federal government and highlighted how SBIR kick-started many of these firms’ ability to deliver solutions to the government. The SBIR program has been the subject of numerous reviews, which have found that the program has successfully stimulated innovation and encouraged various federal agencies to include small businesses in their research and development (R&D) efforts.

However, SBIR is a small part of the overall government spending directed towards small businesses. Despite the common mental image in senior federal leadership that small businesses are consistently engines of innovation, the majority of work performed by small businesses for the federal government is largely unrelated to innovation. The categories of work dominated by small businesses include civil engineering, software installation and programming, facility utilities installation and repair, administrative services, and nontechnical manufacturing.

Within the DOD, small businesses play an important role, though not always in areas typically associated with innovation. As shown in Figure 2, the DOD is the leading agency distributing SBIR funding by total amount of funds dispersed and number of individual grants. These allocations have steadily increased over the past decade for both the DOD and all other federal agencies. Beyond just SBIR, small businesses account for around a fifth of the DOD’s total contract obligations and a fourth of other federal agencies’ contract obligations. However, DOD contracts for small businesses are largely for facility services, administrative services, wholesalers, nontechnical manufacturing, and computer software installation services, which are not often thought of as sectors driving innovation.

The Challenge of Converting Innovation into Programs of Record

SBIR is not without flaws. Perhaps the most persistent challenge is the transition gap. SBIR grants have three phases: (I) Feasibility, (II) Prototyping, and (III) Commercialization. While Phases I and II are funded by agencies’ SBIR budgets, Phase III is not funded by the SBIR program and is designed to be the “success” condition—wherein the SBIR project accomplished the goal of becoming a commercially viable product with uptake by federal agencies or others. Small businesses can face great difficulty in moving from Phase II awards (where a prototype is developed) into Phase III or programs of record (where the government buys and scales the solution).

Improving transition rates from Phase II to Phase III requires more than just money. After all, SBIR funds cannot go towards Phase III commercialization spending. Instead, improving transition across what is commonly called the “valley of death” requires a deliberate effort to align SBIR awards with actual government needs, to involve program managers early in the process, and to track outcomes systematically. While not all innovative efforts should necessarily be adopted, a great loss for the federal government and its taxpayers is when SBIR projects succeed technically but fail bureaucratically, as they are unable to find champions in the acquisition system who can shepherd them into broader use.

A related challenge is that of proper metrics and data collection. While the usage of SBIR has exploded in the past several years, the U.S. federal government does not measure whether this funding is successfully serving the mission of creating innovation and commercialization. There is no public data that captures how many SBIR/STTR–funded prototype development programs have led to programs of record. Without the ability to quantify the conversion of SBIR programs from Phase II to Phase III, the federal government cannot see whether and where its spending is creating the desired effects. Moreover, in the absence of metrics, it is easy for critics to cast doubt on the program’s efficacy. As government leaders often use SBIR funding (along with STTR and OTs) as a proxy for overall innovation, the inability to measure SBIR commercialization hampers the government’s full understanding of its innovation ecosystem.

Considerations as SBIR Faces Reauthorization

SBIR is a powerful vehicle for translating U.S. ingenuity into solutions for the federal government. It has allowed small businesses to prove their ideas, and it has given the federal government access to a pool of innovation that may otherwise have been out of its view. Without reauthorization, the United States would be left with a weakened innovation pipeline, even as global competitors double down on state-backed technology development.

However, Congress should not ignore SBIR’s current shortcomings. Some experts call for expanding participation beyond the current SBIR and STTR recipient base. They point to Government Accountability Office findings that 10 percent of Phase II dollars were awarded to 22 firms, which represent fewer than 1 percent of all Phase II awardees, from FY 2011 through FY 2020. Senator Ernst has championed the INNOVATE Act to cap lifetime SBIR awards to a single firm at $75 million. Other experts argue that multiple SBIR awards to the same firm can advance the goals of innovation by building momentum, creating expertise, and helping bridge the acquisition valley of death for small firms.

Reauthorization can be paired with reform. The administration could collaborate with Congress to collect and publicly disseminate greater data on SBIR/STTR to better quantify innovation spending and successes. Federal agencies should be required to measure and report transition outcomes. This data would enable the government to more clearly understand the innovation and commercialization cycle, as well as the impact of capabilities derived from SBIR spending. Over time, a data-driven approach would raise the overall effectiveness of the program.

Congress should act swiftly to reauthorize SBIR. At the same time, policymakers should address implementation issues. By building stronger metrics, ensuring better alignment with operational needs, and smoothing the transition from prototypes to programs of record, SBIR can continue powering U.S. innovation for the federal government in the decades ahead.

Jerry McGinn is director of the Center for the Industrial Base and senior fellow with the Defense and Security Department at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Henry H. Carroll is a research associate with the Center for the Industrial Base at CSIS.

The authors would like to express their thanks to Madison Bruno and Sabina Hung for their editing and visualization support. The authors also thank the Baroni Center for Government Contracting for its permission to use their data for the accompanying graphics.