SBIR program finally gets a commercialization standard with teeth

America doesn’t lack companies with innovations that could strengthen national security. What it lacks is a reliable path to turn those ideas into capabilities in the hands of warfighters.

The Small Business Innovation Research program was built to be that path. Too often, a handful of firms have captured an outsized share of it while delivering less to the warfighter than their peers.

What SBA proposed

The Small Business Administration recently published a notice in the Federal Register that could reshape SBIR and Small Business Technology Transfer more than any reform in a decade. Comments close Oct. 31.

The rule is simple. Any company that won more than 25 Phase II awards, SBIR and STTR combined, in the last five completed fiscal years must show that a real share of its revenue comes from somewhere other than Phase I and Phase II funding. The bar is 33 percent over the prior three years at the fiscal 2027 assessment, rising to 50 percent in fiscal year 2028.

Commercial sales, private investment, other government contracts and Phase III awards all count. Miss the mark and you can't submit new Phase I or Direct-to-Phase II proposals to any agency for a year. The standard takes effect Nov.15.

How we got here

This notice is the payoff of four years of unglamorous work by people who believe America's seed fund should produce outcomes, not annuities.

In 2022, after a contentious SBIR/STTR reauthorization fight, Congress created tougher standards for experienced firms and directed GAO to study the companies that win the most awards. GAO reported back in March 2024 (GAO-24-106398). From fiscal 2011 through 2020, 22 companies won 50 or more Phase II awards each. They were fewer than 1 percent of Phase II awardees but took 11 percent of the awards and 10 percent of the dollars. They also underperformed: $0.89 in sales and investment per Phase II dollar versus $1.15 for firms with 16 to 49 awards, and $0.19 versus $0.32 from the private sector alone.

GAO also found that Congress's 2022 fix barely touched the problem. The tougher standards applied only to firms with more than 50 awards, and just six companies failed them in fiscal 2023. Even then, the penalty was mild: a failing firm could still win up to 20 new Phase I or Direct-to-Phase II awards from each agency that year. Only two of the six had been winning more than that, so for most of them nothing changed.

SBA's new benchmark closes that gap by lowering the trigger to 25 Phase II awards and barring failing firms from new proposals altogether.

The benchmark is part of a broader rewrite that began this spring. After a six-month lapse, Congress passed the Small Business Innovation and Economic Security Act, signed April 13, which reauthorized the SBIR/STTR program through 2031 and pushed it in the same direction. The law created a Strategic Breakthrough allocation of up to $30 million for companies that bring matching capital, capped proposal volume starting in fiscal 2027, and required Phase III awards to be tracked in federal procurement data. SBA promised implementing rules within three to six months, and this benchmark is the most consequential so far.

Why this is the right fix

Let's be clear: winning a lot of SBIRs is not the problem. A promising company stacking awards while it finds product-market fit is the program working as designed. The problem is a company that needs 20-plus awards a year, every year, for decades. At that point the SBIR program has become the business model.

What is great about SBA's approach is that it doesn't punish anyone for winning. There's no award cap and no dollar ceiling. If you run a high-volume shop that turns research into products people buy, getting a third of your revenue elsewhere should be easy.

Eventually, these successful firms will graduate the small business program altogether into self-sustaining companies making way for new entrepreneurs and entrants in need of government grants for unique and new ideas. On the flip side, if a small business has won more than 25 Phase IIs in five years and still can't transition it's fair to ask whether that company is the right recipient of government grants.

Defenders of the status quo will say national security technology often has no commercial market. Fair enough, and SBA accounted for it. Phase III awards and every other government contract count. Selling to the warfighter counts. The only revenue that doesn't is the SBIR grant funding.

From the investor's seat, the cost of the status quo is easy to see. SBIR topics and dollars are finite, and everyone spent on a company stuck in perpetual research is one the next idea doesn't get.

What often gets lost in this debate is that this isn't about steering SBIR money to venture-backed startups. It's about making room for the next generation of entrepreneurs, whoever backs them. For the startups we invest in, the goal is to graduate from SBIR within three to five years. Those that can't often fold or get acquired.

Either way, the slot opens for someone new, and that turnover is what makes SBIR a real on ramp for new ideas. This benchmark simply applies the same expectation to the program's biggest players.

Make your voice heard by October 31

The companies this benchmark affects have every incentive to fight it and the resources to file polished comments. If theirs are the only voices in the record, SBA hears a lopsided story.

If you're a founder, investor or program official who wants SBIR to deliver for startups, warfighters and taxpayers, file a comment. Say who you are, that you support the benchmark, and why. A specific example from your own experience beats any talking point. Comments go to Joshua Carter, Associate Administrator of SBA's Office of Investment and Innovation, by Oct. 31.

Congress did its part in April. SBA has done its part now. The rest is up to us.

David Rothzeid is a Principal at Shield Capital, an early-stage venture firm focused on national security and commercial technology. He served in the U.S. Air Force as an acquisition officer and is a reservist at the Pentagon. The views expressed are his own.