SBIR/STTR Programs Could Expire September 30. Reauthorization Opposed by Rand Paul and Others.

Program which funded R&D on 23andMe technology will die, if Congress fails to act

Many assume that the Small Business Innovation Research (SBIR) and Small Business Technology Transfer programs (STTR) programs are permanent “entitlements,” like Social Security and Medicare, funded with “mandatory spending” by Congress. They are not. Both programs will expire on September 30, 2022 if Congress does not renew their funding.

Full Disclosure

Here at the FreeMind Group, we’ve helped our clients win hundreds of millions of dollars in SBIR/STTR grants, we’ve seen how these grants help small businesses get through valley of death and make valuable contributions to patients, to medical science, and to society, and we have dedicated dozens of hours to educating life science innovators about these grants and how to apply for them at our annual Non-Dilutive Funding Summit and in our webinars. We are certified fans of the SBIR and STTR programs.

If you are also a fan of these programs, you may want to contact your representative in Congress.

But no pressure.

In this article, we’ll give you our most objective overview of the debate about whether these programs should live or die. (*Gulp*)

What are the SBIR and STTR programs?

In the framework of the SBIR and STTR programs, small business in the US apply to 11 federal agencies, such as the NIH, NSF, DOD, and DOE, and compete for non-dilutive R&D grants. Each agency selects winners based on their science, their commercialization plans, and their alignment with the agency’s goals. Each year, these agencies award approximately $2.5 billion through the SBIR and STTR programs. Cumulatively, they have awarded almost 200,000 SBIR and STTR grants, worth over $63.8 billion in non-dilutive funding for small businesses in the US.

The programs are funded by “taxing” the research budgets of 11 federal agencies; every federal agency with an extramural R&D budget exceeding $100 million is required to award at least 3.2% of that budget in SBIR grants and 0.4% in STTR grants. In 2022, for example, NIH will spend nearly $900 million of its $32 billion budget on these awards.

This is not the first time that the SBIR and STTR programs have been on the chopping block in their 40-year history. The battle to keep them alive has been fought—and won—before.

The Cons and Pros

‘The SBIR and STTR programs shift risk to tax-payers without paying them back for their investment’

Some have argued that the SBIR and STTR programs ought to be cut in order to cut the federal government’s expenses. They claim that the programs use taxpayer dollars to offset high-risk, private business ventures. This effectively lets a privileged, educated class pursue their curiosities and reap the benefits while everyone else finances their success and underwrites their de-risked failures.

Proponents of the programs, however, point out that commercialization of federally funded research has broad benefits that improve life for all Americans as well as billions of people around the world. For example, a 2018 study investigated the economic impact of the SBIR/STTR Phase II awards granted by NCI during the years 1998-2010. NCI invested $787 million in 690 companies. These SBIR/STTR-funded companies had a total economic output of $24.16 billion; they also created over 100,000 jobs; and they more than paid for themselves by generating $2.93 billion in tax revenue. Those numbers represent impressive gains for society even before the health benefits for patients are considered.

Moreover, to critics who would claim that private business gets a free ride on public funds, the $787-million investment by NCI triggered $4.26 billion in outside investment. In other words, the private sector does take up responsibility for these companies’ risk. And not only did private investment more than quintuple government investment, currently a full 10% of venture investment goes to SBIR/STTR-winning companies. In the words of Erika Smith at a recent webinar, CEO, ReNetX Bio:

SBIR funding enabled private investment from angels to private equity funds, serving as proof of concept when engaging in funding discussions.

Where the government ponies up, investors too see winning horses. The SBIR and STTR programs, thus, may be de-risking and encouraging private investment. And because SBIR and STTR awards are also determined according to the priorities of the funding agencies, these public interests trickle down into private investment decisions.

‘The SBIR/STTR programs are bad for science’

Other critics have argued that expanding the SBIR and STTR programs has resulted in decreasing funding for fundamental science. They also argue that SBIR grants are generally lower in quality than NIH’s R01 grants which support typical academic researchers.

Jere Glover, former chief counsel for advocacy at the Small Business Administration and a long-time champion of the SBIR program, counters that these criticisms are short-sighted citing the US National Academies of Sciences, Engineering, and Medicine which has repeatedly found that the SBIR/STTR programs accomplish their mission. He notes that they have created thousands of jobs for scientists and engineers who would not find academic positions after graduating:

We’re part of the pipeline. There are a fixed number of positions for professors, so most of their students are going to have to work outside academia. And it’s most likely that they go to a small business, since they create two-thirds of all jobs.

