The SBIR and STTR small-business R&D programs must implement significant new performance benchmarks and research security protections in response to a three-year renewal passed by Congress last fall.
Just before the cross-agency Small Business Innovation Research and Small Business Technology Transfer programs were set to expire at the end of fiscal year 2022, Congress authorized them for another three years through the SBIR and STTR Extension Act. It also took the opportunity to add new conditions on entities that receive R&D grants from the programs.
Although SBIR and STTR are popular in Congress, critics such as Sen. Rand Paul (R-KY) have faulted the programs for supporting companies that regularly receive SBIR grants but have a poor track record in commercializing technologies or spinning off new companies. In addition, other Republican lawmakers raised concerns about China-based entities exploiting companies funded through SBIR and STTR to acquire sensitive technologies.
Paul, as the top Republican on the Senate Small Business Committee, led efforts to hold up what was otherwise a routine extension to secure reforms. The enacted legislation was a last-minute compromise between House and Senate negotiators that includes tougher commercialization standards for serial awardees and stringent requirements to disclose connections to foreign countries. Agencies are also required in certain situations to deny funding to applicants with connections to China and other “countries of concern.”
New performance criteria for repeat awardees due by April
Created in 1982, SBIR provides R&D grants to small businesses and is administered by 11 federal agencies with annual extramural R&D budgets over $100 million. These agencies are required to commit 3.2% of their extramural funding to the program.
STTR was created in 1992 to help universities and other nonprofit entities to commercialize their research in partnership with small businesses, and agencies with R&D budgets exceeding $1 billion are required to commit 0.45% of their extramural budgets to it.
As federal R&D budgets have grown, so has the impact of SBIR and STTR, with participating federal agencies obligating $3.3 billion to SBIR and $429 million to STTR in fiscal year 2019, the most recent year with official data. However, critics have long expressed frustration that a small number of companies derive much of their revenue from SBIR grants, labeling them “SBIR mills” and arguing they have lackluster commercialization outcomes in proportion to the large number of awards they receive.
The SBIR and STTR Extension Act seeks to rein in such practices by raising the minimum performance benchmarks for firms that receive multiple Phase I or Phase II awards. Phase I supports six-to-twelve month feasibility studies of a technology’s commercialization potential with funding from $50,000 up to $295,000, depending on the project and funding agency. Standard Phase II awards are about $750,000, but can reach up to $1.9 million over two years for further development and demonstration of a technology, including prototyping, testing, and market research.
Companies receiving large numbers of initial Phase I awards are currently screened based on their success in transitioning into follow-on Phase II awards. Awardees with large numbers of Phase II grants are screened based on their sales and attraction of private investment. The extension act ratchets up the transition and commercialization success rates necessary for multiple award winners to receive future grants, with the new standards due to go into effect by this April.
Companies with more than 50 SBIR Phase I awards in the past five years must have a transition success rate to Phase II of at least 50%, meaning that the company must on average win one Phase II award for every two Phase I awards, up from the current one-to-four ratio. Companies with more than 50 Phase II awards over the preceding 10 years must average $250,000 of sales and investments per Phase II award received, up from the current requirement of $100,000. This requirement increases to $450,000 for companies with more than 100 Phase II awards.
The legislation also mandates a Government Accountability Office study of businesses that have won more than 50 Phase II awards to assess factors such as their impact on the program, their ability to commercialize technology, and their ability to produce technologies that meet agency needs. The study will also examine the effectiveness of the modified performance standards.
Despite the concerns over abuse by “SBIR mills,” recent studies have argued that such companies can still provide valuable outputs, such as by helping federal mission agencies procure niche technologies or serving as incubators for entrepreneurs. For instance, a recent National Academies review of SBIR and STTR programs at the Department of Energy found that DOE often uses them to help its national labs acquire specialized equipment that lacks a large commercial market.
Act creates process for denying awards due to foreign risks
The Department of Defense is responsible for about half of all SBIR and STTR grant funding, awarding more than $1.7 billion through the programs in fiscal year 2019. Although DOD is highly supportive of the programs and actively petitioned lawmakers to extend them, an internal DOD study from 2021 argued the program needed more stringent vetting procedures, according to reporting by the Wall Street Journal.
The study documented a small number of cases in which recipients of SBIR funding later dissolved their U.S.-based business and continued their work at entities with ties to the Chinese military, among other problematic activities. Lawmakers such as Sen. Jodi Ernst (R-IA) cited the study as justification for implementing stricter vetting requirements for prospective grantees.
By this June, agencies must create due-diligence programs mandated by the legislation to better screen SBIR and STTR applicants. It also prohibits agencies from making SBIR or STTR grants to applicants that have certain ties to countries of concern, defined as including China, Russia, North Korea, Iran, and any additional country designated by the Secretary of State.
The legislation lays out specific criteria agencies must use when deciding whether to deny funding. Among them are whether company officials participate in “malign foreign talent recruitment programs” or have affiliations with research institutions in countries of concern that pose a “risk to national security,” duplicate effort, or present conflicts of interest, among other red flags.
This prohibition resembles a provision of the CHIPS and Science Act that likewise requires agencies to deny funding to grant applicants who participate in “malign foreign talent recruitment programs,” starting no later than August 2024.
Some new disclosure requirements created by the extension act apply beyond countries of concern, with applicants required to reveal current or pending contractual, financial, or business arrangements with any enterprise owned by a foreign state or entity. The Fiscal Year 2023 National Defense Authorization Act also amended the requirements to stipulate that any foreign ownership of an SBIR applicant company must be disclosed.
Pilot programs extended
In addition to reforming program requirements, the bill extends several on-going pilot programs for three years. Variously, these provisions:
- Allow DOD, the National Institutes of Health, and the Department of Education to make Phase II awards without a preceding Phase I award
- Permit all participating agencies to offer an additional Phase II award to grantees who secure matching funds
- Direct DOD to accelerate the application review process and award disbursements, with the goal of reducing award decision times to around 90 days
- Allow nondefense agencies to use a portion of their funds to support promising Phase II technologies, similar to a separate DOD pilot program
- Extend NIH’s Phase 0 Proof of Concept Partnership pilot program, which the agency has used to fund entrepreneurship hubs that help academic researchers develop commercialization skills needed to transition biomedical technologies to the marketplace
- Permit agencies to use up to 3% of their SBIR budget for certain administrative costs, including program marketing, oversight, and efforts to accelerate proposal processing.
Finally, while DOD agencies traditionally issue SBIR/STTR solicitations on very specific technologies and use cases, the legislation directs each of them to issue at least one “open topic” opportunity per fiscal year. That requirement follows the Air Force’s AFWERX AFVentures program, which regularly holds open-topic competitions for SBIR and STTR grants.
FYI is an editorially independent science policy news service from the American Institute of Physics. If you are interested in republishing this content, please contact [email protected].