The Small Business Innovation Research (SBIR) program is U.S. government program that provides funding to small businesses conducting research and development. Approximately $2.7 billion in funding was awarded in 2017—the most recent year for which complete data is published. For founders, SBIR can present an opportunity to obtain funding without diluting equity.

SBIR funding is awarded on a competitive basis. Federal law requires each government agency with an annual extramural research budget in excess of $100 million to allocate at least 3.2% of that budget to SBIR awards. Participating agencies publish topics on which they are interested in funding research and development; small businesses submit proposals in response to those topics; and the agencies then review the proposals and decide which will be funded. To submit a proposal, a small business must meet certain eligibility requirements, including have 500 or fewer employees and being majority owned (directly, or, in some cases, indirectly) by U.S. citizens or permanent residents.

There are currently eleven agencies participating in the SBIR program. As of 2017, the Department of Defense was the single largest participant, accounting for approximately 43% ($1.15 billion) of total SBIR funding. Health and Human Services was second-largest, accounting for 33% ($885 million) of funding. Department of Energy, National Science Foundation, and NASA also have large programs, ranging from $150-225 million in SBIR awards in 2017. The remaining participating agencies—USDA, DHS, DOT, DOC (through NOAA and NIST), Education, and EPA—have relatively small SBIR programs, on the order of $4-30 million annually.

Structurally, the SBIR program has three phases. Phase I awards are intended to establish feasibility and commercial potential for a proposed technology and typically range from $50,000-$250,000. Phase II awards are generally intended to expand on research on research conducted in a Phase I award and typically range from $750,000-$1,700,000. Phase III awards are contracts in which an agency purchases products or services developed under a prior Phase I or Phase II award. There is no limitation on the amount that can be awarded under a Phase III contract.

For companies interested in selling to the federal government, SBIR can also provide a competitively advantageous path to winning contracts. The SBIR Policy Directive, published by the Small Business Administration, provides that agencies procuring products developed under a prior Phase I or Phase II award shall “to the greatest extent practicable” issue “Phase III awards relating to the technology, including sole source awards, to the Awardee that developed the technology” under the prior award. Additionally, the federal government is generally prohibited from externally sharing data developed under an SBIR funding agreement for 20 years following the date of award, meaning that the SBIR awardee will often be best-positioned to deliver the products resulting from its research.

SBIR can present an excellent funding and business opportunity for emerging companies, and we are pleased to represent a number of companies that have benefited from this program. If the SBIR program interests you, we invite you to learn more about whether SBIR may be a fit for your company and about patenting considerations that pertain specifically to SBIR awardees.

The information contained in this posting does not, and is not intended to, constitute legal advice. If you would like to obtain legal advice relating to the subject matter addressed in this posting, please consult with us or your attorney.