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 needs, to foster and encourage participation in technological innovation by minority and disadvantaged persons, and to increase private-sector commercialization innovations derived from federal research and development (R&D) (U.S. Congress, 1982). The 1992 reauthorization of the program also established the Small Business Technology Transfer (STTR) program, intended to improve the commercialization of innovations resulting from federal funding by requiring collaborations between research institutions and small businesses. In addition, the 1992 legislation tweaked the purposes of the 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 (U.S. Congress, 1992). 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 evaluate the economic and noneconomic benefits of the SBIR and STTR programs (U.S. Congress, 2000).²

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¹ Material in this chapter is similar to that 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).

² The legislation authorizing the programs has, since the beginning, contained sunset provisions, and the programs are currently authorized through 2022. The programs have experienced changes over time, principally when reauthorized. In addition to what is described above, the 2000 reauthorization

By statute, participation in the SBIR and STTR programs is determined by the size of an agency’s extramural R&D budget. As shown in Table 1-1, 11 federal agencies currently participate in the SBIR program, and of these, 5 participate in the STTR program.³ 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. When the STTR program was established, a set-aside of at least 0.05 percent was required for the program in FY 1994, a rate prescribed to increase to 0.15 percent. Subsequent legislation increased these percentages; the FY 2011 reauthorization increased the percentage for each program over that decade, ultimately leading to today’s minimum rates of 3.2 percent for SBIR and 0.45 percent for STTR. Combined with increasing agency extramural R&D budgets,

TABLE 1-1 Federal Agencies Participating in the SBIR and STTR Programs

^a SBIR and STTR programs at the Department of Health and Human Services consist mainly of the programs at the National Institutes of Health.

^b Programs within the Department of Commerce are operated by the National Institute of Standards and Technology and the National Oceanic and Atmospheric Administration.

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also added additional language around commercialization and specifically mentioned that commercial potential should be used as a criterion for awards. More recently, the fiscal year (FY) 2019 National Defense Authorization Act extended some pilot programs through FY 2022 and added additional commercialization assistance. The latest program reauthorization took place in 2016 as part of the FY 2017 National Defense Authorization Act.

³ At the outset, the legislation governing the SBIR program called for participation by any federal agency with extramural research or R&D budgets in excess of $100,000,000. The STTR program has set a higher threshold, requiring participation by any agency with research or R&D budgets in excess of $1,000,000,000. As agency budgets increase, new participants may, and have, come in.

the result has been a significant expansion of the programs. Cumulatively, from its inception through the end of FY 2019, the SBIR program provided more than $54.3 billion in awards to small businesses (SBA, n.d.).

The SBIR program is one of the best-known, most emulated, and extensively studied government R&D programs in the world. Countries as diverse as India and the United Kingdom have adopted programs of a similar nature, sometimes using the same name, in an attempt to engage small businesses more effectively in their national economies (BIRAC, n.d.; Liu, 2014; Netherlands Enterprise Agency, n.d.; U.K. Government, 2020).⁴ Horizon 2020, for example, is a similar, two-phase program within the European Union that funds innovative small and medium-sized businesses (European Commission, n.d.). The SBIR program has been the subject of numerous academic reviews, several studies by the Government Accountability Office, and previous assessments by the National Academies of Sciences, Engineering, and Medicine, some of which also reviewed the STTR program. Yet despite the perceived effectiveness of the SBIR program, various stakeholders—academics, participants, administrators, and policy makers—have varying notions of the program’s purpose and goals. Even the program’s congressionally stated purpose and goals may themselves be in conflict. The challenge of assessing the program offers the opportunity for a fresh perspective on its contributions and effectiveness.

ESTABLISHMENT OF THE SBIR AND STTR PROGRAMS: BACKGROUND AND CONTEXT

In the early 1970s, a number of government officials, led by Roland Tibbetts at the National Science Foundation (NSF), began seeking ways to increase technological innovation and commercial applications stemming from federally sponsored R&D. They expected that doing so would stimulate economic growth, and they believed that individuals and small businesses were key to this endeavor, viewing them as “the primary source of category-creating inventions and technical breakthroughs” (Tibbetts, 2011). According to Tibbetts, large firms do not pursue such innovation because they will not risk breaking from a thus-far successful business model or product line. Moreover, universities and government laboratories are not in the business of commercial development. Unlike large firms, universities, and government labs, however, small businesses aim specifically to raise high-risk capital for the development of new and innovative products with the potential to be major breakthroughs. Additionally, Tibbetts and others believed that small businesses employ more scientists and engineers than any of the other organizational types (Tibbetts, 2011).

