The collective sigh of relief you heard last week came from small businesses and university innovators across the country who had been holding their breath for passage of the SBIR and STTR Extension Act of 2022. The bill, which was finally adopted by Congress on Thursday and signed into law by President Biden on Friday, ensures continuity for a 40-year-old R&D grant program that invests about $4 billion a year in 4,000 small businesses pursuing innovative research across all fields of science, technology, and medicine. The program had been facing termination at the end of September, with its extension held up due to concerns over non-competitiveness and risks of foreign influence. Last week’s extension bill, which Congress slid just under the deadline, includes key provisions to address those concerns, and reauthorizes the program for three years until September 30th, 2025.
What is SBIR / STTR?
The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs fund American small businesses engaging in dual-use research and development (R&D). Often referred to as “America’s Seed Fund,” their goals are to stimulate innovations that can address federal agencies’ missions and be commercialized in the private sector. They also seek to promote the participation of women and socially or economically disadvantaged persons in entrepreneurship. The program is a source of non-dilutive funding for small businesses, meaning they do not give up equity in exchange for SBIR funds.
SBIR has its roots in 1970s-era concerns that the United States was losing its technological and scientific edge in the global economy — concerns that are all too familiar today. Piloted at the National Sciences Foundation (NSF) and formally established in 1982, the program now includes 11 federal agencies. The five largest of those agencies (Department of Defense, Department of Energy, Department of Health and Human Services, NASA, and NSF) also fund STTR awards which require participation of a nonprofit research institution.
Each agency decides which research topics to fund, and awards funding in two sequential phases. For example, the Department of Defense calls for topics that meet warfighter mission needs, while the National Institutes of Health (NIH) funds research related to novel cancer treatments, Alzheimer’s drugs, and more. The program’s success stories include household names like Qualcomm, Symantec, iRobot, and 23andme.
More broadly, the economic impact of both programs is massive. One frequently cited Department of Defense study claims that the two programs generated a 22-1 return on investment for the public between 1995 and 2018, with a total national economic impact of $347 billion and 1.5 million jobs created.
Key Hold Ups to Extension
In light of the looming authorization lapse, Congress discussed an extension of SBIR for months, but negotiations foundered over a few key issues. One of these was disagreement over what to do about the minority of firms that receive an outsized share of awards, which some pejoratively refer to as “SBIR mills.” Most firms that participate in SBIR receive only one or two awards in their lifetime. But the award distribution has a major skew: for instance, a recent analysis finds that just 10 firms, accounting for 0.7% of all SBIR recipient firms, have received 6.5% of all SBIR awards since 2000.
Some argue that this skew is evidence of large, well-entrenched companies gaming a system intended to drive innovation from smaller businesses and new entrants. On the other hand, there is some evidence to suggest these firms do deliver value in the form of scientific publications, inventions, follow-on funding, and commercialization, and may also serve as venues for talented scientists and engineers who go on to become founders.
The other major issue is that of foreign influence. Amid general Congressional concerns over foreign involvement in the U.S. scientific enterprise, an oft-cited 2021 report from the Defense Department allegedly found troubling indications of Chinese state involvement in SBIR funding recipients. These findings prompted cautious backlash on the part of lawmakers.
Summary of Major Bill Sections
While Congress kept it until the final hours, the SBIR and STTR Extension Act of 2022 was ultimately approved by overwhelming majorities. The core of the act is a three-year extension of the overall program and several SBIR pilot programs through September 2025. The reauthorization also includes several new provisions to address past criticism and points of concern. Let’s unpack these below.
Foreign Risk Management: The extension mandates each agency pursue diligence to assess the risk of foreign involvement with and ties to SBIR-funded small businesses. Business applicants will be required to disclose business relationships and financial arrangements before receiving an award, under threat of an agency funding clawback should a firm misrepresent itself. Relatedly, the bill requires multiple agencies to issue reports on foreign risks.
In practice, it is unclear how much of a burden the new financial reporting requirement will be for small businesses. Some startups, particularly first time awardees or those with foreign investors, could face challenges properly reporting this information. Others may be dissuaded from applying to SBIR solicitations entirely. It’s also unclear what mechanism would apply for managing foreign risk after a small business has received funding and completed the planned scope of work. To mitigate this, the SBA should be clear in its guidance to companies on what they need to disclose.
