Congress created the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs in 1982 and 1992, respectively. These programs require certain government agencies to set aside a percentage of their extramural budgets so domestic small businesses can engage in research and development (R&D) with a strong potential for technology commercialization. Accordingly, 11 agencies support the SBIR program with five of them also having STTR programs. The Small Business Administration serves as the coordinating agency for the programs.

Small businesses receive multiple benefits by applying for SBIR/STTR awards. The funding is stable, predictable, and not a loan. In addition, the capital is non-dilutive, and the small business retains certain intellectual property rights for their developments. Companies can use their proposals for SBIR/STTR awards as an opportunity to develop a relationship with a university or other research institutions. These programs allow innovative small businesses to offset the cost of R&D while leaving them in control of any developed IP.

SBIR and STTR Differences

While SBIR and STTR awards are extremely similar in their structure and goals, the programs differ at two main points: project leadership and nonprofit research institution partners. SBIR awards require the project’s principal investigator to be employed primarily—more than half-time—by the small business during the award period while STTR does not define employment criteria for the project’s principal investigator. In addition, STTR requires the small business to have a formal collaboration agreement with a nonprofit research institution during Phases I and II. The research institution is then responsible for at least 30 percent of the total effort for the project, and the small business is responsible for at least 40 percent. On the other hand, SBIR encourages—but does not require—nonprofit research institution partnership. A research institution can complete up to 33 percent of the total effort for a Phase I project and up to 50 percent of the total effort for a Phase II project, as applicable.

SBIR Structure

The SBIR program encourages domestic small businesses to engage in federal R&D that has the potential for commercialization. As a competitive awards-based program, SBIR enables small businesses to explore their technological potential and provides incentives to profit from its commercialization.  To accomplish these goals, the SBIR program is structured into three phases.

Phase I: Under Phase I, a business establishes the technical merit, feasibility and commercial potential of the R&D efforts. In addition, the agency will determine the quality of performance of the small business awardee prior to providing further federal support and funding in Phase II. Phase I awards normally will not exceed $150,000 for six months of performance.

Phase II: If a small business shows promise in their research and moves on to Phase II, it is eligible to receive an additional round of funding. Phase II continues to focus on the R&D efforts with the funding now based upon the results of Phase I. Only Phase I awardees are eligible for a Phase II award which normally does not exceed $1 million over two years.

Phase III: Lastly, Phase III occurs when the small business, as appropriate, purses commercialization objectives resulting from its R&D activities. The government does not fund this stage of the process. Instead, some agencies may follow on with non-SBIR funded R&D or production contracts for products, processes, or services intended for use by the government.

State Matching Programs

The federal government is not always the sole contributor to a small business’s SBIR/STTR award. Currently, 15 states have opted to establish a federal funds matching program, further encouraging small businesses operating within its borders to apply for these types of awards. Every state’s matching incentive is unique to that state. However, all matching programs show a desire for more innovation among small businesses.

The risk and expense of conducting serious R&D efforts are often beyond the means of many small businesses. By reserving a specific percentage of federal R&D funding for small businesses and states adding to the funding, small businesses are able to pursue R&D activities that they might not otherwise have the resources to pursue. SBIR funds assist during this critical startup and development stages while encouraging the eventual commercialization of the research.

The following chart provides a general overview of states’ matching programs:

**Chart Information provided by NIH at https://ncats.nih.gov/smallbusiness/resources/federal-state