1

Introduction¹

The Small Business Innovation Research (SBIR) program was conceived in the late 1970s and early 1980s to address several related, but distinct, challenges. The focus and purpose of the program, at least as articulated by Congress, have changed over time. The 1982 act creating the program stated that its purposes were to stimulate technological innovation, to use small business to meet federal research and development (R&D) needs, to foster and encourage participation in technological innovation by minority and disadvantaged persons, and to increase private-sector commercialization of innovations derived from federal R&D.² The 1992 reauthorization of the program also established the Small Business Technology Transfer (STTR) program, which was intended to improve the commercialization of innovations resulting from federal funding by requiring collaborations between research institutions and small businesses. The 1992 legislation also tweaked the purposes of the SBIR program slightly. The stated purposes of the program were changed to emphasize the goals of increasing private-sector commercialization of technology developed through federal R&D; increasing small business participation in federal R&D; and improving the federal government’s dissemination of information concerning the program, particularly with regard to program participation by small businesses owned by women and socially and economically disadvantaged groups.³ The 1992 act stated that the program had created jobs, but it was not until its 2000 reauthorization that legislative language was added to request that the National Academy of Sciences

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¹ Material in this chapter draws from material in Chapter 1 of the National Academies of Sciences, Engineering, and Medicine report Review of the SBIR and STTR Programs at the Department of Energy (NASEM, 2020); Chapter 1 of the National Academies report Assessment of the SBIR and STTR Programs at the National Institutes of Health (NASEM, 2022a); and Chapter 1 of the National Academies report Review of the SBIR and STTR Programs at the National Science Foundation (NASEM, 2023).

² U.S. Congress, Small Business Innovation Development Act of 1982, P.L. 97-219, Section 2(b) (July 22, 1982).

³ U.S. Congress, Small Business Research and Development Enhancement Act, P.L. 102-564, Section 102(b)(2-4) (October 28, 1992).

evaluate the economic and noneconomic benefits of the SBIR and STTR programs.⁴

By statute, participation in the SBIR and STTR programs is determined by the size of an agency’s extramural R&D budget. Eleven federal agencies currently participate in the SBIR program, and of these, six participate in the STTR program.⁵ The principal budgeting mechanism of the SBIR and STTR programs is a set-aside of each participating agency’s extramural federal R&D budget. Over time, the SBIR and STTR programs have enjoyed considerable support within Congress and various administrations, largely on a bipartisan basis. The percent set-aside for each program has increased over time. For fiscal year (FY) 1983, the percentage to be set aside for the SBIR program, based on the original legislation, was no less than 0.2 percent of a participating agency’s extramural budget, with this percentage increasing over time to 1.25 percent by FY1986.⁶ When the STTR program was established, a set-aside of at least 0.05 percent was required for the program in FY1994, a rate prescribed to increase to 0.15 percent.⁷ Subsequent legislation increased these percentages; the FY2011 reauthorization increased the percentage for each program over the ensuing decade, ultimately leading to today’s minimum rates of 3.2 percent for SBIR and 0.45 percent for STTR.⁸ Combined with increasing agency extramural R&D budgets, the result has been a significant expansion of the programs.

The SBIR program is one of the most emulated government R&D programs in the world (Link, 2024). Countries as diverse as India, New Zealand, South Korea, Taiwan, and Turkey have adopted similar programs to engage small businesses in their national economies more effectively (BIRAC, n.d.a; Link, 2024). In 1998, for example, South Korea established the Korea Small Business Innovation Research (KOSBIR) program, basing it on the U.S. SBIR program (de Souza Lima Júnior et al., 2024). India’s Small Business Innovation Research Initiative (SBIRI), established in 2005, provides support for small- and medium-sized enterprises carrying out high-risk R&D in the biotech sector (BIRAC, n.d.b). In an earlier example, Turkey set up the Small and Medium-sized Industry Development Organization (KOSGEB) in 1990, an enterprise similar to SBIR in some aspects (Unsal, 2024).

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⁴ U.S. Congress, Small Business Reauthorization Act of 2000, HR 5667, P.L. 106-554, Appendix I (December 21, 2000).