Yet despite these apparent advantages of small businesses for converting federal R&D investments into commercial innovations, then, as now, small businesses received the smallest share of extramural funding by far: about 5 percent of such funding went to small businesses with under 250 employees,

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⁴ See also Inoue and Yamaguchi (2017), and Wang and colleagues (2017).

compared with more than 40 percent to large firms and industry-administered federal labs; 38 percent to universities, including university-administered federal labs; and about 12 percent to nonprofits, including national labs (NSF, 2020, 2021). Tibbetts and others believed that small businesses’ participation was low because they could not compete well against large firms, universities, or national labs for awards in the standard federal R&D funding programs. Seeking to help small businesses compete for federal funding and believing in these firms’ greater capability to foster innovation, the advocates began to push for a funding program that would both be available only to small businesses and emphasize the commercialization of research results.

At the same time, these advocates believed that universities and large businesses would not attempt to meet specific, important federal R&D needs. In their view, universities shied away from such needs because the research required was too applied and thus too distant from core research interests, while large businesses would not pursue some research problems because the end market was too small, with only the federal government as the sole or primary purchaser. Tibbetts and the others designed the SBIR program as a single solution to both of these two limitations of existing innovation funding. They hoped to provide a solution with twin purposes: first, to provide “a transparent, competitive, and reliable source of early-stage funding for R&D based entirely on scientific merit,” and second, to ensure that “the government [could] obtain needed R&D that the private sector could not otherwise provide” (Tibbetts, 2011, p. 99).

Early program advocates saw this as an effort to allow small businesses to gain access to high-risk capital, and thus put a larger set of scientists and engineers to work in the service of innovation and national competitiveness than would be the case in the absence of such a funding program. The timing of their efforts coincided with national anxiety over competitiveness and employment as stagflation hit the economy, creating an environment in which Tibbetts could suggest, and receive backing for, an experimental program at NSF that would be open only to small businesses, and in 1977 NSF launched SBIR as an agency program (SBA, n.d.).

National interest in the role of small businesses in the economy and innovation had also grown around this same time in the late 1970s. In 1979 the Small Business Administration (SBA) took note of NSF’s SBIR program and began to work with Congress on expanding the program across the government. About the time of President Reagan’s first State of the Union address, his administration produced the first in a series of reports for Congress examining the economic role of small businesses across industries, detailing employment, production, and investment (SBA, 1982). These reports foreshadowed congressional actions designed to respond to the national economic anxiety and aimed specifically at commercializing the outputs of federal R&D funding. Congress began passing a number of acts to this end, most during the Reagan administration and a few during the George H. W. Bush’s administration (Block, 2008). Among the laws passed, the Small Business Innovation Development Act of 1982 created the SBIR program (U.S. Congress, 1982).

THEORETICAL SUPPORT FOR THE SBIR AND STTR PROGRAMS

The longevity of the SBIR program, along with that of its sister program, STTR, and the size of its budget are due in large part to a strong theoretical justification for the two programs. The economics of knowledge and innovation suggest the need for a strong government role in setting the long-term agenda for future scientific progress. Private firms, reacting to market forces, cannot undertake long-horizon investments for creative and disruptive technologies with the potential to advance social welfare.

Early support for this rationale dates back to Nelson (1959) and Arrow (1962), whose discussion of knowledge as a public good provided the dominant rationale for government support for innovative activity. Their work established that knowledge spillovers would create disincentives for potential private funders of innovation, who would be unable to fully realize the economic returns on their investment.

It has been shown that smaller and younger firms are more agile in adapting innovative capacities to shifting environmental contexts (Sørensen and Stuart, 2000) and that such firms generate higher rates of job growth (Neumark et al., 2011) relative to larger and more established firms. The dominant view until recently has been that it is the size of the firm that is important, and that firm size is negatively related to employment growth (Neumark et al., 2011). Haltiwanger and colleagues (2013), however, provide strong empirical evidence that younger firms are the key drivers of high employment growth among small businesses and that firm size does not predict employment growth once the age of the firm is considered. But these smaller and younger firms are at a competitive disadvantage in the marketplace given their much lower access to the credit and capital required to survive the early stages of the innovation process—the so-called “valley of death” phenomenon (Auerswald and Branscomb, 2003). For firms that survive the valley of death, Haltiwanger and colleagues (2013) found that younger firms outpaced their more mature counterparts in job creation.

