What is the SBIR Program?

The Small Business Innovation Research (SBIR) program is a federal government project that promotes domestic small business Research/Research and Development (R/R&D) towards government objectives.  The program is highly competitive with an average success rate of around 10%.  There are several participating agencies in the SBIR program, including the Environmental Protection Agency, NASA and the Department of Transportation.  The DoD and Health and Human Services (HHS) represent 72% of the total $2.58B program budget and thus represent the greatest opportunity for small businesses. 

The SBIR program is split into three sequential phases:

Phase I – Technology Feasibility

Phase I is to determine, to the extent possible, the scientific, technical, and commercial merit and feasibility of your idea.  Phase I awards are generally capped at $100,000 to $162,000 and may include a Phase I – Option period that is meant to transition between Phase I and Phase II.  Proposals should concentrate on R/R&D which will significantly contribute to proving the scientific and technical feasibility, and commercialization potential of your proposed effort.  Many of the solicitations will call out minimum background progress or expected end-point for the proposed work. 

Phase II – Demonstration and Evaluation of Commercial Potential

Phase II awards are most generally made to firms based upon Phase I performance and results.  Phase II awards are generally between $500,000 to $1,075,000 and the period of performance is up to 24 months.  Generally, the objective of a Phase II contract is to produce a prototype with well-defined and specific deliverables.  This equates to a Technology Readiness Level (TRL) 6 to 7.  If you are unfamiliar with TRL, it is better defined later in this chapter. Near the end of your Phase II, you may be able to enter the SBIR/STTR Phase II Enhancement Program.   Each DoD component agency has developed its own Phase II Enhancement policy. In general, the program can award a Phase II company with additional Phase II SBIR funding if the company can match the additional SBIR funds with non-SBIR funds from DoD acquisition programs or the private sector.  The limit to Phase II enhancement is generally $500k from the SBIR agency if matched with $500k from outside investment.  The investment must be an arrangement in which the outside party provides cash to the small company in return for such items as: equity, royalty or percentage of profits, technology rights, advanced purchase order for products resulting from the technology, or a combination of the above. The invested funds must pay for actions that further the development and/or commercialization of the company's SBIR technology.

 The DoD provides the following examples of outside investors:

• Another company
• Venture capital firm
• Angel investor(s)
• A non-SBIR/non-STTR government program
• Any combination of the above

 It does not include the owners of the small business, their family members, and/or "affiliates" of the small business.  In my opinion the Phase II enhancement is a significant value proposition for startups seeking funding.  Investors want a large ROI with the least risk possible.  At the end of Phase II your business will have a successful prototype and have gained interest from prime manufacturers.  Seeking a $500k round of investment with the added incentive that it will be matched dollar for dollar with non-dilutive funds further capitalizes your startup and aids in reducing investor risk. 

 Phase III – Transition to the Marketplace

Phase III is for commercialization and is the goal of all SBIR projects.  There will be more on commercialization later, but know that commercializing your technology is an essential end-point of the SBIR process.  In Phase III, the Proposer is required to obtain funding from either the private sector, a non-SBIR government source, or both, to develop the prototype into a viable product or non-R&D service for sale in military or private sector markets.  SBIR Phase III refers to work that derives from, extends, or completes an effort made under prior SBIR funding agreements, but is funded by sources other than the SBIR Program.  A DoD agency may award a Phase III contract based on a project’s success with the following conditions and limits:

• No federal SBIR/STTR funding may be used on a Phase III contract, although non-SBIR/non-STTR government funds are allowed.
• There is no limit on the number, duration, type, or dollar value of Phase III awards made to a business concern.
• There is no limit on the time that may elapse between the phases.
• The small business size limits for Phase I and Phase II awards do not apply to Phase III awards.