⁵ At the outset, the legislation governing the SBIR program called for participation by any federal agency with extramural research or an R&D budget in excess of $100 million. U.S. Congress, Small Business Innovation Development Act of 1982, P.L. 97-219, Section 4(f)(1) (July 22, 1982). The STTR program has set a higher threshold, requiring participation by any agency with a research or R&D budget in excess of $1 billion. U.S. Congress, Small Business Research and Development Enhancement Act, P.L. 102-564, Section 202(c)(n)(1) (October 28, 1992). As agency budgets increase, new participants may be, and have been, drawn into the programs.

⁶ U.S. Congress, Small Business Innovation Development Act of 1982, P.L. 97-219, Section 4(f)(1) (July 22, 1982).

⁷ U.S. Congress, Small Business Research and Development Enhancement Act, P.L. 102-564, Section 202(c)(n)(1) (October 28, 1992).

⁸ 15 U.S.C., Section 638(f)(1), and 15 U.S.C., Section 638(n)(1)(B).

THE NATIONAL ACADEMIES STUDY MANDATE

Congress first requested that the National Academies of Sciences, Engineering, and Medicine (the National Academies) undertake a study of the SBIR program as part of the Small Business Reauthorization Act of 2000.⁹ This study mandate was expanded in the National Defense Authorization Act for Fiscal Year 2012,¹⁰ wherein Congress directed agencies with SBIR program budgets of more than $50 million to engage with the National Academies to conduct a quadrennial assessment of their SBIR and STTR programs.¹¹

The congressional mandate calls for assessments to study “how the SBIR program has stimulated technological innovation and used small businesses to meet federal research and development needs.”¹² These assessments are to encompass several specific analyses and evaluations, including the value and quality of the R&D conducted under the programs and the programs’ economic and noneconomic benefits. The mandate also includes an analysis of whether federal agencies are making sufficient effort to utilize funded firms to fulfill procurement needs. Since 2011, the legislative mandate has in addition called for a study of how the STTR program has “stimulated technological innovation and technology transfer.”¹³

This report is the product of a National Academies study focused on the SBIR and STTR programs at the Department of Defense (DOD). The stated purpose of the study was to examine the economic and noneconomic benefits of the DOD SBIR and STTR programs and the effectiveness of program processes. To carry out the study, the National Academies assembled a committee of experts including academic scholars specializing in innovation and entrepreneurship; former SBIR and STTR awardees; former executive branch and congressional defense experts; and research, engineering, and development experts from defense industries.¹⁴ The committee’s formal statement of task is presented in Box 1-1.

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⁹ U.S. Congress, Small Business Reauthorization Act of 2000, HR 5667, P.L. 106-554, Appendix I (December 21, 2000).

¹⁰ U.S. Congress, National Defense Authorization Act for 2012, P.L. 112-81, Section 5137 (December 31, 2011).

¹¹ The National Academies has conducted previous sets of studies in response to the legislative mandate. The first, completed in 2009, included a review of the SBIR programs at DOD, the National Institutes of Health (NIH), the Department of Energy (DOE), the National Aeronautics and Space Administration, and the National Science Foundation (NSF). The second, completed by a separate committee in 2016, included reviews of both the SBIR and STTR programs at those same agencies. More recent National Academies studies have had a stand-alone committee for each participating agency. In 2020, a National Academies committee completed a review of the SBIR and STTR programs at DOE (NASEM, 2020); in 2022, a committee completed a review of the SBIR and STTR programs at NIH (NASEM, 2022a); and most recently, in 2023, a committee completed a review of the SBIR and STTR programs at NSF (NASEM, 2023).

¹² U.S. Congress, Small Business Reauthorization Act of 2000, HR 5667, P.L. 106-554, Appendix I, Section 108(a)(1) (December 21, 2000).

¹³ U.S. Congress, National Defense Authorization Act for 2012, P.L. 112-81, Section 5137(e)(1)(B) (December 31, 2011).

¹⁴ Brief biographies of committee members can be found in Appendix B.

PROGRAM OPERATIONS

SBIR and STTR program operations are decentralized to agencies and subagencies throughout the federal government, with the Small Business Administration (SBA) playing a broad oversight role. Although specific features of the programs vary significantly across and within agencies, and agencies have engaged in adaptation and experimentation in their programs, the broad structure of the two programs is similar across agencies.

