The Small Business Innovative Research (SBIR) Program is more important than ever in the era of COVID-19 and social unrest.
The SBIR Program was established in 1982 through the Small Business Innovation Development Act (The Act), to address concerns about the U.S. losing its competitiveness against emerging competitors and adversaries. The Program seeks to ensure that small businesses without access to capital receive an opportunity to develop new technology through federally-funded research and development. What started as a tiny experiment by Roland Tibbetts at the National Science Foundation (NSF) developed into more than $21 billion worth of research by more than 15,000 firms—resulting in more than 45,000 patents.
Without question, SBIR proponents have achieved notable successes along the way, but to achieve the Program’s full potential they must increase outreach to small businesses across the board, and particularly to minority and women-owned small businesses. The program also needs to do better overcoming implicit biases in scientific research and producing measured results.
According to the NSF, “America’s Seed Fund powered by NSF (also known as the NSF SBIR program) has helped startups develop their ideas and bring them to market. From 2007 to 2016, we funded roughly 400 companies each year.” Significantly, the SBIR program has yielded great returns on investment seeding successes such as Genentech, Qualcomm, iRobot, LASIK, and 23andMe. Each firm has created disruptive new technologies, improving people’s lives and making significant contributions to our economy.
In looking back at what is arguably the most successful Seed Fund in the world, one wonders where are the Black, Latina/Latino, and Native American owned SBIR success stories? A key tenet within The Act and the NSF SBIR Program is to “foster and encourage participation in innovation and entrepreneurship by women and people of color as well as first-time entrepreneurs from all 50 states and U.S. territories.” The COVID-19 Pandemic and social unrest have brought attention to the fact that despite the SBIR program’s clear mission, racial inequities—affecting Black researchers, inventors, and entrepreneurs, and lack of investment including Phase III commercialization negatively affects Black communities and decreases the availability of well-paying jobs among Black, Latina/Latino and Native Americans.
The recent announcements of Innovation Funds for People of Color, though encouraging, casts spotlights on the historic lack of investment and support that black and brown entrepreneurs experience as compared to their white counterparts. Thus we thought now would be a good time to review recent developments in the SBIR program within the context of contemporaneous events in our nation’s history. Three come to mind: 1) the SBIR Reauthorization and Small Business Administration’s New Policy Directory, 2) The 2020 Minibus, and 3) the National Defense Authorization Act (NDAA) of 2020.
In May 2019, Senator Marco Rubio convened a reauthorization hearing for the SBIR program, which he described as “programs that provide needed investment in America’s most innovative small business.” The Senate received testimony that raising seed funding from traditional venture capital investors had gotten more difficult in recent years, especially for startups outside traditional tech hubs like Silicon Valley; and the problem was more acute for start-ups with female or minority founders.
By contrast, innovation-based economic development is intentionally addressed under The Act. Thus, the SBIR program could provide critical initial investment for many disadvantaged high-tech entrepreneurs who struggle to access private capital. But is America’s Seed Fund meeting these goals in practice? To find out, I contacted Dr. Jennifer C. Shieh, Chief Scientist, SBIR/STTR of the SBA and asked the following questions, Dr. Shieh responded to me by email:
Eric Adolphe: Dr. Shieh, given the multiple announcements related to Black and Latina/Latino innovation funds being established by the private sector, do you see an opportunity to partner with the SBIR program to advance the goals of increasing outreach for women and minority-owned businesses?
Dr. Shieh: Yes! A key goal of the SBIR/STTR programs is to foster and encourage participation in innovation and entrepreneurship by all Americans, particularly those who have been historically underrepresented, including women, people of color, people with disabilities, and entrepreneurs located in all states and U.S. territories. SBA and SBIR funding agencies welcome the opportunity to partner with Black and Latinx innovation funds from the private sector to collaborate on increasing innovations coming from women and minority-owned businesses. Building a more inclusive innovation ecosystem is critical to support the Nation’s economy and requires partners from across the various stages of entrepreneurship.
The National Women’s Business Council (NWBC) recently released a report on the inclusion of women in the SBIR/STTR programs that highlights that less than 15% of SBIR/STTR proposals are submitted by women-owned small businesses, and women make up only about 13% of the Principal Investigators (PIs) on awards (https://www.nwbc.gov/2020/08/12/womens-inclusion-in-small-business-innovation-research-small-business-technology-transfer-programs/). The report also highlights some of the outreach and training initiatives used by Federal agencies, as well as SBA resource partners, including efforts to directly engage with underrepresented entrepreneurs and offer specific technical assistance and mentoring through the SBIR/STTR process.
