SBIR 101: The Startup’s Guide to Understanding SBIR and Using the Funding Effectively

by Jeff Decker, PhD, and K. Austin DeLorme

Winning non-dilutive funding through the Small Business Innovation Research (SBIR) program (and the related program Small Business Technology Transfer, or STTR) is an exciting milestone for entrepreneurs building early-stage technologies. However, entrepreneurs with a freshly awarded SBIR should avoid assuming SBIR bears significantly on their ability to ink a contract with the Defense Department.

Companies in SBIR Phases I and II do not have paying customers. Companies working with paying defense customers earn funding that is linked to a specific program and requirement. Paying customers assume risk and costs to do business with your company. SBIR awards are often funded out of a segregated account not associated with long term funding opportunities.

This blog post provides a primer on SBIR so defense tech entrepreneurs can leverage it to get paying customers. It explains what an SBIR is and how to use it for sole source authority and generating past performance which will help you land real contracts with the Defense Department.

What Is a SBIR?

SBIR is a set of regulations governing how a portion of an agency’s or service’s R&D funding must be spent. It is an important way in which the government supports small businesses building promising new technologies. SBIR was established (for the greater Defense Department) by Congress in 1982 and is now supported by eleven federal agencies. STTR was established in 1992 and focuses on small businesses and nonprofit U.S. research institutions, such as universities. While SBIR regulations are standard across the federal government, there are differences between how each agency and service runs their program. For instance, the Army’s SBIR program is run differently from Air Force and Navy programs.

SBIR (and, to a lesser degree, STTR) is valuable to defense tech companies looking for early-stage funding and access to the defense market. Note, however, that it is a one-time award. Neither SBIR nor STTR is a contract vehicle.

The Phases of SBIR

Businesses are eligible for a total of three SBIR phases. Companies can receive funding for more than one Phase I or Phase II if each of the SBIR awards relates to a different technology component in a product. Very few companies make it beyond Phase I or Phase II.

Phase I is very exploratory, and funds are, accordingly, minimal (they range between $50-$150k). Historically, this has been a 6-12-month contract to demonstrate technical feasibility. Phase I funding allows businesses to de-risk the federal market by providing funding to research who their customers are within the Defense Department and how their product is relevant to defense needs. You can think of Phase I as getting “paid” to discover if your product is desirable to defense customers, whether delivering it is feasible, and if the defense market is viable.

Companies completing Phase I apply to Phase II, which is more complex. There is also a direct to Phase II option. Phase II awardees demonstrate technical feasibility. Initial Phase II awards typically range from $500k to $1.8M for a one- to two-year R&D effort. The funding usually results in the development of a prototype, identification of a government customer capable of acquiring your product and, in some cases, additional funds to mature the technology.

Agencies are allowed to add additional funding to Phase II awards, should it be deemed necessary, to support transition. While this can be done for any Phase II, programs such as the Air Force’s TACFI and STRATFI programs and the Army’s Catalyst program leverage government and private funds to reduce the risk for both government and private investors while enabling the company to further de-risk the defense market by funding product development and testing with defense customers.

SBIR Phases I and II fund technological advancement, help companies forge relationships critical to succeed in the market, and build investor confidence. Again, Phase I and/or Phase II award funding does not come directly from a military customer. On the other hand, companies in SBIR Phase III have landed paying customers.

Phase III is a contractual authority that covers any work that extends, completes, or derives from SBIR Phases I or II awards. It is not a funding mechanism or a type of contract. Phase III Authority enables the sole source award (more on sole source below) for ANY type of contract to include subcontract activity. In addition, Phase III is somewhat of a misnomer. Any company receiving a Phase I or Phase II gains the ability to use Phase III Authority.

Using SBIR Phase I and II to Win Real Contracts

Phase I and Phase II awards are beneficial to companies beyond providing non-dilutive funding. SBIRs make it easier for companies to succeed in the federal market by providing sole source award authority and building past performance.

Sole Source Authority

When the government wants to buy something, it must, by law, competitively bid the contract to all companies. Those interested in the contract submit proposals. The government then assesses the proposals and selects a winner.

