The reauthorization of the Small Business Innovation Research program is caught in a tug-of-war.

The new-age venture capitalists want to transform the 43-year-old program to meet what they say is the 21^st century approach to research and development.

Long-time program supporters say those changes, as proposed by Sen. Joni Ernst (R-Iowa) in her INNOVATE Act, are trying to solve problems that generally do not exist and would harm both small businesses and the agencies that depend on the program, most particularly the Defense Department.

This debate over the future of the SBIR is the undercurrent to the fact that the program’s current three-year authorization expires on Sept. 30. If Congress doesn’t act this month, programs at the Defense Department, NASA, the Energy Department and eight other agencies will be put on hold pending action by lawmakers.

“My sense is that it will ultimately be reauthorized, but I am concerned,” said Emily Murphy, a former administrator of the General Services Administration, Hill staff member who worked to reauthorize the SBIR program and now a senior fellow at the George Mason University Baroni Center for Government Contracting. “We’re going to see the problem we’ve seen the last few times we’ve had a reauthorization, where there is a lapse in authorization and it sets the program back, not by months but by years, because Phase 1 awards can’t go out, Phase 2 awards can’t go out and Phase 3s can’t be awarded. Companies that have been working on their proposals or hit a critical point in their research and development can’t go and get the additional level of funding they need. New technologies can’t be ingested through the Phase 1 awards. It slows things down. While I understand Congress’ incredible need and desire to make sure that there’s appropriate oversight of the program, that protections are strengthened, that the program’s funds are going to the companies that Congress intends, I just hope that they get it done quickly.”

The debate over reauthorizing the SBIR and Small Business Technology Transfer (STTR) programs is centered around the changes Ernst’s bill would bring.

Sen. Joni Ernst (R-Iowa) is the chairwoman of the Small Business and Entrepreneurship Committee. (AP Photo/J. Scott Applewhite)

“While we’ve seen a measure of success over the years through the committee’s oversight efforts, agency studies and GAO reports, it is clear SBIR is in need of additional reforms to safeguard taxpayer funds and enable this program to meet its full potential,” Ernst said back in March when introducing the bill.

Among the changes the Investing in National Next-Generation Opportunities for Venture Acceleration and Technological Excellence (INNOVATE) Act is proposing are:

• To reserve 2.5% of the SBIR allocation for smaller, one-time $40,000 awards to new applicants with a shorter, streamlined application focused on the commercialization potential of their innovation.
• To impose a $75 million lifetime cap on awards for companies in the SBIR program.
• To increase the total set aside for SBIR to 3.45% from 3.25% starting in fiscal 2026 for agencies with annual extramural R&D budgets over $100 million.
• To initiate one-time strategic breakthrough Phase 2 awards of up to $30 million to scale the strongest technologies.
• To establish default fixed price contracts.
• To strengthen the due diligence of companies to prevent adversary-linked companies from exploiting program dollars.
• To reform the application process to make it easier for small firms to apply for SBIR/STTR awards.

“The INNOVATE Act ensures that SBIR/STTR award dollars go to the best and brightest that are developing technology supporting our warfighters. For too long, SBIR mills have gamed the system by taking in hundreds of millions of award dollars, but too often produced nothing more than policy white papers,” said a spokesman for Sen. Ernst in an email to Federal News Network. “Firms producing mission-critical and commercially viable technology will thrive under Chairwoman Ernst’s legislation, and those leeching off taxpayers will be exposed.”

The legislation hasn’t moved out of the Small Business and Entrepreneurship Committee, of which Ernst is the chairwoman. Rep. Roger Williams (R-Texas), chairman of the Small Business Committee, introduced a companion bill in July.

There is a second bill to reauthorize the SBIR program permanently. Sen. Ed Markey (D-Mass.) and Rep. Nydia Velazquez’s (D-N.Y.) legislation also would make some other changes to broaden participation of small businesses and protect federal investments. This bill also hasn’t moved out of committee.

Experts say the most logical way for Congress to reauthorize SBIR will be by attaching one of these two bills or some compromise version to the 2026 Defense Authorization bill.

Future of SBIR being contested

Until then, the debate around the future of the SBIR program will continue to heat up.

On one side of the debate are the supporters of Ernst’s bill, who believe the SBIR/STTR programs are stuck in the 1980s, don’t set up the DoD and other agencies to compete with China and other nation states and say both programs have created cottage industries of consultants and a small number of companies who make their living off SBIR awards.

David Rothzeid, a principal of investments at Sheild Capital, which invests in small businesses, including those in the SBIR program, said the approach to research and development used to be the domain of the government labs, which is how Congress set up the program in 1982.