Eric Adolphe: Recently, the NSF hosted a webcast to explore ways to tackle implicit bias in scientific research. While the SBIR program wasn’t the focus of the webcast, do you have any thoughts on the impact if any that implicit bias may play in Phase I/II awards and Phase III commercialization?
Dr. Shieh: Federal agencies typically use standardized proposal review processes with clearly identified criteria provided in their solicitations to ensure fair reviews. With any process that involves people, you cannot completely eliminate implicit bias. While the proportion of proposals and awards is similar for women-owned small businesses, there is a greater difference between proposals and awards for socially/economically disadvantaged small businesses. This difference could be due to issues with review criteria, bias in reviewers, or could indicate subject matter mismatches for agency priorities.
There are two distinct paths to look at for Phase III commercialization: private sector investment and commercialization, and Federal Phase III awards. Venture capital invests less than 10%, and by some estimates closer to 1-2%, in female or minority-founded startups, though there have been some positive trends in recent years. The story seems better for Federal government contracting. Though we do not have specific data for Phase III commercialization, the Federal government has exceeded the goal of 5% for contracting with small disadvantaged businesses, reaching over 10% or $51 billion in 2019, and meeting the 5% goal for contracting with women-owned small businesses, with $26 billion in 2019.
Regardless of the stage or how well the SBIR/STTR programs may be doing compared to private sector investments, we work to ensure that policies, structures, and training can move towards equitable opportunities to translate research into impactful products, services, and companies.
On August 01, 2020, U.S. House Assistant Speaker Ben Ray Luján (D-N.M.) celebrated the passage of the “Minibus II” appropriations package in the House of Representatives. The package included Fiscal Year 2021 appropriations bills: Defense; Commerce-Justice-Science; Energy and Water Development; Financial Services and General Government; Labor-HHS-Education, and Transportation-HUD.
The Minibus also included language providing greater flexibility to the Department of Energy’s (DOE) administration of SBIR program. Notably, the NDAA for fiscal 2020 also provided additional SBIR flexibility for small businesses that are more than 50 percent owned by venture capital, but the Department of Defense ( DOD) has yet to fully promulgate this new flexibility authority.
Given the National COVID-19 Pandemic Crisis when time is particularly of the essence, there is an urgent need to exercise new and “old” flexibilities including sole source authorities to meet the government’s specific needs. The two contracting methods favored today are Other Transaction Authorities (OTA) and SBIR.
The DOD’s surging use of OTAs reflects its strong desire to meet our national priorities and access innovations that otherwise may not be available to the government. There is an obvious overlap between OTAs and SBIRs. And we have seen a steady erosion of the SBIR program in favor of OTA contracts. The pivot to OTA presents a challenge to women and minority entrepreneurs because OTAs lack protections afforded by the Federal Acquisition Regulations (FAR); and The Act, which as mentioned earlier requires agencies to “foster and encourage participation in innovation and entrepreneurship by women and people of color.”
For example, according to USASpending.gov report, the government awarded $12.5 billion from 2015-2017, in SBIR contracts and grants, versus $4.9 billion in OTA contracts. Over the same one year span from 2018-2019, the government awarded $5.7 billion in SBIR contracts and $11.4 billion in OTA contracts. This recent development is concerning because SBIR funds reach a much wider set of U.S. communities than OTA companies. This fact should be alarming to agencies and lawmakers because the SBIR program has been so successful and was put in place to ensure that America does not lose its technological edge.
Study after study has proven that small businesses innovate faster and create, and deliver deeper and long lasting economic benefits. Based on SBIR.gov data, the largest 100 metropolitan areas captured 78% of total SBIR funding and rural areas received a little over 3% of all SBIR funds.
It is clear from the government’s own data that OTAs directly compete against SBIR Phase III Awards, a proven method within the FAR to avoid the arduous process the government must go through to complete a requirement. In fact, an SBIR sole-source award can be made in a matter of weeks even days (see https://www.sbir.gov/tutorials/data-rights/tutorial-4).
In 2019, the SBA issued an updated Final Policy Directive that included expanded requirements to enforce the Phase III contracting preference. The implementing statutes and regulations require that “[t]o the greatest extent practicable, Federal agencies and Federal prime contractors shall issue Phase III awards relating to technology, including sole source awards, to the SBIR award recipients that developed the technology.”
