When Henry Luce, Time publisher, coined the phrase “The American Century” at the end of World War II, he may not have recognized how enduring his neologism would eventually become. The phrase was meant for the United States to take the role of main missionary spreading democracy throughout the world through its soft power. Arguably, one of America’s greatest global public good in this mission is its foundation of universities and research institutes that has become an international magnet and force for the advancement in the sciences and arts.
Today, great and inventive minds from every corner of the global economy come to the United States to study and work. Also among our national resources is the expanse of small business. Small business in America accounts for 99% of the economy and employs nearly half the US workforce. In 1982, due to the success of a pilot program at the National Science Foundation (NSF), Congress recognized that small businesses are among the most cost-effective performers of research and development. Small enterprises are particularly talented in bringing R&D results to market in the form of new products and services. In order to capitalize on their role, the Small Business Innovation Development Act (P.L. 97-219) created Small Business Innovation Research (SBIR) programs to engage small business in the research and development efforts of major federal agencies.
The legislation aimed to increase participation of small innovative companies in federally funded R&D and leverage their hand in job creation, productivity improvements, and U.S. competitiveness. Despite the significance of small business’s contribution to technical creativity, the vast majority of federal funded R&D is performed by large companies. SBIR programs are set aside funds that allow government to act as entrepreneur – a sort of venture capitalist. By taking the lead in investing in innovative risks under circumstances where the private sector would not, the federal government brings to market socially beneficial assets. Assets that can protect the country and improve our quality of life.
The SBIR program was scheduled to terminate on September 30, 2008. Instead, after being reauthorized several times, the government expanded it from a prototype project of the NSF to 11 federal department and agencies. It also added a companion program. The Small Business Technology Transfer (STTR) program facilitates the commercialization of university and federal R&D by small companies. Both programs are administered by the Small Business Administration (SBA).
Under STTR, small business works with research institutes to commercialize ideas. Today, agencies with extramural R&D budgets of $1 billion or more are required to set aside a portion of these funds (3.20% of the external research budget) to finance SBIR. As of 2020, five federal agencies (who contribute 0.45% of their external research budget) operate STTR programs.
To be eligible for SBIR/STTR, a company must be a US for-profit with no more than 500 employees. The number of employees includes affiliates companies and its physical location cannot be outside the border. Ownership characteristics are essential. They include:
- more than 50% directly owned and controlled by one or more citizens or permanent resident aliens of the United States.
- more than 50% owned by multiple venture capital operating companies, hedge funds, private equity firms, or any combination of these, with no single such firm owning more than 50% of the small business; or
- a joint venture in which each entity to the joint venture meets the above requirements. The SBIR/STTR does not accept unsolicited proposals. Applications are in response to a specific funding solicitation. These ‘open agency’ solicitations are listed on the SBIR/STTR website: https://www.sbir.gov/solicitations. Announcements contain information about the rules and guidelines for submitting a response for proposal (RFP).
Typically, the award structure breaks out in three distinct phases.
Phase 1 Proof of Concept
6-12 months
$50,000 – $275,000
Phase 2 Technology Development
24 months
$750,000 – $1.8 million
Phase 2 Commercialization
NO FUNDING – Awardees take their product to the commercial market or sell in the multibillion dollar federal contracting marketplace
Since 1999, there have been efforts to broaden the geographic distribution of awards. Further, not only have agencies made attempts to encourage the submission of proposals from companies in states with fewer awards, SBIR/STTR programs reach out to a diverse portfolio of startups. They specifically target underserved groups for inclusion. These groups are typically businesses owned by women, people of color, owners with disabilities, entrepreneurs located in socially/economically distressed regions, and opportunity zones. The aim is to drive economic development, create jobs, enkindle technological creativity, while providing tax benefits to investors.
The SBIR/STTR programs have proven themselves to have been a brilliant return on investment. When compared with other research activities, SBIR projects have a greater potential to result in new products and processes. The increment of proposals and the noticeable level of competition convert into opportunities which are estimated to be more gainful than projects funded by government agencies internally.
In short, SBIR/STTR is a modest mechanism for maintaining the grand ideals of “The American Century”. It is also a bipartisan example of workable legislation that is possible in a contentious, market-driven society.