Sole source authority shortcuts the process. The authority allows the government to directly purchase a solution without competition. No bidding the contract on the open market. No proposal assessment. The trouble is that getting the authority to sole source is difficult as it is usually attained through a lengthy legal review process called Justification & Approval (J&A).

Companies awarded SBIR (or STTR) gain Phase III sole source award authority without requiring the lengthy legal J&A review process. As such, Phase III sole source authority is valuable because it allows companies to shortcut the government’s lengthy acquisitions process reducing the time it takes companies to get on contract. The accelerated process can cause government Program Managers to select your company over a competitor so they can rapidly deliver a solution. Used correctly, SBIR sole source can be highly lucrative to you because it can cause you to get contracts over competitors and get them faster.

A word of caution: Many government personnel are not familiar with the SBIR program and the sole source opportunity it brings. It is important to communicate that you are eligible for a sole source award. Do so by writing the statement below, in its entirety, on all documentation to potential customers. It should be included in a proposal introduction, pitch decks, a company overview, and anywhere you discuss acquisitions and contracts. Including this statement will tell government personnel exactly what they need to know about SBIR sole source authority to help them use it.

[Your company’s name] is sole source eligible through Phase III SBIR Authority without the use of a justification and approval (J&A) pursuant to 15 U.S.C. § 638(r)(4).

Past Performance

While sole source awards are valuable, you must also be prepared to compete for contracts. Some programs or offices may choose to use Phase III sole source authority, but they are not required to do so. If you are in a crowded market, for instance, a program manager may believe competition is in the best interest of the government. When competing for an award, past performance is almost always a key criterion in the award process.

“Past performance” refers to similar work a company has previously performed. Performance is characterized by on time deliveries, clean documentation, responsiveness, and flexibility to the needs of the government. A company that performs well will receive a positive past performance rating indicating to future government personnel that the company gets the job done. This rating is important because the government wants to avoid awarding contracts to underperforming companies. The bad news is that companies new to the defense market don’t have a history of performance causing the government to view them as a risk.

SBIR enables companies new to the government market to begin building a positive past performance rating. You can do this in two ways. First, focus on meeting the requirements of the SBIR, not only on building cutting-edge tech. Producing high-quality deliverables on time and to standard will cause you to receive a positive past performance rating.

Second, relationships count in the defense market, even more so than in the commercial market. Intentionally build a relationship with your program manager. Yes, the majority of the relationship building depends on meeting SBIR requirements, but it also involves being easy to work with as well as supportive of the program manager’s needs. The program manager relationship is important because you need them to enter a positive past performance rating into CPARS (Contractor Performance Assessment Reporting System). Getting a positive rating will help you generate a strong past performance reputation valuable to winning future contracts. Being difficult to work with will result in a negative rating making it even more difficult for you to land future contracts. In addition, a program manager that had a positive experience working with your company is likely to advocate for you with other program managers which will give you an inside track on future awards.

Summary

SBIR is the fastest way to get government dollars and can help companies enter the defense market. Make no mistake, winning an SBIR doesn’t mean that you have paying customers. SBIR will pay you to learn which organizations may purchase your product and provides companies with sole source authority and past performance, making it easier and quicker to get a contract.

While sole source authority and past performance are important benefits of SBIRs you can leverage, don’t assume SBIR will lead to Phase III contracts. The first step to transitioning to a real contract is engaging prospective customers. If you have a Navy SBIR, meet with the program office responsible for integrating your SBIR. Usually, they played a role in developing the topic. If you have an Army or Air Force SBIR, engage with the acquisitions and operations people and, sometimes, the special program or initiative of interest that sponsor the SBIR, to identify potential customers. Lastly, ensure you develop a good working relationship with your program manager. Winning on the defense market requires strong relationships and internal advocacy.

Please contact us if you have an SBIR and are interested in learning about next steps.

K. Austin DeLorme served for 15 years as an Air Force acquisition officer, and continues to pursue her mission of expanding the defense industrial base through nontraditional partnerships as CEO & co-founder of Auxo.

Jeff Decker, PhD, is managing director of Hacking for Defense at Stanford University’s Precourt Institute of Energy and is a co-instructor of the graduate-level Hacking for Defense course. Jeff is an Army veteran.