Recent Research: GAO Report Examines SBIR Awards Made by NIH and DoD

The notion that, since a 2003 ruling, small businesses that are majority-owned by venture capital (VC) funds are being unfairly excluded from participating in the Small Business Innovation Research (SBIR) program is inaccurate, according to a recent study from the Government Accountability Office (GAO).

Controversy has risen over the last several years over whether SBIR awards can be made to small businesses whose majority owners are venture capital firms. To receive an SBIR award, firms must meet ownership criteria, and in 2002, the Small Business Administration (SBA) clarified that majority owners of firms that receive awards must be individuals rather than corporations. Subsequently, in 2003, an SBA administrative law judge issued a decision stating that VC firms could not be considered "individuals" for the purpose of satisfying the ownership criteria for the program.

During fiscal years 2001-04, the National Institutes of Health (NIH) and Department of Defense (DoD) made 16,019 SBIR awards valued at $5.3 billion. Since the SBA clarified SBIR ownership eligibility criteria in 2002, an increasing number of awards have been made to small business firms that received VC investments, the report finds. For example, the number of firms that received VC investment and SBIR awards from NIH increased from 106 in FY 01 to 150 in FY 04. These firms attracted a greater percentage of NIH's total SBIR dollars each year - about 21 percent on average in FY 2003-04, compared to an average of 14 percent in FY 2001-02. According to the GAO report, similar trends were found at DoD, but to a lesser extent.

Overall, from FY 2001-04, about half of NIH awards and 12 percent of DoD awards exceeded the guidelines. The report identifies the following key characteristics:

• Most awards were concentrated in a few states. Firms in California and Massachusetts submitted about one-third of all the applications and received about one-third of all SBIR awards.
• A small number of awarding components in NIH and DoD made most of the awards.
• Award amounts ranged from well below the guidelines to significantly above the guidelines.
• The percentage of awards to firms that received VC investment was relatively small at both agencies, but was larger at NIH. The firms that received VC backing were generally concentrated in the same states and in the same award-making agency components as for all the awards.
• The firms that received DoD SBIR awards were, on average, relatively small-sized firms, while SBIR awardee firms that also had VC backing were about 30 percent larger than firms that did not.

In response to the report, DoD did not find the results surprising in light of differences in markets for research supported by NIH and DoD. SBA noted that while the information may be useful, it could be misconstrued as suggesting a link between the presence of VC investment and SBIR ownership criteria when no such link exists, the report states.

To determine the total number and characteristics of SBIR awards, GAO obtained data from NIH and DoD and combined that with data from private sector sources to identify firms that received VC investment anytime before they received an SBIR award in the time frame. In addition, GAO interviewed officials at NIH, DoD and SBA about their procedures and reviewed agency documentation on awards, award selection and funding, eligibility determinations, and the data elements collected during the eligibility process. The report, Small Business Innovation Research: Information on Awards Made by NIH and DoD in Fiscal Years 2001 through 2004, is available at: http://www.gao.gov/new.items/d06565.pdf

Links to this report and nearly 4,000 additional TBED-related research reports, strategic plans and other papers can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at: http://www.tbedresourcecenter.org/.