Basic research, Glover has also argued, doesn’t exist in a vacuum, and SBIR/STTR grants ensure it is validated with real-world payoffs:

[Critics] say we’re eating our seed corn by spending more money on commercialization, … but that seed corn will die if you don’t use it to feed something—and that’s what the SBIR program does.

‘The SBIR programs are a security risk’

Senator Dr. Rand Paul (R-KY), the top Republican on the Senate Small Business and Entrepreneurship Committee, has refused to support reauthorizing the SBIR and STTR programs as they are. He argues that rival China has picked up science and technology from SBIR/STTR awardees. According to an anonymous spokesman speaking on his behalf:

There are currently severe risks to national security when China continues to steal technology seeded by this program… Dr. Paul will not reauthorize this program without reforms to strengthen research security and stop abusive behavior by bad actors lining their pockets with taxpayer dollars at the expense of new small businesses with emerging technologies being able to access SBIR awards.

The Pentagon, however, sees the situation differently. DOD officials have urged Congress to reauthorize the SBIR and STTR programs. If the SBIR and STTR programs lapse, the DOD notes, American power in the technological, military, and economic arenas will wane. Undersecretary of Defense for Acquisition and Austainment William LaPlante and Undersecretary for Research and Engineering Heidi Shyu argued in direct opposition to Rand’s perspective on China, saying that SBIR/STTR seed funding is important for the US to compete with China.

Common Denominators

Remarkably, none of these disagreements are over fundamental principles; and in principle all can be resolved empirically.

Do SBIR/STTR grants shift risk to tax-payers without paying them back for their investment? Results from the study cited above suggest that the answer is a resounding no.

Have the SBIR/STTR programs led to long-term reduction in funding for basic research? According to Glover’s reasoning, as a part of the scientific pipeline, they should lead to a long-term increase in funding for basic research. This is an answerable question. And the results in America can be compared with result in other countries which have established programs modeled after America’s.

Have valuable security secrets leaked to China through companies funded with SBIR/STTR grants? Likely, they have. In April 2021, the DOD reported lack of due diligence in the SBIR granting process led to funding companies linked to the People’s Liberation Army. The answer to the problem, however, need not be to discontinue the SBIR and STTR programs but instead to improve the grant evaluation process. And Senator Paul seems to acknowledge precisely that. His objection is not to the programs per se. He is pushing for reform which will prevent China from stealing technology seeded by the programs.

To be or not to be… or to be bigger?

Historically the debate over the SBIR and STTR programs has included both the question of whether the programs should exist and also how large the programs should be.

From 1997 to 2011, the minimum percentage of the extramural R&D budget to be allocated for SBIR grants was 2.5%. Legislation was passed to increase the minimum by 0.1% each year till 2016 when it would become 3.0%.

In 2016, when Congress debated reauthorization of the program, both houses of Congress had before them proposed legislation which would raise mandatory allocations. The Senate’s version of the amendment (S. 2812) would have made the SBIR and STTR programs permanent (so that they no longer needed periodic reauthorization), and it would have raised the minimum allocation to 6% for SBIR grants and to 1% for STTR grants by 2028. The House’s version of the amendment (H.R. 4783) would not have made the programs permanent, but it still would have raised the minimum allocation to 4.5% for SBIR grants and 0.6% for STTR grants by 2022.

Today every federal agency with an extramural R&D budget exceeding $100 million must award at least 3.2% of that budget in SBIR grants and 0.4% in STTR grants.

What do you think?

Again, here at FreeMind, we love SBIR/STTR grants. We’ve helped our clients compete for and win SBIR/STTR grants, and we’ve watched them reap the benefits, fund their R&D, reach their milestones, help patients, contribute to medical science, create jobs, etc. etc. etc.

We are biased.

But—we would claim—we are biased for very good reasons.

If you would like to learn more about how you can win SBIR/STTR funding for your company or you would like to hear about other non-dilutive funding opportunities, then we would encourage you to register for our free, educational event, the annual Non-Dilutive Funding Summit, held every year at J.P. Morgan Healthcare Week in San Francisco, or to drop us a quick message.