On December 21, 2018, the U.S. Government Accountability Office (GAO) published a report analyzing contract and grant awards of Small Business Innovation Research (SBIR) funding to small businesses owned by multiple venture capital (VC) companies, hedge funds, or private equity firms between 2015 and 2018.  In 2011, agencies were given the authority to award SBIR funds to small businesses owned by multiple venture capital companies, hedge funds, or private equity firms (investment companies and funds), however these awards were not to exceed either 25% or 15% of the agencies’ SBIR budgets depending on which agency was making the award.  The GAO found that of the 11 federal agencies participating in the SBIR program, only three agencies (the Department of Health and Human Services’ National Institutes of Health (NIH), the Department of Energy’s Advanced Research Projects Agency-Energy (ARPA-E), and the Department of Education’s Institute for Education Sciences) awarded contracts or grants to small businesses majority-owned by multiple venture capital operating companies, hedge funds, or private equity firms.  These three agencies made a total of 62 awards and obligated $43.6 million to such businesses from 2015 to 2018, only amounting to 0.1% to 2.7% of the three agencies’ total SBIR awards.

Of these awards, NIH made 60 of the 62 total awards amounting to approximately $43.2 million of the $43.6 million total amount awarded.  NIH was also the only agency to make awards to small businesses majority-owned by investment companies and funds in all four fiscal years analyzed in the GAO report.  According to NIH, it decided to allow small businesses majority-owned by multiple investment companies and funds to participate in its SBIR program because very few small businesses had the means to commercialize their technologies without private investment funding due to the extreme costs of taking biomedical products to market, and small businesses that gain early funding are more likely to bring breakthrough health discoveries to public markets.  The ARPA-E obligated $250,000 to an existing Phase II project in FY 2015, amounting to less than 1% of ARPA-E’s total SBIR funds available for that year.  In FY 2018, the Institute of Education Sciences awarded only $200,000.

Why Agencies Are Reluctant to Make SBIR Awards to Small Businesses Owned by Investment Funds

The data reveals that agencies still appear very reluctant to make SBIR awards to small businesses owned by multiple investment firms or funds.  The most common reasons cited by agencies for not using their authority to make SBIR awards to small businesses majority owned by multiple investment companies and funds included (1) an unknown or anticipated small level of interest from such businesses in applying for SBIR awards, and (2) a belief that such companies do not need SBIR funds because of more access to capital and financial backing than typical small businesses.  Agencies also noted various other reasons, including the focus of the SBIR program on early stages of R&D, and a belief that most small businesses majority owned by multiple investment companies and funds had R&D efforts in their later stages, making them ineligible for award.  A limitation of SBIR funds was also listed as a concern, considering all participating agencies are limited to awarding these businesses only 15% or 25% of their SBIR funds. Whatever the reason is, agencies are not fully utilizing their statutory authority to award SBIR funds to VC-backed small businesses, thus potentially keeping certain R&D efforts from reaching commercialization.