SBIR Proposal Writing Basics: What Does the SBIR/STTR Reauthorization Mean for Your Company?
Gail
& Jim Greenwood, Greenwood Consulting Group, Inc.
Copyright © 2012 by Greenwood Consulting Group, Inc.
You
probably have heard by now that the SBIR and STTR programs have been
reauthorized. It occurred in late December, and was tucked inside of the
National Defense Authorization Act, but at least it happened. It gives us the
SBIR/STTR programs through 2017. Kudos go to Senator Mary Landrieu of Louisiana
who really lead the effort, as well as to Jere Glover of the Small Business
Technology Council (SBTC, www.sbtc.org)
and Rick Shindell of the SBIR Gateway (www.zyn.com/sbir)
who worked tirelessly to move the reauthorization forward and keep us all
informed of the progress (and at times, the lack thereof).
So
after we all heave a sigh of relief that we have “secure” SBIR/STTR programs
for the next six years, the question becomes how the reauthorization will impact
our firms and how (or even if) we should compete in these programs for grants
and contracts to move our innovations forward. We have plowed through the 100+
pages of the reauthorization legislation (you are encouraged to do likewise; you
can find it at www.zyn.com/sbir/insider/SBIR_Pages_from-HR1540conf.pdf
), and
we want to offer our initial impressions and conclusions about how the
reauthorization is going to impact the SBIR/STTR programs. We apologize for the
length of this discussion but, as you will see, there are a lot of changes in
store for SBIR/STTR.
1.
There are changes in the level of funding for the SBIR/STTR programs. For SBIR,
the reauthorization calls for annual increases of 0.1% from the current level of
2.5% of the agencies’ extramural R&D budgets that must be set aside for
SBIR. Therefore, the set aside is 2.6% in Federal fiscal year (FY) 2012, 2.7% in
2013, and so forth—although oddly there is a 0.2% increase from 3.0 to 3.2%
between FY2016 and FY2017. But the agencies are now allowed to keep up to 3% of
their SBIR budgets for administrative purposes, and a fraction of the SBIR funds
are now available to previously-ineligible applicants who are majority owned by
multiple venture capitalists, hedge funds and private equity funds (VC/HF/PEFs).
And of course there’s the impact of the inevitable ebb and flow of each
agency’s extramural R&D budget, especially in such turbulent economic
times.
So
what is the net increase or decrease in SBIR funding? Here’s our assessment:
we assume a steady state in each agency’s extramural R&D budget. We add
the annual 0.1% increase in the SBIR set aside amounts while subtracting the 3%
that the agencies can now keep for administrative purposes. This yields, by
FY2017, a 24% net increase in SBIR funding, compared to FY2011. That overall
increase will then be impacted by the fraction of each agency’s SBIR budget
that can now be awarded to previously-ineligible firms (those that are majority
owned by multiple VC/HF/PEFs). Who knows at this point how many proposals from
such entities will be submitted and funded, but if we assume the average agency
awards 15% of its SBIR funds to them (the reauthorization permits a maximum of
25% at NIH, NSF and DoE, and 15% at the other agencies), then there will be a 5%
net increase between FY2011 and FY2017 in SBIR funds available to small firms
that are not majority owned by multiple VC/HF/PEFs.
That’s
the SBIR situation. What about STTR? We think STTR comes out far better. The
reauthorization legislation calls for 0.05% increases in each fiscal year
between 2012 and 2016. Doesn’t sound like much, but 0.05% as a fraction of the
current STTR set aside of 0.3% is actually quite a bit—we estimate that, by
FY2017, there will be a 50% increase in STTR funding, compared to FY2011
amounts. What’s the bad news relative to the STTR funding? THERE ISN’T ANY.
STTR is not subject to the 3% administrative tax being imposed on SBIR, and
firms majority owned by multiple VC/HF/PEFs are still ineligible for STTR.
