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Wednesday, November 29, 2023

PERSPECTIVE: SBIR/STTR Reauthorization Includes Promising Reforms But Significant Barriers Remain

Sometimes applicants selected for SBIR awards do not actually receive funding, often because of limited government resources.

With just two days remaining before expiration, Congress passed legislation to reauthorize the Small Business Innovation Research Program (SBIR) and the Small Business Technology Transfer program (STTR) for three years, and on Sept. 30 President Biden signed into law the SBIR and STTR Extension Act of 2022. The SBIR/STTR program represents one of the foremost vehicles for the federal government to invest in and scale emerging technologies paramount to United States national security. It is a critical enabling tool as the U.S. faces increasing competition from near peer adversaries. The significance of the program cannot be understated, evident from both its monumental contributions to the U.S. economy, and the widespread industry and governmental concern over Congress’ down-to-the-wire, last minute approach to reauthorize and strengthen it.

Reauthorization faced initial hurdles over concerns of unchecked foreign influence and fears that some awardees have been both too slow to commercialize their technologies and may be over-reliant on SBIR contracts to sustain their business. While the series of reforms passed by Congress go a long way toward assuaging these concerns, they will also require prospective applicants to familiarize themselves with new guidance, including some notable changes:

  • Foreign Risk Management: Agencies must now adopt their own internal due diligence practices to evaluate the impact of any possible risks in their SBIR/STTR applicant pool stemming from any foreign business ties or obligations. While the actual components of these practices may vary by agency, potential evaluation criteria could include addressing business ownership relationships, supply chain surety, cybersecurity, and even employee background analyses. Now that prospective applicants must disclose any ties to “any foreign country of concern,” failure to appropriately vet and identify potential risks can result in application denials. This change is largely motivated by findings from an April 2021 Pentagon report expressing a concerning number of instances where SBIR award recipients had either also received venture investments from Chinese-controlled entities or dissolved their U.S. presence and took their SBIR-funded technological gains overseas for continued development and commercialization.
  • Open Topics: Under the bill, all Department of Defense (DoD) components must issue at least one Open Topic per year. The Open Topic is technology agnostic and allows industry to submit innovative ideas for unidentified needs. With each Open Topic posting, agencies must ensure fair competition procedures and that eligibility criteria are not influenced by any individual contractors or other external parties. While this new requirement seems promising on the surface, only time will tell how these annual calls for Open Topic pitches will impact other incubators and prototyping programs at the DoD’s disposal.
  • Requirement for the Government Accountability Office (GAO) to review: The GAO will also be required to perform studies on an annual basis comparing conventional solicitation approaches versus Open Topic solicitations, and GAO will be expected to assess the subcontracting practices of SBIR/STTR. These reports must evaluate such factors as “(1) the small business concerns that progress from Phase I to Phase II awards, then to Phase III awards; (2) the number of awards under the SBIR and STTR programs made to first-time applicants and first-time awardees; and (3) a description of outreach and assistance efforts by the Department of Defense to encourage and prepare new and diverse small business concerns to participate in the program,” as some examples.
  • Higher Competition Standards: Through much of the recent history of the SBIR/STTR program, a handful of companies have experienced rampant success capturing billions of dollars in awards themselves alone (these companies are often referred to as “SBIR Mills”). An ongoing criticism of these companies highlights a disproportionately low return on the government’s investment, where the bulk of SBIR Mills’ awards have not lived up to their promise and translated to enough fielded capability. To promote more competition and generate eventual dual-use, production-ready technologies, private contractors are now prohibited from writing their own solicitation topics, and any small business that either 1) receives >50 Phase II awards in a 10-year period or 2) receives >100 Phase II awards in a 10-year period is required to demonstrate aggregate sales and investments of $250,000, and $450,000, respectively, per award. Failure to adhere to either standard will result in a company not being able to receive more than 20 Phase I SBIR/STTR awards at each agency, for the entire following year.
  • Extension of Pilot Programs: In addition to the SBIR/STTR program renewal and changes, there are six key pilot programs that have also received extensions over the next three years – offering the benefit of more time for industry and Congress to further evaluate. They include the following efforts (language pursuant to the Senate Committee on Small Business & Entrepreneurship’s analysis of the reauthorization bill):
    • Phase Flexibility Pilot authorizes National Institutes of Health (NIH), DoD, and the Department of Education to skip Phase I awards and go directly to Phase II awards for applicants who have already proven the scientific and technical merit and feasibility of a project to accelerate development
    • Civilian Agency Commercialization Readiness Pilot authorizes civilian agencies to use up to 10 percent of SBIR and STTR funds for awards (up to three times the amount of Phase II awards) to support Test & Evaluation and commercialization of promising SBIR/STTR Phase II technologies to accelerate commercial/transition success
    • Pilot to Accelerate DoD SBIR/STTR Awards requires the DoD standardize its acquisition procedures across agencies and accelerate its process for issuing SBIR/STTR awards to a 90-day maximum, when possible
    • NIH Phase 0 Proof of Concept Partnership Pilot authorizes NIH to use up to $5 million of STTR funds to make awards to research institutions for $100,000 maximum grants for proof-of-concept work and commercialization mentoring
    • Assistance for Administrative, Oversight, and Contract Processing Costs Pilot authorizes agencies to use up to three percent of SBIR funds for limited administrative purposes, including commercializing projects
    • Commercialization Assistance Pilot Program allows agencies to use up to five percent of SBIR funds for a third Phase II award contingent on 100 percent matching funds

