4 Takeaways on What Small Businesses Need from R&D

By Rebecca Pselos | MSGI Partner
President of Kite Tail Strategy 

This week the House Small Business Committee held a hearing on the Small Business Innovation and Research (SBIR) and Small Business Technology Transfer (STTR) programs.  These programs require reauthorization this year otherwise they expire in the fall.  Members and witnesses reinforced concerns that the U.S. is falling behind other countries when it comes to research and development and subsequent commercialization of new technologies.  SBIR/STTR provide a necessary path for the U.S. to support small businesses - our most innovative sector. The hearing highlighted four main recommendations for lawmakers to consider.  

1. Increase funding for small businesses. Less than 10 percent of federal research and development funding goes to small businesses; however, they are the most innovative sector.  Other countries, including the E.U. and China, are directing as much as 20 percent to small businesses.  In addition, other countries are targeting certain areas such as robotics, energy technology, and biomedical engineering.  Having SBIR/STTR prioritize funds for specifics areas has not occurred to date, but it may be time to do so to help the U.S. compete with other countries. 

2. More assistance for commercialization. Often referred to the Valley of Death, the transition from Phases 1 and 2 to commercialization (Phase 3) is challenging.  In theory, federal funding and venture capital complement each other - the first supporting research and the second supporting commercialization.  Venture capital requires a business to demonstrate commercial viability in order to justify an investment. A SBIR recipient has a difficult time demonstrating this when they finish Phase 1 and 2 making Phase 3 elusive for many. Again, this problem places the U.S. at a disadvantage compared to other countries that are assisting with commercialization.  Of note, Representative Houlahan referenced H.R. 652 - Research Advancing to Market Production (RAMP) for Innovators Act.  The bill provides commercialization services under the SBIR and STTR programs.

3. Support women-owned and minority-owned businesses. Minorities and women have a harder time accessing seed capital.  Women hold less than 20 percent of tech jobs and less than 5 percent of leadership positions in tech companies.  Part of this problem is that there is a significant funding gap from venture capital firms for women-owned businesses. 

4. Ease entry in the program, and make the program attractive.  Twenty-five percent of SBIR winners are new to the program.  This statistic generated several questions - how can the government encourage more businesses to partake in the program and should existing recipients be limited on the number of awards they can receive.  Witnesses strongly advocated for changes that address the fact that small businesses have limited resources and expertise to write award-winning application, even though they have extremely valuable ideas; manage the grants; and keep employees on payroll while they wait for Phase 2 funding, which can take up to 2 years.  Hurdles that make the program less attractive, especially when there is no guarantee of completing Phases 2 and 3.  Witnesses also explained why limiting the number of awards to individual businesses would be detrimental.