Our
conclusion is that STTR may look more attractive to you as a candidate for your
Phase 1 proposal. Yes, there is far less money in STTR than SBIR, and not all
agencies have STTR programs, but a 17% increase in STTR funds this first year
(especially when some of your competitors don’t know that STTR is getting that
kind of increase), and a 50% overall increase by FY2017 could create
opportunities for you. Further, you do not have to compete with firms that are
majority owned by multiple VC/HF/PEFs that may have deep pockets to fund their
SBIR proposal preparation efforts.
2.
STTR is far more prominent in this reauthorization compared to past ones. Ever
since STTR was created in the 1992 Reauthorization, it has been treated with
less respect (and with lower expectations) compared to SBIR. But in this
reauthorization, most of the provisions and expectations put on SBIR are also
placed on STTR (notable exceptions being the 3% admin tax and VC/HF/PEF
siphoning discussed above). Particularly notable is the expectation that STTR
should generate the same sort of Phase 3 commercialization successes as those
coming from SBIR.
Again,
our interpretation is that this is good news for you if your project is a
candidate for STTR. STTR recipients can now qualify, for example, for the
DoD’s popular commercialization pilot program and the opportunity for
expansion of that program into the other 10 agencies (see more on this below).
3.
Some of us have supported the 3% administrative tax that is available to the
agencies because we thought it would give them funds to do a better job of
managing their SBIR/STTR programs, give more beneficial debriefings, and more
quickly get awards in place. Unfortunately, the reauthorization puts many new
administrative requirements and expectations on the agencies, which will
undoubtedly take some of that 3% admin money.
4.
Several parts of the reauthorization legislation convey a very unfortunate, if
not alarming, attitude that SBIR/STTR companies cannot be trusted and are not
being truthful, honest, and sincere in their dealings with the Federal
government, and that those sins must be sought out, prosecuted, and eliminated.
See, for example, subparagraphs E through G on page 1123 of the above referenced
PDF file, which talk about how the 3% admin tax can be spent: “activities
relating to…waste, fraud, and abuse prevention…targeted reviews
of…recipients...at high risk for fraud, waste, or abuse to ensure
compliance… verification of
reports and invoices and cost reviews.”
The tone towards small businesses participating in SBIR/STTR is not
positive, in our opinion, in a number of sections of the reauthorization.
There have been some bad apples among the thousands of small companies
that have received SBIR/STTR funds over the years, and they should be weeded
out, but a more common problem in our experience has been a lack of knowledge
about the rules and regulations and/or a lack of appreciation for the
seriousness of things that an entrepreneur may think is “no big deal.”
Unfortunately, the tone appears to be one of “seek out and destroy” rather
than to heighten the awareness of SBIR/STTR applicants on the seriousness of
major waste, fraud and abuse issues, and educating them on what is permitted and
what is not.
5.
The reauthorization legislation not only places many requirements on the
awarding agencies, but also on the Small Business Administration (SBA). SBA has
always had a role in developing SBIR/STTR related policy and gaining compliance
by the awarding agencies. At times it has done this job well, and not so well
during other times. But the reauthorization requires SBA develop and implement
policy and guidance for a large number of new provisions and, unlike the SBIR/STTR
awarding agencies which get their 3% admin tax, the SBA does not appear to get
any additional resources under the reauthorization. We are concerned about
SBA’s ability to meet its obligations under the reauthorization, with no new
resources to do so. This may manifest itself with delayed implementation of some
provisions of the reauthorization, or worse.
We’ll
finish up now with some additional interesting provisions in the SBIR/STTR
reauthorization:
·
Agencies
are no longer allowed to use an “invitation only” process for selecting
Phase 2 applicants. While several agencies do this currently, Dept of Defense is
the most prominent.
·
The
3% admin tax given to the agencies is only authorized for 3 fiscal years, and is
referred to as a “pilot” provision. It is not clear what happens after this
pilot program expires.