Three Program Phases

SBIR and STTR awards are made on a competitive basis, with each participating agency issuing solicitations—also referred to as funding opportunity announcements—at least once per year. By design in the original Small Business Act, the program funding proceeds in three phases¹⁵:

• Phase I: This is a feasibility demonstration phase to “determine the scientific and technical merit and feasibility of [a] proposed effort and the quality of performance of the [small business] with a relatively small agency investment before consideration of further Federal support in Phase II” (SBA, 2023, p. 18). Award amounts from DOD vary by agency component, averaging $150,000 with a 12-month duration, although the SBA Policy Directive allows Phase I awards to exceed $300,000 (SBA, 2023).
• Phase II: This phase is intended to support Phase I projects that have showed positive results and continue to demonstrate scientific and technical merit, along with commercial potential. The typical Phase II award from DOD is $1 million with a 24-month duration, although SBA allows awards of up to nearly $2.1 million.
• Phase III: This phase receives no funding from the SBIR/STTR programs. Instead, it entails follow-on funding for “work that derives from, extends, or completes an effort made under prior SBIR/STTR Funding Agreements” (SBA, 2023, p. 25), which may include direct purchase of the product by some SBIR/STTR-participating agencies. Congress’s original intent was for this phase to be where “non-federal capital pursues commercial applications of the research or research and development,”¹⁶ or where non-SBIR/STTR federal follow-on funds support “SBIR/STTR-derived

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¹⁵ The SBIR and STTR programs consist of the same phases and dollar amounts, but small businesses receiving STTR awards are required to collaborate formally with a research institution (such as a university or federal laboratory) in Phases I and II.

¹⁶ U.S. Congress, Small Business Innovation Development Act of 1982, P.L. 97-219, Section 4(e)(4)C) (July 22, 1982).

• products or services intended for use by the Federal Government” (SBA, 2023, p. 25).

Funds are available for commercialization assistance, and agencies can request and receive approval from SBA to exceed Phase I and Phase II award amounts. Furthermore, in addition to standard Phase I and Phase II awards, some agencies may provide funding either prior to a Phase I or following a Phase II award.

Recent Legislative Changes to the SBIR and STTR Programs

The legislation authorizing the programs has, from its outset, contained sunset provisions; the programs were authorized through September 2025, and reauthorization of the programs is pending in Congress. The programs have experienced changes over time, principally when reauthorized. For instance, in addition to calling for program assessments by the National Academies, the 2000 reauthorization included language around commercialization and specifically mentioned that commercial potential should be used as a criterion for awards. A number of legislative changes accompanied the programs’ reauthorizations in 2018 and 2022.¹⁷

The August 2018 program reauthorization expanded the scope and level of assistance to awardees. It raised the levels of commercialization assistance to $6,500 per Phase I award and up to $50,000 per Phase II award, each raised from the previous limit of $5,000 per awarded project. This assistance, now known as Technical and Business Assistance (TABA), can be used for business or commercialization assistance, such as intellectual property protection, market research and validation, and the development of regulatory and manufacturing plans. At civilian agencies, this assistance is supplemented by the Commercialization Readiness Pilot Program, which provides support to selected prior Phase II awardees for technical assistance not normally covered under Phase II. Established in the December 2011 reauthorization, that program, like the entire SBIR/STTR program, is pending reauthorization.

Other pilot programs extended through 2025 include a 2018 pilot to hasten the award process at DOD; authorization for the National Institutes of Health, Department of Education, and DOD to give Phase II awards to companies that did not receive a Phase I award; and a 2011 pilot allowing agencies to use 3 percent of their SBIR funds to help cover SBIR/STTR oversight and contract processing costs.

The SBIR and STTR Extension Act of 2022, which reauthorized the programs through September 2025, introduced measures designed to address national security concerns. As part of their review of applications, awarding

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¹⁷ U.S. Congress, National Defense Authorization Act for 2012, P.L. 112-81 (December 31, 2011); U.S. Congress, John S. McCain National Defense Authorization Act for Fiscal Year 2019, P.L. 115–232 (August 13, 2018); U.S. Congress, SBIR and STTR Extension Act of 2022, P.L. 117-183 (September 30, 2022).

agencies are now required to perform a security risk assessment for all applicants. Applications must disclose any ties with foreign countries—for example, affiliations, participation in talent recruitment programs, contractual or financial obligations, relationships with venture funds, technology licensing arrangements, or any intellectual property sale involving a foreign country.