“Dual use technology meant that it spilled out into the commercial sector, and businesses were built around it. Today it’s going in the opposite direction. It’s commercial driven companies who then have national security applications, and so the government would be better off pulling it in versus pushing it out,” said Rothzeid, who also testified in March in support of the INNOVATE Act. “If you go back to 1960s, which predates the SBIR program, 36% of all the world’s research and development funding was rooted in the Department of Defense. That’s a lot. Today, it’s less than 1.5%. Your purchasing power around these technologies is just a very different equation, and it’s the venture capital community who are able to provide very patient capital around the technology that’s going to matter for the future. We are also willing to take risk.”

Rothzeid said the program, as currently designed, makes it too difficult for that pull of technology into DoD to happen, in part because there is a belief that the program is rigged or too difficult for new entrants.

“The INNOVATE Act targets and modernizes the program to be more relevant to how technology is built. It is listening to the national security apparatus that you could say should just be able to help themselves. If they don’t want to award all of these contracts to these multi-time award winners, or what other people call SBIR mills, then don’t,” he said. “It’s really challenging for the agencies without certain guardrails and the relationships that the SBIR mills enjoy with the national labs and the universities to partner on the STTRs. That’s a large core competency that they enjoy. By putting things like ratios and caps and a small set aside to help first-time award winners, I think this is really meeting the spirit of what President [Barack] Obama called the Seed Capital Fund for the United States with the end goal of we need more commercial companies that recognize and understand the national security apparatus and are intent to building companies that can withstand market forces, versus again, staying artificially constrained so that you can win against these small business set asides.”

Rothzeid, who spent about a dozen years on active duty as an Air Force acquisition officer and currently is a reservist in the Pentagon under the Air Force’s senior acquisition executive, added the success of  the Air Force AFWERX, the Defense Innovation Unit and other similar organizations have demonstrated the limitations of the SBIR program.

Ben Van Roo is the co-founder and CEO of Legion Intelligence, which has won two SBIR Phase 1 awards totaling about $100,000.

He said the changes to the SBIR program would open the door to more companies like his who have technologies that would benefit the government.

“It would undoubtedly benefit the 98% of companies in the program today. It will put a real constraint on how the [SBIR mills] operate as it will force them to be held accountable to make money outside of the SBIR program in the DoD,” Van Roo said. “The 98% will actually have really interesting opportunities to have pathways for them to grow. Part of this money will be allowed to have them accelerate and go through valley of death.”

One of the most successful programs

On the other side of the debate are those who believe the current SBIR program is not only one of the most successful programs in the government’s history, but has evolved and transformed to address the potential and real problems of the past.

Jere Glover, the executive director of the Small Business Technology Council, which is a non-profit, nonpartisan organization dedicated to promoting America’s high-tech, innovative small companies, said the INNOVATE Act would promote the concept of “picking winners and losers,” which is something the government has never been good at. He said it would push the SBIR program to look too much like the investment model used by venture capitalists.

Jere Glover is the executive director of the Small Business Technology Council.

“They want to refocus it to later stage, venture-type investments, and for a lot of reasons, that doesn’t work. Quite frankly, the multiple award issue has been floated around since the first 10 years of the program, but as the data all shows, multiple award winners have been a very successful and integral part of the program. They’ve been critical strategic partners for the Department of Defense in particular, and a lot of great technology has been developed because you need to have the expertise, the equipment, the scientists that know specific areas of the government that’s being developed,” said Glover, who helped write the SBIR law in the early 1980s. “That has been a concern raised by Congress, and lawmakers changed that by increasing the focus on commercialization. Maybe 15 years ago, the evaluation criteria said if you don’t commercialize at least 25% then you get kicked out of the program. By and large, the companies that have exited the program have always been acquired because their technology became critical.”

Alec Orban, staff member of the Small Business Technology Council, added Ernst’s bill places too big of a focus on companies that produce a single technology and then tries to commercialize it quickly.

“Those types of companies are great to have in the program. We don’t want to exclude them, but they shouldn’t be the only type of company that can compete in SBIR, because there are other types of companies who have technologies, who have research that the government needs, particularly the DoD,” Orban said. “DoD has historically pushed back on any cap for multiple award winners, and the Ernst bill basically throws everything at the wall trying to get something to stick. If you can’t ban them this way, then we’ll try to ban them that way or this other way.”

Concerns over SBIR mills also are overstated, Glover and others say.

Kenan Ezal is the vice president and director of antenna and radio frequency systems at the Toyon Research Corporation. He said Toyon is one of those so-called “SBIR mills.”

