New SBA Policy Directive on the SBIR program

The 2012 Defense Reauthorization Act also renewed the SBIR and STTR programs.  There were certain elements of the Act that required the SBA to establish new policy in order to implement the portions of the new law.  It took almost 9 months for the first draft of the new SBIR Policy Directive to be published on Aug. 6, 2012.  After public comments were solicited and received by the SBA, the policy directive was finalized and made effective Jan. 8, 2014.  There are some major changes that are worth noting including:

  • A company may receive a Phase II award from a different agency than the agency that it received a Phase I award from
  • Clarified that Phase IIb or 2.5 awards are considered part of the initial Phase II award and subject to the award guideline of $1M to a limit of $1.5M
  • Established guidelines for agency benchmarks to measure progress towards commercialization
  • NIH, DoD & DoEd may issue Phase II awards to a small business that didn't complete a Phase I if the small business can demonstrate scientific and technical merit and feasibility of commercial potential
  • A Phase II awardee may receive one additional sequential Phase II award to continue work of an initial Phase II award.
  • Agencies may issue Phase II awards for testing and evaluation of products & services for use in technical or weapons systems
  • NIH, DoE & NSF may award 25% of their SBIR funds to small businesses that are owned in majority part by multiple venture capital companies (hedge funds or private equity firms).  All other agencies may award not more than 15% of their funds to these type of firms
  • Small business may include proprietary information in proposals but must mark this clearly to protect it

There are a few other policy directives contained in this document as well.  There were also some public comments that did not make it into the directive.  For instance, one comment related to the fact that the government seemed to put more stringent requirements on the small business concerns participating in the SBIR program and wanted the burden of this relieved from the small business.  The SBA could not determine what this specifically meant so nothing was added to the directive at this time.  They left the door open for future modification in this area.

There has been a lot of talk about Venture Capital involvement in the SBIR program.  I know that there are definitely two sides to this issue.  Some small business people I know think this is a way for the Venture Capital companies to get income from government sources and dilutes their (small business) ability to get money in early development stages.  Traditionally VC money comes after a product is more clearly defined and therefore the risks are more well known.  The SBIR program has traditionally been viewed as a small business financing mechanism fo fund early stage development beyond the 4"F's" stage (Founder, Family, Friends & Fools).  There are others that believe that the addition of Venture Funding in the early stages will help fuel the development cycle and increase the chance of success of the small business.  We now have an opportunity to see which side is right.

The other biggest change is that of benchmarks for progress towards commercialization.  The SBIR program was originally started with the idea to spur product innovative new development in the United States.  By definition, this means that the research should have some measured return in new products that are viable in the marketplace.  There has been some belief that some small businesses are more focused on winning more SBIR's and have lost their focus on turning the research into products.  This new directive establishes ways for the government to measure that progress.  For instance, if an awardee fails to meet either of the established benchmarks, then they are not eligible to receive further SBIR awards for a specified time period.  These rules will apply to small businesses that have received more than 15 (in some cases 20) Phase 1 awards in a specified time period.  The rules are slightly complex (it is the government after all) so it behooves the small business owner to read the regulations.  If you have difficulty with the wording, give me a call.


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