The 2022 reauthorization bill introduces many changes, which will lower barriers for new entrants. And while these reforms indeed mitigate many of the security risk and programmatic concerns raised over the last year by Congress and industry at large, significant funding, access, and competition barriers remain:

  • Funding Shortfalls: Sometimes applicants selected for SBIR awards do not actually receive funding, often because of limited government resources. The promising technology innovation that our nation needs is out there, and recognized in the selection process, but funding or budgetary shortfalls can inhibit moving forward. SBIR program funding should itself be re-evaluated – to reflect both governmental demand and the various pockets of capability within industry capable of meeting specific requirements.
  • Participation Restrictions Imposed on Venture Capital (VC)-Backed Businesses: Many government agencies remain unable to issue SBIR and STTR awards to companies with majority VC-ownership – with a few exceptions, such as DARPA, Navy, Air Force, Department of Education, Centers for Disease Control and Prevention (CDC), and the Department of Energy’s Advanced Research Projects Agency. Given there are myriad majority-VC-owned companies that make up the U.S. domestic small business innovation engine, this restriction severely limits the government’s accessibility of the most promising technologies.
  • Questions over Fair Competition Practices: Indeed, while the increased minimum performance standards for multiple award winners threatens to restrict non-conforming businesses to 20 Phase I awards per agency in the following year, the fact remains that this is an agency-specific limitation versus a government-wide one. Time will tell how much further, if at all, this limitation needs to be further interrogated and revised to allot fairer and broader competition.
  • Transparency and Justification for Phase III Award Decisions: While GAO has been directed to perform evaluations of agency-awarding practices, the reauthorization bill fails to compel agencies to review any culpability they may have that contributes to the lack of transparency or justification in Phase III award decision-making. Standardization of agency self-evaluation and reporting metrics can only help those small businesses that have experienced Phase I-II successes better capture Phase III awards and more broadly scale their technologies.

While the reauthorization bill solidifies many promising changes, the complexity of conformance coupled with lingering access and competition challenges will likely require future applicants to develop awareness of security risk mitigation tactics, and longer-run agency Science & Technology (S&T) or operational goals. The barriers that remain affect both small businesses, which seek an initial foothold in the program, as well as those which seek further growth within the program – beyond early Phase awards. As established contractors and new entrants face these SBIR/STTR updates, they can benefit from leveraging expertise in the evaluation of new technology incubation channels and mitigation of possible security risks to help them navigate these new changes, achieve compliance, align capabilities to SBIR and non-SBIR funding pools, map technology applications to future agency operational requirements, and ultimately ensure they succeed and win Research & Development opportunities in their growth markets.


The views expressed here are the writer’s and are not necessarily endorsed by Homeland Security Today, which welcomes a broad range of viewpoints in support of securing our homeland. To submit a piece for consideration, email [email protected].

Aaron Roth and Cameron Fegers
Aaron Roth and Cameron Fegers
Aaron Roth is Managing Director of the Federal Strategy and Security practice at the Chertoff Group where he helps companies identify and mitigate risk, coordinate and plan business operations, and understand federal market dynamics. Prior to joining TCG, Aaron was the Deputy Executive Assistant Administrator for Operations Support at the Transportation Security Administration (TSA) where he led TSA’s global strategies, security policy, industry engagement, intelligence and analysis, vetting programs, and requirements and capabilities analysis. Aaron served as a Captain (O-6) in the U.S. Coast Guard and retired after 24 years of service. Cameron Fegers is a Senior Associate in The Chertoff Group’s Federal Strategy practice. Cameron joined The Chertoff Group following his tenure as an Associate in the Growth Office at Booz Allen Hamilton, where he specialized in strategic planning, advanced market analysis, and competitive intelligence for corporate growth initiatives, and across the firm’s Navy, Marine Corps, Joint Combatant Command, and National Security markets.

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