Open Topics: The extension mandates that Defense Department components each issue at least one ‘open topic’ announcement per year. Open topics are technology-agnostic solicitations to which any small business may respond with their proposed innovation. The Air Force pioneered the open topic model at DoD in 2018, and according to a 2022 GAO report, it proved successful in attracting first-time award winners (43% of awardees were net new) and cutting time to award (108-126 days faster on average). This new requirement also requests annual reports comparing open and conventional topic awards across a host of metrics.
Increased Minimum Performance Standards for Experienced Firms: The extension outlines higher performance standards for experienced firms regarding both Phase I and Phase II awards. They’re also known as “multiple award winners.” This is an effort to cut down on SBIR ‘mills’, but whether it will achieve this end or not is questionable. The number of companies these restrictions apply to is small, and the minimum penalty for not meeting the standard is a restriction to only 20 Phase I awards at each agency in the next year. The impact of these new restrictions is an open question that the next three years will hopefully answer. Finally, the new standards remove patents as a way to meet performance standards.
Here’s a breakdown of the new standards:
|Phase I-II||> than 20 Phase I awards||1 Phase II award for every 4 Phase I awards (existing standard)|
|Phase I – II||> than 50 Phase I awards during the previous 5 years||1 Phase II award for every 4 Phase I awards|
|Phase II-III [Tier 1]||> 50 phase II awards during the previous 10 years||$250,000 in sales revenue or investment for every Phase II award during 10 year period|
|Phase II -III [Tier 2]||> 100 Phase II award during the previous 10 years||$450,000 in sales revenue or investment for every Phase II award during 10 year period|
The reauthorization of pilot programs–and the inclusion of new efforts–provides the SBA and policymakers an opportunity to learn more from different agency efforts. They’ll get three more years worth of data to weigh whether or not to permanently weave these pilots into the fabric of the overall program. Brief overview of the pilots are included below:
- Phase Flexibility Pilot: NIH, DoD, and ED can issue direct to Phase II awards to fund projects that might be too advanced for a Phase I.
- Civilian Agency Commercialization Readiness Pilot: Civilian agencies can use 10% of their SBIR funding for technical assistance not usually covered by Phase II awards. NIH uses it to give Phase II awardees resources for slow moving processes like Food and Drug Administration (FDA) approval, development of an intellectual property (IP) strategy, or planning for clinical trials.
- Pilot to Accelerate DoD SBIR/STTR Awards: DoD required to simplify their award process and issue awards in about 90 days from start to finish.
- NIH Phase of Proof of Concept Partnership Pilot: NIH can use $5 million of STTR funding to do proof of concept work. This pilot, otherwise known as the Research and Evaluation Commercialization Hub (REACH) program, provides funds to research sites to address barriers to commercialization in biomedical basic science.
- Assistance for Administrative, Oversight, and Contract Processing Costs Pilot: All agencies can use 3% of their funding for administration, outreach to new participants, and proposal writing assistance.
- Commercialization Assistance Program: Agencies can use 5% of their SBIR funding to make additional awards, with matching funds, past Phase II.
The bill, which was cheered on by the head of SBA, extends the SBIR/STTR program for three years instead of the usual five. That means the next debate over reauthorization and reform will approach quickly. In the intervening years, policymakers will get additional data and information on various aspects of the program through a series of mandated reports from GAO and agencies.
First, DoD, DOE, NSF, and HHS are required to produce a report on foreign influence and risks within 6 months. This will be the first comprehensive study of adversarial influence in the program across agencies.
Second, the GAO is required to conduct annual studies comparing open vs conventional topics for the next four years. These studies will compare solicitations across several metrics including transition rates, awardees, technology types, and others, and may help to shed light on policy-relevant similarities and differences between the models.
Third, GAO is mandated to report on multiple award winners within 18 months of enactment. The report will examine commercialization rates, types of technology and their federal impact, potential lifetime award caps, and the effect of the enacted performance standards on firms.
With luck, these collective reports will provide valuable inputs to the next round of reform – which will hopefully not have to wait until the last minute next time. For our part, we’ll be looking forward to learning more about the program through these mandated reports, and doing our own research on areas for improvements. We’re looking for diverse perspectives from practitioners, ecosystem builders, and small businesses on how the program might be improved. Unearthing opportunities for the various elements of the program to evolve will help agencies and entrepreneurs unlock their full potential.