Performance metrics introduced in the December 2011 reauthorization of the programs were applied to multiple-award recipients with award counts above certain thresholds over set periods of time. The reauthorization required the establishment and administration of standards concerning both a company’s track record in progressing from Phase I to Phase II and the extent to which a company has progressed past projects from Phase II toward commercialization. The resulting¹⁸ Transition Rate Benchmark currently applies to companies that have received 21 or more Phase I awards during the past 5 fiscal years, excluding the most recently completed fiscal year, and requires that a company have achieved an average ratio of Phase II’s to Phase I’s of 0.25.¹⁹ Additionally, the legislation calls for a Commercialization Rate Benchmark that applies to any company having received 16 or more Phase II awards during the past 10 fiscal years, excluding the two most recently completed fiscal years. It requires that a company have achieved an average of $100,000 in sales/investments per Phase II award received during that 10-year period, or have received a number patents equaling or exceeding 15 percent of the number of Phase II awards received over that period.²⁰ Both provisions went into effect in 2013. Each year, SBA identifies those companies failing to meet the standards, which then become ineligible to apply for a Phase I or Direct to Phase II award for 1 year.

The 2022 reauthorization tightened restrictions on multiple-award recipients by establishing increased performance standards for more experienced firms, both for their transition rate and for commercialization progress. Firms that have received more than 50 Phase I awards over the 5 fiscal years preceding the most recently completed fiscal year must have achieved an average ratio of Phase II’s to Phase I’s of 0.50, double the Transition Rate Benchmark required for less experienced firms described above. As for the Commercialization Rate Benchmark, the 2022 reauthorization created two tiers of more experienced firms, each with its own standard. Firms that have received more than 50 Phase II awards during the past 10 fiscal years, excluding the two most recently completed fiscal years, must achieve minimum average sales and/or investments of $250,000 per Phase II award received during that period. Firms that have received more than

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¹⁸ The current standards are published by SBA on its website. See SBA, “Performance Benchmark Requirements,” https://www.sbir.gov/performance-benchmarks.

¹⁹ When calculating the Phase II/Phase I Transition Rate for a company, the measurement period for Phase II’s begins and ends 1 year after those years used to calculate the number of Phase I’s received by a firm.

²⁰ Firms report commercialization data via the Company Commercialization Report on the SBA website. Awardees are required to update their report at the end of any Phase II and then annually for at least 5 years. Phase II applicants must update their company’s report whenever applying for a new Phase II award.

100 Phase II awards during the same period must achieve minimum average sales and/or investments of $450,000 per Phase II award received during that period. In contrast with the terms of the 2012 reauthorization, sales paid for with federal funds do not count toward these requirements.²¹ Any experienced firm, as determined under the provisions of the 2022 reauthorization, that fails to meet either the required transition or commercialization rate cannot receive more than 20 total Phase I and Direct to Phase II awards from each federal agency for a period of 1 year.

The 2022 reauthorization also mandated that agencies offer open topic opportunities for applicants. DOD in particular was mandated to offer at least one open topic announcement at each agency component each fiscal year, the aim being to “increase the transition of commercial technology to the Department of Defense,” “expand the small business nontraditional industrial base,” “increase commercialization derived from investments of the Department of Defense,” and “expand the ability for qualifying small business concerns to propose technology solutions to meet the needs of the Department of Defense.”²²

Tailoring of the SBIR/STTR Programs to DOD

Although Congress charged the SBA administrator with overseeing and coordinating the SBIR/STTR program activities of participating agencies, it also granted each agency latitude in determining how it will operate its SBIR and STTR programs. Specifically, each agency can determine the categories of projects and solicitation topics, issue solicitations, receive and evaluate its own proposals, make final award decisions, and make and manage its own funding agreements.