He said while winning SBIR awards are important, they account for less than 20% of the company’s revenue. But what it allows Toyon to do is dabble in cutting edge technology to solve problems for warfighters.

“Most of our work is for the military and we tend not to take technology and push into commercial realm. It requires a different kind of set up to do that because we primarily are trying to solve problems for warfighters and it costs money to do work in the classified world like we do. Building a sensitive compartmented information facility is expensive,” Ezal said. “The problem I see with Ernst’s bill is it’s premised on something that is complete false. There is this belief that there are companies like us that we have it wired. I lose far more proposals than I win. On average we win one out of six for Phase 1. Across all of DoD, the win rate for Phase 1 is like 16%. There are cases where DoD gets 30-to-40 proposals per SBIR topic, and if I win, I’m one of several companies that win. It’s cutthroat. The SBIR program has gotten far more complicated and many agencies have added more layers of requirements for proposals.”

Problems are with agency implementation

The Government Accountability Office found in a March 2024 report that repeat winners were, generally, not a problem for the SBIR/STTR programs. Between 2011 and 2020, GAO found 22 small businesses received 50 or more Phase 2 awards, accounting for less than 1% of all awardees. These firms received about 10% of the total Phase 2 award dollars.

“In 2022, Congress increased standards for small businesses that receive the highest numbers of awards — like requiring them to make sales related to the funded research. However, we found that most businesses meet the new standards, and few face meaningful consequences if they don’t,” GAO said.

Along with the SBTC, other organizations are against the INNOVATE Act. The New England Innovation Alliance, an organization of entrepreneurial companies focused on transitioning innovative technologies to government and commercial use, said the bill would immediately remove more than 54 companies in 17 states from further participation in the program by capping contract awards.

“It uses an unfair ex-post-facto approach that retroactively penalizes our members for following the program’s rules and being competitively selected for awards over the history of the program,” the Alliance wrote in a release earlier this summer.

Bob Smith, the former director of the Navy’s SBIR/STTR programs, said the problem the INNOVATE Act is trying to solve by pushing for more commercialization of these technologies is grounded in the Defense Department and other federal agencies processes rather than the companies themselves.

He said agencies have to incentivize program and acquisition offices to use the technologies that come out of SBIR.

“The program is doing what it’s supposed to, but it still runs up against the Valley of Death. Ernst’s bill expects the SBIR program to get that poor company across the Valley of Death, versus encouraging and directing acquisition to use those solutions,” he said. “Congress hasn’t held agencies accountable for that. Why aren’t you agencies using their successful SBIR companies? Why aren’t agencies giving preference to the SBIR firms that solved their problem? Where we really need a fund is in the valley of death. The program is flawed. It’s a federal program. Is anything perfect? But if you look at the statistics, if you look at solid programs like the Navy’s or the Army’s, it’s getting better, SBIR can and does work quite well.”

Better ways to measure SBIR’s impact

Smith said the Navy helped address this issue many years ago by working with the acquisition offices who had to provide a 3% “fee” for the SBIR program.

In return, Smith said, the program offices could control how the SBIR office spent the funds.

“I don’t want to call it a tax assessment, but they have the right of first refusal on what they’re going to use that SBIR for. So it’s aligned to their acquisition programs, so they already know if it works, where it’s going to go versus if you hand it to disconnected program managers,” he said. “There’s now a connection to people that have big checkbooks.”

Murphy, the former Hill staff member and GSA administrator, said there are several questions that the INNOVATE Act raises that would need to be answered during implementation, including the details around the caps and how they would apply governmentwide, or just to specific agencies.

But she said the SBIR program is more nuanced than most recognize.

“Given the number of applications and given the volume of dollars that are going through the SBIR program, without having some additional expertise that said, we’ve got a lot of new technology like AI and things along those lines, it’d be really interesting to see if technology might actually be part of the solution to our R&D problem, where we could do a better job of assessing and coming up with some more meaningful metrics as to what it means to be successful in the SBIR program,” she said. “Commercialization is one measure of success. We consider a Phase 3 award to be commercialization, but the patents that come out of it could be another measure of success. Contributing to an overall body of knowledge, especially at a low dollar value, could be another one. It’s clear no one’s getting rich on a $40,000 Phase 1A award or if the AFWERX has done a great job of doing a lot of $50,000 awards and trying to see what sticks on those smaller dollar value SBIRs. How can we better align the Phase 1s and Phase 2s with the ultimate Phase 3, so making sure that is part of the Phase 1 submission a company has to detail if this were to ultimately be commercialized? Having those things track along so that we’re better able to get to a successful company at the end of the day and a successful technology being deployed than we are right now.”

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