Under the new SBA directive, SBIR awarding agencies will now be required to first consider and document whether a requirement involves Phase III work, and if so, whether a Phase III sole source is practicable. If, and only if, a sole source is not practical, the agency must then further consider and document other ways to give Phase I or Phase II awardees preference. Agencies are also now required to notify SBA of any intent not to issue a Phase III award, so that SBA may file a notice of intent to appeal the decision with the head of the contracting agency.
And finally, DOD Instruction 5000.02T, page 51 states: “Program managers will establish goals for applying SBIR and STTR technologies in programs of record and incentivize primes to meet those goals. For contracts with a value at or above $100 million, program managers will establish goals for the transition of Phase III technologies in subcontracting plans and require primes to report the number and dollar amount of Phase III SBIR or STTR contracts.”
In light of these sole-source authorities and new flexibilities, I asked Dr. Shieh the following question:
Eric Adolphe: What advice would you offer a small business that has timely notified an agency of Phase III rights, and learned that the agency has proceeded to a competitive procurement?
Dr. Shieh: First, ensure that the procuring agency is aware of the SBIR/STTR Policy Directive and Phase III preference. In addition to the SBIR/STTR Policy Directive, there are useful Phase III reference guides with specific information for contracting personnel from Navy (https://www.navysbir.com/docs/DON-SBIR_STTR_Phase-III_Guidebook_V2-2020.pdf) and Air Force (https://www.afsbirsttr.af.mil/Portals/60/Pages/Publications/PhaseIII_BookletV2-JAN2019.pdf). There is also a useful tutorial about Phase III on the SBIR.gov site (https://www.sbir.gov/tutorials/data-rights/tutorial-3)
The term “Phase III” is defined in statute (15 U.S.C. §638(e)) as “work that derives from, extends, or completes efforts made under prior funding agreements” under the SBIR or STTR program, where the SBIR/STTR-funded research or research and development (R/R&D) is funded through either non-Federal sources of capital or non-SBIR/STTR Federal funds for products, services, or continued R/R&D. The purpose of the Phase III award is to provide the small business that developed the technology in Phases I or II the opportunity to commercialize it, whether through a Federal prime or subcontract or other type of agreement.
Federal agencies and Federal prime contractors are directed to issue Phase III awards relating to technology to the SBIR/STTR award recipients that developed the technology to the greatest extent practicable (15 U.S.C. §638(r)(4)). An agency should determine whether a requirement, solicitation or intended work either is Phase III work or includes it. If the requirement is or includes Phase III work, or if the agency is later informed that it is or includes Phase III work, the agency must document that the requirement is Phase III and then evaluate the practicability of pursuing the required work with the SBIR/STTR awardee that conducted the prior SBIR or STTR work. If an agency determines that it cannot issue a sole source award to the SBIR/STTR awardee, the agency must consider whether there are other ways to provide the preference to the SBIR/STTR awardee. If the agency finds it is not practicable to pursue Phase III work with the SBIR/STTR awardee, this decision must be documented in the contract file and a copy of that decision, including the rationale, must be provided to SBA. An agency must notify SBA when it does not intend to issue a Phase III award and then SBA may file a notice of intent to appeal, which may be followed by filing an appeal.
If a small business has learned that they are not receiving their appropriate Phase III preference, they should notify SBA at email@example.com with the relevant information regarding the procurement, so that SBA may follow-up with the agency.
Note: Dr. Shieh provided comments via email as part of our virtual conversation. However, the rest of the article, including opinions and conclusions are solely those of the author.
Agency management and contracting officials need to analyze the alternatives associated with SBIR/STTR and OTA strengths and limitations in terms of achieving their agency’s mission. This analysis must include full consideration of the strengths and capabilities small and minority businesses bring to the process. Please see the Project on Government Oversight article entitled Other Transactions: Do the Rewards Outweigh the Risks? – https://www.pogo.org/report/2019/03/other-transactions-do-the-rewards-outweigh-the-risks/ – and also the Defense Acquisition University listing of pros and cons: Small Business vs. SBIR/STTR – https://aaf.dau.edu/aaf/contracting-cone/far-19-v-sbir/ – related to risks associated with transitioning SBIR technologies into programs of record.
Finally, a note of caution to SBIR Phase I/II holders. In a recent Court of Federal Claims decision (re Lite Machines Corp v. the United States), the Court recognized that agencies have often failed to use the Phase III authorities and preferences. However, the SBIR company’s complaint was dismissed. The Court issued an opinion stating that the SBIR company had other remedies at its disposal. Namely, the SBIR company should have filed a pre-award bid protest and/or follow the SBA’s appeal process whenever they learn that an agency intends to award Phase III work to another company.
The appeal process is discussed briefly in the following article: