Strengthening the Economic Promise of SBIR and STTR

The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs spur innovation, bolster U.S. economic competitiveness, and strengthen the small business sector. With authorization expiring September 30th, there’s an urgency to act now.

Through reauthorization, Congress can eliminate uncertainty and make improvements that enhance impact, foster broader participation in entrepreneurship, and increase commercialization of federal investments. Importantly, Congress can make these needed improvements while addressing legitimate concerns about multiple award recipients.

Both the SBIR and STTR programs award federal grants to small businesses to engage in research and development to discover and commercialize new technologies. (A recent BPC explainer provides an overview of both programs for those looking to understand the basics.)

These innovative endeavors are capital-intensive, and success uncertain. Like any investor, the federal government has an expectation that taxpayers receive a reasonable return on their investment (ROI).

Unsurprisingly, policymakers and others have sought more information about small businesses that win multiple SBIR and STTR awards year over year. A particular question is how effective multiple award winners are in driving commercialization by leveraging repeat awards.

Assessing Multiple Award Recipients

Winning more than one award over several years is common. An SSTI analysis of SBIR awards between 2009 and 2019 found that over half (58.5%) of Phase I awards went to companies that won two or more. Multiple awardees have a large presence in the SBIR ecosystem—and not all multiple awardees could be classified as “mills.” This is a term used critically by those who see multiple awardees as abusing the system by winning many awards yet producing few commercial outcomes.

Importantly, there is significant variation across federal agencies. Most companies that receive Phase II awards from the National Science Foundation, for example, have not received a prior award. At the Defense Department, by contrast, about 80% of Phase II awardees have previously received awards, according to analysis by the Information Technology and Innovation Foundation.

Yet, the existence of multiple awardees is not prima facie evidence of cronyism or system manipulation. Research by Maryann Feldman and others has found that firms receiving multiple SBIR awards can play important roles in transferring technology and incubating future entrepreneurs.

Measuring Commercial Impact

The question of how to determine the economic impact of SBIR awards—and of multiple awardees in particular—is a sticking point. In 2011, Congress directed the Small Business Administration (SBA) and SBIR/STTR granting agencies to establish performance benchmarks that measure progress toward commercialization by small businesses that win multiple awards.

These benchmarks assess the rate at which small businesses transition from Phase I to Phase II awards and gauge their commercialization activities, as measured by sales, investment, and patents.

Establishment of benchmarks was a step in the right direction toward program accountability and results. A 2018 Government Accountability Office report, however, found that data challenges, such as difficulty developing commercialization metrics that are consistently applicable across a wide variety of agencies and projects, limited the ability to assess the commercialization outcomes of small businesses that receive SBIR and STTR awards.

Prior BPC reports have emphasized the importance of developing better metrics for the programs, along with other reforms to strengthen them. When it comes to addressing concerns about multiple award recipients, several actions related to these recommendations would go a long way.

Reforms to Address Multiple Award Recipients

Better Metrics, Stronger Performance Benchmarks

Good data is needed to assess the value and impact of any program. New metrics can be established to fill gaps where data is absent or insufficient to determine taxpayer ROI. Data collection can also be improved to aid robust evaluation and tailored to fit the context of individual projects or across different agencies.

• Require data collection from multiple awardees on:
  • Follow-on funding from the private sector,
  • Number of employees that go on to start new businesses,
  • Commercial success or federal use of technologies developed.
• Reduce reliance on patents as a benchmark.
  • Patents are a blunt proxy for innovation. Sole reliance on patent filings for SBIR commercialization success can be misleading.

Expand Participation

• Multiple award recipients tend to be clustered in certain metropolitan areas. Many of these cities are some of the same places that capture an outsized share of venture capital investment.
  • Foster partnerships with a broader group of universities and entrepreneurship support organizations.

Additionally, the vast majority of SBIR and STTR award recipients are not from underrepresented groups, despite the goal of encouraging participation in entrepreneurship from more demographically diverse small business owners. From 2005 to 2017, there was no increase in the number of successful applications for SBIR and STTR grants from minority-owned small businesses.

• Conduct strategic outreach to potential applicants, offering application assistance, and work with the private sector to develop mentorship programs.

Measures to expand participation could “redistribute” some grants away from multiple award recipients and to small businesses new to the program located in other parts of the country and to small businesses owned by women or those from underrepresented groups.

Open and Simplify the Application Process

Open competitions that allow small businesses to propose SBIR projects not identified by the government increase new entrants and lead to stronger commercialization outcomes. Conventional, top-down competitions with complex and time-consuming application processes, on the other hand, perpetuate firms receiving multiple awards and play to the strengths of small businesses that have developed the internal expertise and capacity to apply for and win funding.

• Offer open topic competitions and simplify application processes.

Emphasize Commercialization in Proposal Review

At some federal agencies, only about 10% of SBIR and STTR reviewers have a private-sector background. Intellectual property infringement is one justification for having academic-heavy review panels, yet it may skew outcomes more toward research than commercialization.

• Increase the percentage of private-sector reviewers with entrepreneurial experience.

Other Considerations: A Cap?

There is something unsettling about small businesses receiving an outsized portion of their revenue from federal grants. Research and data on the potential economic role of multiple award recipients will not easily allay that concern. For some, “mills” appear to be outright examples of cronyism and wasteful spending. For others, the concentration of awards to a handful of firms undermines recipient diversity.

It is tempting, in the face of these concerns, to reach for a seemingly simple solution: cap the number of SBIR awards a single firm can receive. We worry that such a cap may lead to distortive behavior, with firms closing and opening new corporate entities for SBIR application or principal investigators moving between firms. The type of bureaucratic gameplaying that a cap could precipitate is the opposite outcome desired by those seeking greater accountability. A cap may also prohibit awards going to those small businesses that do keep generating and pursuing innovative new technologies.

SBIR and STTR are valuable programs. A lapse in authorization would harm small businesses and the federal agencies that rely on them for developing new products and technologies. Yet, it’s clearly time for improvements that enhance accountability. Better data and stronger commercialization requirements for multiple award recipients can help ensure the programs deliver a strong ROI for taxpayers.