The current literature lacks consensus around the optimal role of government in addressing private firms’ financial constraints, although several findings support the effectiveness of the basic structure and operations of the SBIR and STTR programs. According to researchers, a major role for these programs is to help firms overcome credit and capital constraints at the early stages of the innovation process. Indeed, such “technology push” programs have been proven essential in the mix of policy instruments necessary to bring firms through the innovation process to commercialization, especially in the early stages of the process (Nemet, 2009). Beyond financial constraints, innovative firms benefit from collaboration with federal mission agencies, which define long-term goals to address pressing societal concerns. Further, technical innovations have been shown to be most successful when coupled with market opportunities (Arthur, 2007), a finding that provides strong justification for the SBIR program’s evaluation of innovative proposals that also demonstrate strong prospects for commercial success.

The SBIR/STTR programs capitalize on gains realized from diversifying the government supplier base and promoting entry into technical fields. The programs open up new procurement pipelines for federal agencies while allowing the agencies to support small business innovations that advance their missions. Products emerging from these symbiotic relationships can have dramatic commercial impacts. Sherwin and Isenson’s (1967) early work on the subject documented hundreds of innovations that came from government-funded weapons systems. More recently, Mazzucato (2013) illustrated the same procurement–commercialization link by pointing to government funding for what became numerous components of Apple’s iPhone.

CONFLICTING PROGRAMMATIC GOALS

The SBIR/STTR programs, and any study of them, face a major challenge in that the various constituent groups in the programs’ community espouse different views of the programs’ purpose and goals. The result is differing expectations of what the programs should accomplish, what they should provide to awardees, how they should be implemented, and what outcomes should be expected. By contrast, a full program assessment requires a clear statement of program goals and expected outcomes for use in measuring progress or success.

Solving this dilemma is not as easy as looking at statements of purpose and goals from the federal government, because many versions of such statements come from various federal actors. Congressional statements differ from those from the SBA, for example. Further, Congress’s legislative request for the present study asks that it attempt to measure certain outcomes, some of which do not appear to stem from the goals enunciated in the legislation (Small Business Act of 1982) that established the SBIR program. Looking at the statements of industry groups or at the goals assessed by researchers only complicates the matter.

Complicating matters still further, the statements of goals for the SBIR and STTR programs appear to be in conflict. Three of the goals listed on the sbir.gov website, for example, are (1) “stimulate technological innovation”; (2) “meet federal research and development needs”; and (3) “increase private-sector commercialization of innovations derived from federal research and development funding” (SBA, n.d.). A well-known challenge of innovation processes, however, is the gap between research and commercialization. Individuals skilled at research tend to have much lower capability for translating their research into products and then commercializing those products, and vice versa (Toole and Czarnitzki, 2007). Many expressions of the programs’ goals emphasize commercialization, which could lead to prioritizing funding for projects that promise short-term commercialization potential over those with longer-term innovation potential.

The fourth goal stated on sbir.gov is for agencies to “foster and encourage participation in innovation and entrepreneurship by women and socially or economically disadvantaged persons,” and the STTR program has an additional goal to “foster technology transfer through cooperative R&D between

small businesses and research institutions” (SBA, n.d.). Therefore, agencies administering the SBIR and STTR programs must try to balance their agency missions and goals with programmatic goals even as some, and sometimes all, of those goals are in tension if not conflict with one another. Essentially, the program asks that agencies and awardees simultaneously solve research problems, solve commercialization problems, and diversify participation to address the overall societal mission of the funding agencies.

THE NATIONAL ACADEMIES STUDY MANDATE

Congress first requested that the National Academies undertake a study of the SBIR program as part of the Small Business Reauthorization Act of 2000. This study mandate was expanded in the National Defense Authorization Act for Fiscal Year 2012, 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.⁵

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,” and to include several specific analyses and evaluations. The first objective of the study is to assess the value of the R&D conducted under the program and evaluate its quality; the second is to evaluate the economic benefits and compare that against other federal R&D expenditures; and the third is to evaluate noneconomic benefits. The mandate also requests an analysis of whether federal agencies are making sufficient effort to utilize funded firms to fulfill procurement needs. Since 2011, the legislative mandate has also called for a study of how the STTR program has “stimulated technological innovation and technology transfer” (15 USC § 638).

This report is the product of a National Academies study focused on the SBIR and STTR programs at the National Institutes of Health (NIH). The purpose of the study was to examine the economic and health care benefits of the NIH SBIR and STTR programs and the effectiveness of the enabling strategies NIH has used to enhance the programs. As part of its analysis, the study committee also reviewed the collaborations created by the STTR program between small businesses and research institutions. The committee’s formal statement of task is presented in Box 1-1.

