Investing in Innovation: The SBIR Program

The SBIR Program

The Small Business Innovation Research (SBIR) program, under coordination by the U.S. Small Business Administration, provides a set of federal funds specifically earmarked for investing in the research and development of innovative technology. With significant benefits to both business and government, SBIR contracts offer opportunity for all involved. This article will outline some of the main aspects of the program.

What Is It?

Agencies with $100M or more in their research and development budget must allocate 3.2% of those funds for use on SBIR projects. Only small businesses may participate in the program. Notably, the eligibility requirements for what qualifies as a small business in the SBIR program differ from that of other small business programs. The specifics of these requirements are beyond the scope of this article, but generally the company must be located in the United States, be for-profit, be a legally formed entity, meet percentage ownership requirements, and have not more than 500 employees.

How It Works

SBIR investment rolls out in three phases. Phase I is essentially a proof of concept model to determine the technical merit and commercial feasibility of the product. These purchases are generally lower-dollar amounts of $150,000 or less over a six-month period. Phase II contracts are more robust awards, as the government invests in a broader scope of development based on what was learned about feasibility in the Phase I state. These awards are typically no more than $1M in total costs over 2 years. Finally, Phase III moves the product to full commercialization for the contractor, and the government purchase funds move out of SBIR R&D and into traditional procurement.

The Benefits

Certain small businesses, usually start-ups, have an innovative product that a participating agency believes could provide significant benefit to the government. However, these prospective contractors are either unwilling to engage in the traditional procurement market given its liabilities and compliance burdens or are simply unable to due to lack of product development or performance history. SBIR contracts provide a mechanism to bridge this gap by making the purchase and sale of the technology easier. Buyers have the choice to go through a shortened competitive, procurement-like process or purchase on the spot. And, they have varying contract vehicles for use, including other transaction agreements (OTAs). Sellers have the benefit of a potentially significant investor seeking to rapidly advance the commercialization of their product, taking no equity, and offering generous intellectual property terms.


Like with any government contract, pitfalls exist and participants in this program should be well aware that they are no longer in the familiar setting of commercial transactions. If an agency uses an OTA, contractors bear the risks of the uncertainty around those types of agreements. On the other hand, if a procurement contract is the vehicle of choice, then a participant suddenly becomes more like a traditional government contractor subject to FAR clauses and other controlling regulations, statutes, and precedent. Notwithstanding, the SBIR program is one that fast-tracks a mutually beneficial relationship and brings innovation to government and investment to pioneering companies.


investing in innovationOur government contracts posts are published by Attorney Kristi Morgan Aronica. She serves as counsel to government contractors and subcontractors throughout Texas and nationally.