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 March 2008 

Lawrence P. Farrell Jr.Small Business Innovation Research: Renew it Now!

March 2008

By Lawrence P. Farrell Jr.

It is no secret that small businesses are one of America’s biggest assets. Firms with fewer than 500 employees represent 99.9 percent of the nation’s 26.8 million businesses.

And it should come as no surprise that a large number of these small businesses are the incubators of many advanced technologies, including cutting-edge systems currently used by the U.S. military.

Which brings me to a recent congressional hearing where lawmakers debated the merits of renewing the Small Business Innovation Research Program that is set to expire Sept. 30.

NDIA, a long-time supporter of SBIR, joined other organizations in asking Congress to reauthorize the 25-year-old program. It is an important tool to stimulate high-risk technological innovation in the private sector and to increase the commercial application of government-funded efforts.

More than 16,000 companies have participated in SBIR. It is one of the few federal programs that specifically address small businesses. It has three components. In phase I, companies receive between $70,000 and $100,000 to execute early research. Phase II, which ranges from $200,000 to $750,000, allows the technology to be further developed. Phase III requires the company to find customers for commercialization. The total cycle can take up to 42 months including award and assessment time.

About $2 billion a year is spent on SBIR projects, and the payoffs can be seen everywhere. The National Institutes of Health relies on SBIR funds for much of its biotechnology and medical research. The Defense Department, which oversees about half of the SBIR funding, has been a strong proponent. Pentagon officials often have said that small businesses are critical engines of innovation that contribute to key war fighting capabilities.

In a larger sense, the U.S. defense industry’s competitiveness depends in part on small business performance through SBIR.

The Defense Department’s SBIR program has experienced substantial growth in recent years, more than doubling in size from 1999 to 2005, and it continued to grow through 2007 to approximately $1.25 billion.

The “set-aside” funding— 2.5 percent of all defense research and development must go to SBIR awards — has remained constant. So this expansion is directly driven by growth in the Pentagon’s R&D budget.

Since the inception of SBIR in 1983, the Defense Department has awarded nearly $11 billion to qualifying small firms via 44,500 contracts. One problem, however, is that the administrative fee that the department receives — 1 percent of the value of the contracts — is not nearly enough to effectively measure and manage SBIR projects.

Federal management of similar programs averages about 5 percent to 10 percent overhead. Industry management of comparable projects runs as high as 25 percent overhead.

We believe that flexibility is the key to contract award guidelines. Sometimes a $100,000 award for phase I and $750,000 for phase II is not enough. For example, manufacturing-related initiatives can run into the millions of dollars to effectively prototype and demonstrate. Additionally, tests can be quite expensive for technologies destined for military use.

Some critics have questioned the lack of quantifiable data to measure the performance of SBIR programs.

One measure of success is the number of SBIR companies that have been acquired by large businesses.

Nine of the largest defense corporations have together acquired 75 SBIR companies during the past few years, a positive indication of the value the defense industry sees in these innovative small businesses.

In 2006, Congress challenged the Army, Air Force and Navy to use the SBIR program to identify and implement best practices in commercializing SBIR products for military applications. In just two years, the Army, Air Force and Navy have revitalized their SBIR programs to ensure that the administrative improvements Congress demanded are working.

It’s worthwhile noting that 45 percent of all SBIR projects make it to the commercialization phase in less than two and a half years. It’s no exaggeration to say that the program pays for itself. SBIR success stories can be found on the program’s main website

NDIA recommended the SBIR reauthorization for the following reasons. It is highly leveraged with a high transition to commercialization rate. It is important to the country because of its efficient job creation rate and its agile, innovative character. It is important to the Defense Department because its enabling technologies support a robust supplier base. It is important to small businesses as nearly 70 percent of the phase I awards go to firms with fewer than 25 employees.

Congress should extend SBIR and by doing so, it will send a reassuring message to the nation’s small businesses — the most efficient and innovative job creators. They need all the support they can get, and our industry needs their productive creativity. NDIA’s testimony can be viewed on You Tube at

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