Agencies enjoy wide latitude in the operation of the SBIR and STTR programs. Ultimately the legislation governs the programs and provides the

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⁵ The National Academies has completed previous sets of studies in response to the legislative mandate. The first was completed in 2009 and included a review of the SBIR programs at the Department of Defense, National Institutes of Health, Department of Energy, National Aeronautics and Space Administration, and National Science Foundation. The second, produced by a separate committee, was completed in 2016 and included reviews of both SBIR and STTR programs at those same agencies. And in early 2020, a third National Academies committee completed a review of the SBIR and STTR programs at the Department of Energy.

criteria for which program managers are held accountable. Research and previous assessments of the programs have moved away from the multidimensional and agency-focused nature of the programs’ legislative goals to focus on other concerns. These studies have introduced new considerations and created confusion about the programs’ goals. In this assessment, the committee’s considerations are limited to the legislative mandate.

PROGRAM OPERATION

SBIR and STTR program operations are decentralized to agencies and subagencies throughout the federal government, with SBA playing a broad oversight role. Although there is significant variation across and within agencies—and agencies have engaged in adaptation and experimentation in their programs—a number of key features of the programs stand out, and 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 phases:⁶

• Phase I: This is a feasibility demonstration phase intended to support projects that seek to “establish the technical merit, feasibility, and commercial potential” of a line of research or R&D. This phase also provides an opportunity and the information needed for the agency to assess the ability of the small business to conduct the work before any further federal support is provided, especially through a Phase II award. At the time of this writing, Phase I awards were normally being funded at amounts up to $259,613 over 1–2 years.
• Phase II: This phase is intended to support Phase I projects that showed positive results and continue to show scientific and technical merit, along with commercial potential. Only Phase I awardees are eligible to apply for Phase II funding. At the time of this writing, Phase II awards were normally being funded at amounts up to $1,730,751 over 1–3 years.⁷

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⁶ 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.

⁷ Phase I and Phase II award amounts are taken from July 2021 omnibus solicitation. See, for example, PHS 2021-2 Omnibus Solicitation of the NIH and Centers for Disease Control and Prevention for Small Business Innovation Research Grant Applications (Parent SBIR [R43/R44] Clinical Trial

• Phase III: This phase receives no funding from the SBIR/STTR programs. Instead, it entails follow-on funding in pursuit of commercialization, which may include direct purchase of the product at 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” (U.S. Congress, 1982) or where non-SBIR/STTR federal follow-on funds support additional research or “production contracts for products, processes or services intended for use by the U.S. government” (SBA, n.d.).

Additional funds are available for commercialization assistance, and agencies can request and receive approval from SBA to exceed Phase I and Phase II award amounts. Indeed, NIH has a waiver from SBA to exceed the Phase I and Phase II budget ceilings for many topics. 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.

Eligibility Rules

To receive an SBIR Phase I or Phase II award, an awardee must qualify as a small business concern as defined in SBA’s regulations at 13 C.F.R. Sections 121.701–121.705, and the primary employment of the principal investigator must be with the small business concern during the period of the award. At least two-thirds of Phase I and one-half of Phase II SBIR efforts must be performed by the awardee, with some room for exceptions.

Under STTR, with its requirement that awardees collaborate formally with a nonprofit research institution (such as a university or federal lab) in Phases I and II, the rules are somewhat different. Awardees must qualify as a small business concern just as under SBIR, but the rules state that for both Phase I and Phase II, no less than 40 percent of the R&D must be performed by the small business, and no less than 30 percent must be performed by the partnering institution. The primary employment of the principal investigator of an STTR award may be with either the small business or the research institution at the time and during the period of the award.

As a rule, the Phase I and Phase II research and R&D effort under each program must be completed in the United States. Generally, companies receiving SBIR or STTR awards must be “more than 50% owned and controlled by one or more individuals who are citizens or permanent resident aliens of the United

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Required), PA-21-260, released July 8, 2021; https://grants.nih.gov/grants/guide/pa-files/PA-21260.html. See also PHS 2021-2 Omnibus Solicitation of the NIH for Small Business Technology Transfer Grant Applications (Parent STTR [R41/R42] Clinical Trial Required), PA-21-261, released July 8, 2021; https://grants.nih.gov/grants/guide/pa-files/PA-21-261.html. As of November 2021, agencies may issue Phase I and Phase II award amounts up to $275,766 and $1,838,436, respectively without seeking a waiver. (SBA, n.d.)