·
Agencies
are not to exceed the $150k Phase 1 and $1 million Phase 2 “guidelines” by
more than 50%. Therefore, Phase 1 awards are really capped at $225k and Phase 2
awards at $1.5 million (with annual provisions for increases in the cost of
living). This will certainly impact NIH grant and PA/RFA programs, under which
much larger awards have been made. There is a provision for SBA waivers on
specific topics
·
Phase
1 SBIR winners can receive Phase 2 funding through the STTR program, and Phase 1
STTR winners can get SBIR Phase 2 awards. This gives you greater flexibility if
you want to switch from one program to the other between phases.
·
A
pilot program will allow NIH, DoD and DoEd to make Phase 2 awards for a
particular project to firms that have not received a Phase 1 award for the same
project. Critics of this approach have argued that it will reduce the level of
innovation funded by SBIR, and increase the funding of “sure bets.” There is
no limit on the fraction of SBIR funds that can be channeled into this pilot.
·
Up
to 25% of SBIR funding at NIH, NSF and DoE can go to small businesses which are
majority owned by multiple VC/HF/PEFs. All other agencies can give awards
equaling 15% or less of their SBIR budgets to such entities. There is no minimum
dollar amount that must be awarded to such entities, but there are penalties for
agencies that exceed the stated percentages.
·
The
legislation clarifies that the VC/HF/PEFs cannot be majority owned or controlled
by large or foreign firms. This allays some fears that large firms could set up
venture capital companies and compete for SBIR awards.
·
It
also states that the agencies “…may not use investment of venture
capital…as a criterion for the award of” SBIR/STTR projects. Presumably this
was inserted to prevent agencies from discriminating against VC/HF/PEFs, but it
also oddly seems to prohibit them from giving any preference for these firms.
This also will impact agencies that have used funding commitments from third
parties as a measure of an SBIR/STTR project’s commercial potential.
·
Firms
are given greater freedom to subcontract to Federal laboratories. This replaces
an unfortunate waiver process that has hindered use of Federal labs on SBIRs.
Federal labs also can’t require advance payments for more than 30 days worth
of work as a subcontractor on an SBIR or STTR award.
·
The
DoD’s popular Commercialization Pilot Program (CPP) becomes permanent under
the name Commercialization Readiness Program.
The legislation also invites the other 10 agencies to create a
Commercialization Readiness Pilot Program (CRPP) modeled after the DOD’s CPP
using not more than 10% of their SBIR/STTR funds. We expect several of the
agencies that are more aggressive on Phase 3 commercialization to take advantage
of this opportunity.
·
Final
funding decisions must be made on SBIR and STTR proposals within 90 days of the
deadline for their submission, except at NIH and NSF where such decisions must
be made within 1 year. This suggests to us that agencies may seek ways to
quickly narrow in on a relatively small number of proposals that will be given
serious consideration. It also seems to give an incentive to agencies to reduce
the number of awards given (perhaps by increasing the dollar value of each, or
putting significant portions of their SBIR/STTR budgets into CRPP or other set
asides).
·
NIH
can spend up to $5 million of its STTR funds for a Phase 0 Proof of Concept
Partnership Pilot Program in which it give up to $1 million per year for up to 3
years to a university “or other research institution that participants in the
[NIH] STTR Program” to “accelerate the creation of small businesses and the
commercialization of research innovations” from within the institution.
NIH’s FY09 STTR obligation was about $72 million, so this pilot could absorb
about 7% of NIH’s STTR funding.
·
There
does not appear to be any provision for continuing the Federal and State
Technology Partnership Program (FAST) that has sporadically provided funding to
state SBIR/STTR outreach efforts. This is unfortunate, because those outreach
efforts are crucial to help ensure that SBIR/STTR applicants do not unknowingly
or unintentionally engage in the “waste, fraud and abuse” issues that
permeate the reauthorization.
We
recommend you stay in touch with the reauthorization implementation efforts,
through www.sbtc.org
and www.zyn.com/sbir,
to know what SBA and the awarding agencies are doing, and take advantage of any
public comment opportunities to voice your questions, concerns and complements.
Put another way, we can’t sit back and rest now that we finally have the
reauthorization, but instead we must remain diligent as changes in the SBIR/STTR
programs required under the reauthorization are implemented by SBA and the
awarding agencies.