RAI Explainer: the Small Business Innovation Research Program
SBIR today is one of the most emulated and extensively studied government R&D programs in the world. Countries from India to the United Kingdom have adopted or adapted programs of a similar nature to engage innovative small businesses more effectively in their national economies.
Below, we look at the history and features of this program and why the future of SBIR in the U.S. is in doubt.
The History of SBIR
The Small Business Innovation Research Program was piloted at the National Science Foundation (NSF) in 1977. The program was conceived by Roland Tibbets, then a Senior Program Officer at NSF, to harness the innovative potential of small, high-tech companies to address national objectives. To eliminate the prohibitive hurdles that these firms faced when pursuing federal R&D funding, Senator Edward Kennedy (D-MA) advocated for the NSF to support research funding for qualified small businesses and called for a small percentage set-aside of the federal extramural R&D budget to be directed towards them. Working with biotechnology entrepreneur Arthur Obermayer, Kennedy succeeded in instituting the SBIR within the NSF in 1977.
Obermayer subsequently advised the Congressional Subcommittee on Science, Research, and Technology of the House Committee on Science and Technology that the NSF SBIR program was “potentially…the most significant government program of this century in the field of science and technology”. In part due to his testimony, in 1979 the Small Business Administration (SBA) concluded that SBIR programs should be implemented across all government agencies involved in extramural research and development. In 1982, President Reagan signed the government-wide SBIR into law, under the Small Business Innovation Development Act of 1982.
Objectives of SBIR
The SBIR Program encourages small, U.S.-owned businesses to address the diverse missions of eleven federal agencies. To be eligible, these businesses must be organized as for-profit enterprises, with a place of business located in the United States. More than 50% of the business must be owned and controlled by U.S. citizens or permanent residents, and the business must employ no more than five-hundred employees to qualify.
Program managers across each of the agencies work with their SBIR offices to identify mission challenges that are periodically posted as open solicitations for qualified small businesses to solve. By crowd-sourcing low-cost answers to agency challenges, SBIR creates overlapping incentives for small businesses as well as for agency managers, facilitating win-win partnerships that benefit the nation.
The legislation establishing SBIR outlines four goals of the program. These are to (1) stimulate technological innovation, (2) use small businesses to meet federal research and development needs, (3) foster and encourage the participation of minorities and disadvantaged persons in technological innovation, and (4) increase private sector commercialization of innovation derived from federal R&D.
While the Small Business Administration serves as the coordinating agency for the SBIR program, eleven federal departments participate in SBIR.
Each year, the SBIR programs across all agencies allocate a minimum of $3.2 billion U.S. dollars to small businesses. In 2021 alone, the program provided 6,769 competitive awards. The Department of Defense made awards totaling $1.8 billion, about 55% of overall SBIR funding. The Department of Health and Human Services made awards totaling $1,061 million and making up 34.1% of overall funding. The Department of Energy contributed 9% of funding, the National Science Foundation makes up 6.3%, and the National Aeronautics and Space Administration makes up 5.9% of the program. In sum, these agencies contribute 97.6% of overall SBIR funding.
The Gated Structure of the SBIR Program
As a highly competitive program, SBIR encourages domestic small businesses to engage in Federal Research/Research and Development (R/R&D) with the potential for commercialization. The program’s awards are structured into three phases:
- Phase I: seeks to establish the technical merit, feasibility, and commercial potential of the proposed Research/R&D efforts as well as to determine the quality of performance prior to providing further Federal support in Phase II. Phase I awards are typically $50,000-$250,000 for six months (SBIR).
- Phase II: continues the Research/R&D efforts initiated in Phase I. Generally, only Phase I awardees are eligible for a Phase II award. The SBIR/STTR Phase II awards are generally $750,000 for two years.
- Phase III: calls for the pursuit of commercialization objectives resulting from Phase I/II Research/R&D activities. The SBIR/STTR programs do not fund Phase III.
SBIR helps small innovative companies cross what is known as the “Valley of Death,” a term that refers to the phase between the initial development of an innovative idea and proof that it has potential in the marketplace. Entrepreneurs need capital and investors to commercialize their innovative ideas but can struggle to gain funding after initial conception of an idea. Oftentimes, the risk associated with investing in new technologies and innovations is too high for private venture capital firms to support. SBIR aims to solve this problem by providing some of the necessary, early-stage funding for new innovations to succeed. Moreover, by validating the commercial potential and technical soundness of the new technology, SBIR helps companies overcome the information deficit prevalent in private venture markets that hampers seed and early-stage funding for innovative technologies. This de-risks additional investment.
SBIR has helped to sustain the development of firms such as Qualcomm, 23andMe, and Boeing-SVS, Inc., and has led to the commercialization of new technologies including Lasik surgery for cataracts, sonar systems that help the Navy identify and avoid whales and dolphins, and technologies enabling wireless connectivity found in virtually every smartphone, tablet, and computer.
Today, the SBIR program continues to support scientific excellence and technological innovation through the investment of federal funds in promising American businesses to build a strong national economy. To date, the SBIR program has played a role in over 70,000 issued patents, supported the development of close to 700 publicly traded companies, and stimulated approximately $41 billion dollars in venture capital investments.
In terms of overall impact, the Department of Defense (DoD) SBIR program alone estimated that for awardees receiving DoD funding between 1995 and 2012, well over half of the Phase II contracts (58%) resulted in the commercialization of a technology or innovation. The economic impacts of the DoD’s contribution to the SBIR program during that period amounted to $121 billion in total sales of new products and services, $28 billion in sales of new products to the U.S. military, $347 billion in total economic impact nationwide, and 1,508,295 jobs (65,578 per year) with an average annual salary of $73,461. Overall, this represents a 22:1 return on the DoD’s investment in its SBIR program.
The SBIR program has been reauthorized and extended several times since its creation, including in 1992, under the Small Business Research and Development Enhancement Act, in 2000 under the Small Business Reauthorization Act, and in 2011 through the National Defense Authorization Act for FY2012, and in 2016 under the National Defense Authorization Act for FY2017, which extended the program’s expiration date to September 2022.
SBIR is once more up for reauthorization, but the future of the program is threatened. Recently, Senator Rand Paul (R-KY), the ranking Republican on the Senate Small Business and Entrepreneurship Committee, announced he will not support reauthorizing the SBIR, citing concerns over the “severe risks to national security when China continues to steal technology seeded by this program.”
In a June 3rd letter to lawmakers, Undersecretary for Defense Acquisition and Sustainment William LaPlante and Undersecretary for Research and Engineering Heidi Shyu urged the renewal of SBIR. They stated that failure to reauthorize the funding will adversely affection national defense by hamstringing a critical source of research and technology development. The lapse could also force thousands of federally supported businesses into lay-offs, or drive them to other sources of funding, including foreign investment.
To be sure, greater attention and funds are needed to help small businesses secure their ideas against cyber threats and acquisition by U.S. strategic rivals. Moreover, given the importance of innovation in sustaining the nation’s competitiveness and national security - and the key role that SBIR plays in this space - there is need for policy stability and continuity for a U.S. innovation program that has been proven to work, is a significant strategic asset, and that is widely admired around the world.
Gabrielle Athanasia is a Program Coordinator and Research Assistant with the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington, DC.
The Perspectives on Innovation Blog is produced by the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).