SBIR: the funds that keep on giving

July 1, 1996
You`ve probably noticed the brief announcements that we run from time to time in our industry news pages about awards of SBIR (Small Business Innovation Research) funds to smaller high-technology companies. In the larger context of federal government spending, these SBIR awards are often for relatively piddling amounts, typically $100,000. But for the company that receives funding, the award can make a very real difference in turning research into a commercial product.

You`ve probably noticed the brief announcements that we run from time to time in our industry news pages about awards of SBIR (Small Business Innovation Research) funds to smaller high-technology companies. In the larger context of federal government spending, these SBIR awards are often for relatively piddling amounts, typically $100,000. But for the company that receives funding, the award can make a very real difference in turning research into a commercial product.

What I did not know about the SBIR program is that it has been growing by leaps and bounds since it was first established in 1983 when $44.5 million was handed out to deserving researchers. In fiscal 1996, the SBIR program is expected to hand out some $1.1 billion. As former Illinois senator Everett Dirksen was fond of remarking about government spending, "A billion dollars here and a billion dollars there and pretty soon you`re talking about real money." And that was in the days when a billion dollars truly was real money.

Although some people look upon the SBIR program as a sort of "tax" on the research and development spending of the 11 federal agencies that spend more than $100 million a year on external R&D, it is really a congressional "set-aside" program requiring these agencies to devote a certain percentage of their R&D funds to SBIR awards. The catch here is that this is a mandated program that keeps on growing whether the agencies like it or not. In 1983, the set-aside was 0.2%; in fiscal 1997 it will jump from 2% to 2.5%. And the program is authorized by Congress through the year 2000.

Three steps to commercialization

The SBIR awards are based on a three-phase program:*

Phase I is the start-up phase where awards of up to $100,000 are given for roughly six months support of the exploration of the technical feasibility of an idea.

Phase II expands on Phase I as the developer performs further R&D and evaluates the commercial potential. Phase II awards may go as high as $750,000.

Phase III is the period in which the idea moves from the laboratory into the commercial marketplace as a product or service. No SBIR funds are given for this phase. The company must find its own funding in the private sector (or from another non-SBIR federal agency funding source).

Some experts feel that the SBIR program has simply substituted public spending on R&D for private funding, a charge hotly denied by the House Committee on Small Business, a staunch supporter of the SBIR program. However, according to Science magazine, an unpublished study by Stanford University graduate student Scott Wallsten reports that winning an SBIR award appears to have a negative effect on the size of a company`s R&D budget and, surprisingly, no effect on its ability to create jobs or increase sales. However, the same article in Science quotes Harvard University economist Joshua Lerner as saying that SBIR award winners grow significantly faster than nonwinners when located in regions with substantial sources of venture capital.

Several academics have attacked the SBIR program as supporting lesser-quality research as measured by National Institutes of Health (NIH) criteria. After the Department of Defense (DoD), the NIH is the second largest source of SBIR funds, money that, presumably, could have gone to fund university research projects at a time of generally shrinking NIH funds. So there may be more than a little sour grapes in the academic criticism of the SBIR awards. However, the Government Accounting Office (GAO), a federal watchdog agency, has twice examined the SBIR program and has not come up with any adverse finding.

Of course, the proof of the SBIR pudding is in the actual products and services that result directly from the program. There is anecdotal evidence that the program has produced results in the form of commercial products, but it may be hard to say that those products would never have seen the light of day without the SBIR funding. The SBA claims that more than 30% of the Phase II projects will result in a commercial product or service. By my estimate, that would be close to 1000 products--an optimistic number, I`d say. Nonetheless, the SBIR program appears to be worth continuing at least until the current authorization runs out.

About the Author

Jeffrey Bairstow | Contributing Editor

Jeffrey Bairstow is a Contributing Editor for Laser Focus World; he previously served as Group Editorial Director.

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