States, or by other small business concerns that are each more than 50% owned and controlled by one or more individuals who are citizens or permanent resident aliens of the United States” (SBA, n.d.). An exception to this requirement is that companies receiving SBIR awards may be majority-owned by multiple venture capital companies, hedge funds, or private equity firms; however, for NSF, NIH, and the Department of Energy (DOE), the overall value of awards to such companies is restricted to no more than 25 percent of the agency’s SBIR funds, and for all other agencies is restricted to no more than 15 percent of the agency’s SBIR funds (15 USC 638[dd][1]).

The Application and Award Process

For both the SBIR and STTR programs, the participating agency issues a solicitation at least once per year. At NIH, the omnibus solicitations are open to any topics of interest to applicants, whereas at some federal agencies, funding solicitations are accompanied by a list of topics developed to reflect agency priorities. In view of the program goal to “foster and encourage participation in innovation and entrepreneurship by women and socially or economically disadvantaged persons” (SBA, n.d.), agencies engage in outreach to encourage applications from underrepresented groups. Agency solicitations include eligibility requirements, application requirements, review criteria, and due dates. SBA encourages agencies to use their “routine review processes” for SBIR and STTR awards, whether they be internal or external (SBA, 2020).

Awards are made as either contracts or grants, depending on the agency. Most agencies (not including NIH) are required to issue awards no more than 90 calendar days after the close of a solicitation.⁸ Once a grant has been made, a high level of engagement between an agency and an awardee typically does not occur. SBA has created a database to track awards in which some data on applicants are maintained including a section that allows companies to report on commercialization results for their awards. Agencies also are required to maintain a database of certain information on their awardees and to provide an annual report of that information to SBA and the White House Office of Science and Technology Policy. As of this writing, agencies’ annual performance plans to Congress were required to include sections on their SBIR and STTR programs. NIH maintains an impressive online database—RePORTER—of all its awards made by the agency, including those made under these two programs.

Tailoring of the SBIR/STTR Programs to NIH

Although Congress charged the SBA administrator with overseeing and coordinating the SBIR/STTR program activities of participating agencies, it also

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⁸ To reduce cycle times and resulting funding gaps between phases, some agencies, such as NIH, employ “fast track” awards in which Phase I and Phase II application information is reviewed in one step.

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. Of the 27 institutes and centers (ICs) within NIH, 24 operate SBIR and STTR programs, and like other federal agencies, NIH has tailored its implementation of the programs to support its overall mission and the missions of these 24 ICs.

Overall program coordination and support at NIH is provided by the Small Business Education and Entrepreneurial Development (SEED) Office, housed in the Office of Extramural Research. The SEED Office is tasked with leading initiatives that develop relationships between NIH and universities, research institutions, small businesses, trade associations and societies, angel investors, and strategic partners. It provides information to applicants about NIH’s SBIR and STTR programs; produces webinars on the omnibus solicitation (see below) and other requests for proposals; implements NIH’s technical and business assistance programs; and oversees some of the entrepreneurial training programs and resources across NIH, such as the Entrepreneurs in Residence program.

Program coordination within the ICs is handled by individual SBIR/STTR program managers. SBIR/STTR applications often are just one component of these program managers’ work portfolios. The ICs have wide-ranging independence in their implementation of the programs, from outreach, to final award selection and funding levels, to the guidance provided to applicants and awardees.

NIH releases a set of omnibus solicitations for the SBIR and STTR programs and conducts three application cycles per year for the programs. Reflecting the investigator-driven nature of extramural research at NIH, the omnibus solicitations are open to any R&D topics, and most NIH SBIR/STTR awards made each year are funded through these solicitations. In addition to these solicitations, the 24 ICs within NIH that operate SBIR and STTR programs may release targeted funding opportunities, with their own due dates and sometimes with separate dedicated funding, for topics of special interest to them. As discussed in Chapter 3, in many ways the SBIR and STTR programs at NIH operate as a collection of smaller programs varying in size from very small to very large.

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 presents the committee’s framework for evaluating NIH’s SBIR/STTR programs and their role in the biomedical innovation ecosystem. A description of the organization and administration of the NIH programs follows in Chapter 3, including processes for outreach, review of applicants, and selection

of and commercialization support for awardees. Chapter 4 describes the demographic and geographic characteristics of NIH SBIR/STTR applicants and awardees, with particular focus on trends for several relevant subgroups of awardees: woman-owned and underrepresented minority-owned firms. Finally, Chapter 5 focuses on innovation and health-related outcomes from SBIR and STTR awards.

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

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