Congress established the Small Business Innovative Research (SBIR) program in 1982 to develop new technologies through the efforts of U.S.-owned small businesses.

The SBIR program has exploded since its debut in 1983. Back in that first year, in those "Morning in America" days, the program made 686 Phase I awards for a total of $44.5 million. In FY 2001, the program made 3,215 Phase I awards and 1,533 Phase II awards, totaling approximately $1.5 billion dollars.

Congress reauthorized the program in December 2000 for a period of eight years (until September 30, 2008). The reauthorization included some program enhancements, such as small business data rights protection.

Three Phases

This is how it works for participants: After proposals are submitted, agencies make SBIR awards based on innovation, technical merit, and market potential. Resulting small business awardees and grantees then begin a three-phase program:

• Phase I is the startup phase. Awards of up to $100,000 are made that last for approximately 6 months. The purpose of these awards is to support explorations of technical merit or feasibility of ideas or technologies.
• Phase II involves awards of up to $750,000, for as many as 2 years. During this time, the R&D work is performed and commercialization potential evaluated. Phase II award winners are limited to those who won Phase I awards.
• In Phase III, Phase II innovation moves out into the marketplace. Government does not financially support Phase III. Small businesses must find private capital or other non-SBIR funding.

Program Benefits

One of the SBIR program's biggest benefits is this: it allows a small business to retain ownership of the technology it develops. In other words, the government pays companies to develop and later benefit financially from technical innovation. There's more: products developed under an SBIR contract often qualify to be marketed sole-source to the federal government. It is this potential sole-source opportunity that really gets companies jazzed up about the program.

The SBIR program is coordinated and administered by the Small Business Administration (SBA), but the real action is at the ten federal agencies that participate:

Department of Agriculture
Department of Commerce
Department of Defense
Department of Education
Department of Energy
Department of Health and Human Services
Department of Transportation
Environmental Protection Agency
National Aeronautics and Space Administration
National Science Foundation

Each agency sets aside a portion of its research and development budget exclusively for SBIR contracts and grants.

Qualifying

To qualify, a business must be small. For the purposes of SBIR, a small business:

• is independently owned and operated, is not dominant in the field of operation in which it is proposing, has its principal place of business located in the United States, and is organized for profit;
• is at least 51 percent owned, or in the case of a publicly owned business, at least 51 percent of its voting stock is owned by United States citizens, or lawfully admitted permanent resident aliens; and
• has, including its affiliates, a number of employees not exceeding 500.

During Phase I, the proposing firm must perform a minimum of two-thirds of the research; in Phase II, the proposing firm must perform a minimum of one-half of the research. All research must be performed within the United States for both of the first two phases.