The DOD SBIR and STTR programs are designed to “encourage domestic small businesses’ engagement in research and development, scientific excellence, and technological innovation through federal research fund investment in critical American priorities to build a strong national economy and accelerate Warfighter capabilities (OBSI, para. 2).” The Office of the Under Secretary of Defense for Research and Engineering (OUSD[R&E]) serves as the Office of the Secretary of Defense’s point of contact for Congress, SBA, the Government Accountability Office, and the interagency SBIR/STTR community.²³ This SBIR/STTR central oversight and policy organization also cultivates technology partnerships within DOD and other federal agencies.

The DOD SBIR/STTR program leaders must balance multiple objectives while aligning implementation with their component’s unique mission needs. As

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²¹ Also, in contrast with the standards established in response to the 2011 reauthorization, there is no provision for patents to meet the commercialization standard for firms that have received more than 50 Phase II awards during the period specified in the 2022 reauthorization.

²² U.S. Congress, SBIR and STTR Extension Act of 2022, P.L. 117-183, Section 7(a)(2) (September 30, 2022).

²³ USD(R&E) is tasked with leading the program by DOD Directive 5137.02 (https://www.esd.whs.mil/Portals/54/Documents/DD/issuances/DODd/513702p.pdf).

a result, the program operates with considerable variation across the services and components that make up DOD. To accommodate this heterogeneity, since FY2022, DOD has issued three prescheduled Broad Agency Announcements (BAAs) in addition to Annual BAAs to give the Departments’ components flexibility to release topics throughout the year.

As noted above, Phase I award amounts from DOD vary by component; they have averaged $150,000 with a 12-month duration, although the SBA Policy Directive allows Phase I awards to exceed $300,000. The typical Phase II award amount from DOD is $1 million with a 24-month duration, although SBA allows awards of up to nearly $2.1 million. Each DOD component slightly modifies award amounts and time limits to meet its organizational needs. DOD offers additional funding opportunities to help small businesses commercialize the results of their SBIR/STTR awards.

STUDY METHODOLOGY AND LIMITATIONS

The committee based its review on a wide range of evidence, including descriptive and qualitative evidence regarding department- and service/component-level outcomes; quantitative data on patterns in the landscape of awards, firms, and related geographic characteristics; and qualitative evidence concerning the administration of the programs from the perspective of the department and its personnel. The committee also used descriptive evidence regarding program impacts with respect to collaborations, firm structure/orientation, and other system-level outcomes that cannot easily be determined using standard econometric techniques. Finally, the committee considered causal evidence of direct and indirect effects of the programs on innovation and commercialization and agency transition.

The committee gathered quantitative data from (1) SBA’s SBIR/STTR Company and Award Listing, (2) DOD (application data), (3) SBA Dynamic Small Business Search, (4) the U.S. General Services Administration’s System for Award Management, (5) USASpending, (6) the U.S. Economic Development Administration’s Cluster Map, (7) the Federal Procurement Data System, (8) publication data in Web of Science, (9) patent data in PatentsView, (10) venture capital funding and initial public offering/acquisition outcome data in PitchBook and Crunchbase, and (11) firm-level data in the National Establishment Time-Series database. Data from these sources were compiled, matched, and verified to provide the empirical basis for this study.

Sources of qualitative data include presentations by DOD SBIR/STTR personnel; archival data available from the DOD SBIR/STTR website, such as webinars, publicly available documents, and solicitations; and presentations from DOD SBIR/STTR awardees.

ORGANIZATION OF THIS REPORT

The remainder of this report contains detailed information on the SBIR/STTR programs, describes the study methodology and results, and presents the committee’s findings and recommendations.

Chapter 2 describes the role of small business in defense innovation technology, while Chapter 3 provides an overview of the DOD SBIR and STTR program funding and awardees. A description of the organization and administration of the DOD SBIR/STTR programs, including processes for outreach, review of applicants, and selection of and commercialization support for awardees, follows in Chapter 4. Chapter 5 presents an analysis of application and award data for DOD, focused mainly on SBIR, and Chapter 6 takes a deeper look at those data for DOD’s STTR program. Chapters 7 and 8 focus on program impact—first on agency mission and then on innovation more broadly. Finally, Chapter 9 looks at the impact of firms with multiple SBIR/STTR awards on agency mission and the potential impact of greater restrictions on their participation introduced in the most recent reauthorization of the programs.

The body of the report is followed by a list of references, agendas for meetings of the committee, brief biographies of committee members, and chapter annexes.