Should SBIR Reauthorization Include Limits on Multiple Award Winners?

At the end of September, the Small Business Innovation Research (SBIR) and Small Business Technology Transfer Research (STTR) programs will expire. Bipartisan agreement on their reauthorization remains uncertain.

Let’s first address the most basic question: should the SBIR/STTR programs be reauthorized? Without a doubt, yes. There is, and has historically been, strong bipartisan agreement regarding the economic value of SBIR/STTR as well as their utility in helping federal agencies access new technologies. Some agencies tell us they are already slowing or postponing their review and award processes due to political uncertainty. It’s likely that many small businesses have simply declined to apply for an award for the same reason.

A key obstacle to reauthorization is how to address multiple award winners (MAWs). Some argue MAWs create public and private value. Others believe some fraction of MAWs are “mills” that add little economically.

Thus, the question at hand: should reauthorization of SBIR/STTR include limits on multiple award winners?

Yes | SBIR MAWs waste taxpayer dollars without generating private sector returns and restrict opportunities for new entrants and innovations.

Those who celebrate the economic impact of SBIR/STTR often refer to it as “America’s Seed Fund.” That’s even the trademarked tagline on the program’s website. By definition, a “seed fund” is something that provides initial financial support to get an idea off the ground. (There’s a reason for the botanical analogy: subsequent growth should require other resources, not more “seeds.”) However, if a single firm receives 150 SBIR awards worth tens of millions of dollars and generates zero revenue from non-SBIR sources, shouldn’t it be cut off at some point or risk being merely a taxpayer-subsidized entity?

This example is not hyperbolic. There are scores of SBIR mills that win award after award—hundreds in some cases. Many generate little (sometimes zero) revenue from either private-sector sales or other public sources such as government procurement. At NASA, the Energy Department, and Defense Department, for example, only “about one-quarter of their Phase II awards [go] to companies with no prior awards.” Persistent dominance by MAWs is a barrier to new entrants who might bring innovations and fresh thinking to federal agencies and the marketplace.

A very similar situation can be found in federal procurement, where small business participation has fallen precipitously. From 2010 to 2019, the number of small businesses providing common products and services to the federal government shrank by 39%. Worse, the number of new small business entrants into the federal procurement marketplace fell by 79% over that same period. This has contributed to a growing concern in the national security community over the erosion of the defense industrial base. The same concerns apply regarding SBIR: having too few businesses meeting the Defense Department’s innovation needs weakens national security.

Private conversations with companies that have won multiple SBIR awards are illuminating in this respect. When potential changes that would attract new entrants—such as simplified application procedures or dedicated on-ramps—are proposed, incumbent companies express stern opposition. This is a classic case of pulling up the drawbridge to preserve one’s own position. Economists call this “rent,” and, in this case, rent-seeking comes at the expense of taxpayers.

Instead of a closed, incumbent-protecting system, benchmarks that put limits on MAWs—especially those with small shares of non-SBIR revenue—and greater use of open competitions will expand innovation and enhance taxpayer stewardship.

No | Multiple awardees play a critical role for federal agencies and the broader economy—and there are other SBIR reforms that should be prioritized to address the issue.

It is unsettling to see any company, let alone dozens, receive millions in government grants and generate little to no additional revenue sources. Confining the analysis to that lens alone, however, misses the broader economic contribution of so-called “mills.”

Multiple award winners do not simply churn through taxpayer money. Their boundaries are porous. They license technology and spin off startups that trace their roots back to an initial SBIR award at a multiple award winner. Many of them become suppliers to federal agencies, keeping the government at the fore of technological advance.

Now is most definitely not the time to allow program uncertainty to persist that could further harm our defense industrial base. While it is eroding, MAWs play a critical role in that base. In the case of the Defense Department, a very high percentage of SBIR recipients are MAWs. Over time, through multiple awards, relationships are developed, expertise is honed, and commercialization is facilitated. New ideas are always needed in the national security space; artificially excluding MAWs is not the way to achieve it.

Part of the challenge is legislative mandate. At some agencies, SBIR/STTR funds authorized by Congress go to program offices within each agency rather than flowing to the agency as a whole. Each office is responsible for spending its set-aside. In many cases, to meet its legislative requirements, an office has little choice but to work with a small, well-established group of MAWs in a particular industry. Congressional critics of SBIR/STTR shouldn’t structure funding in a way that leads, almost inexorably, to “mills” and then criticize agencies for that exact outcome.

One worthwhile reform would be for Congress to set strategic agency wide SBIR/STTR priorities. Agencies could then direct SBIR/STTR funds accordingly, breaking out of the individual office box that often limits SBIR choices to just a relative handful of MAWs.

Another reform that would mitigate concerns over MAWs would be to hold agencies more accountable to their statutory requirement to promote and support innovative entrepreneurship among women, people of color, and socially disadvantaged persons. Venture capital firms often get criticized for not investing more in, for example, women-led startups. But when VC has raised its share of investment in women founders at a faster clip than SBIR agencies, that should indicate a problem. Taking steps to expand the demographic diversity of SBIR/STTR recipients—a statutory goal—will help address concerns about MAWs.

What About a Free Pass?

Republicans and Democrats generally agree—and have for four decades—that SBIR/STTR are valuable programs, both for the government and the economy. Both parties also agree that sensible steps should be taken to address MAWs, which could set the stage for a logical, bipartisan compromise in exchange for making SBIR/STTR permanent.

Take revised performance benchmarks for MAWs, for example. If a new benchmark has the consequence of excluding some fraction of MAWs from further awards, Congress could grant agencies a “free pass.” Under such a scenario, an agency that wanted to award 50 SBIR grants to MAWs but failed the new benchmark would have an allowable number of free passes per fiscal year to make awards to some of those applicants. A free pass mechanism could be a feasible way to address MAW concerns while proceeding with reauthorization.

There is little question that changes are needed to ensure the programs continue to meet original purposes and stay current with agency and economic needs. Disagreements about the nature of those changes are understandable and legitimate. Yet bipartisan compromise is possible—and essential.