Understanding the Investment
For four decades, the Department of Defense (DoD) has allocated a staggering $35 billion to the Small Business Innovation Research (SBIR) program, with plans to distribute an additional $1.5 billion annually. But what metrics determine success? Is it simply the number of small businesses funded and jobs created, or should the emphasis be placed on the operational capabilities delivered to the nation’s warfighters?
With SBIR expiration looming this fall, Congress faces a pivotal moment to redefine the strategic objectives of this crucial program, which plays a vital role in integrating advanced technologies into military operations. If the aim is to deliver innovative capabilities swiftly and effectively, SBIR—and similar initiatives—must align with the private sector’s momentum in national defense innovation.
The Push for Strategic Breakthrough Funding
A significant step toward enhancing SBIR’s impact would be the passage of a reauthorization bill that incorporates the Strategic Breakthrough Funding (SBF) program, a proposal championed by Senator Joni Ernst through the INNOVATE Act. SBF would empower small businesses by offering up to $30 million in SBIR funds, provided these funds are matched by non-SBIR government contracts or private investments. This initiative could invigorate the small business defense industrial ecosystem.
A Historical Context
Established by the Small Business Development Act of 1982, SBIR funding is carved from extramural research and development budgets, representing one of the largest segments of DoD funding not confined by congressional appropriations. Originally, SBIR aimed to harness the innovative capabilities of small businesses to fulfill federal R&D needs, especially in accelerating technology for pressing national security issues.
For the first 25 years, SBIR primarily focused on early-stage innovation, financing feasibility studies and prototyping. However, by the mid-2000s, it became clear that many companies, despite having viable ideas and prototypes, faced a significant hurdle: the absence of a pathway to operational adoption. In response, the SBIR Reauthorization Act of 2011 introduced reforms aimed at bridging this „Valley of Death” where startups struggled to transition from prototype to program acceptance.
Reforms and Their Impact
The most notable outcome of the 2011 reforms is the Strategic Funding Increase (STRATFI) program, managed by AFWERX and SpaceWERX. This initiative allows for matching up to $15 million in SBIR funds in a 1:1:2 ratio with contributions from DoD program offices and private investors, yielding potential awards of up to $60 million. To date, over 65 companies have benefited from STRATFI funding, developing systems that range from advanced firearms to hypersonic vehicles.
These strategic reforms coincided with the emergence of a dynamic cohort of defense startups. Currently, over 200 venture-backed companies are addressing critical national security challenges across diverse domains such as space, autonomy, cyber, and advanced manufacturing. Staffed by elite engineers from both Silicon Valley and traditional defense sectors, they embody a new model of capability development rooted in commercially viable technology.
The Startup Challenge
While the defense innovation landscape is vibrant, startups operate within strict timelines. Capital investments follow cyclical trends, with escalating expectations at each fundraising stage. For instance, a startup may secure a $25 million Series A round based on $10 million in contracts. To advance to a $40–50 million Series B—crucial for reaching operational capability—a company might need to demonstrate $20 million in booked annual revenue. Here, government contracts serve as essential demand signals, not only for procurement but also for investor confidence. Neglected signals can severely impact progress.
Proposals for Improvement
While STRATFI is a promising approach, it requires refinement to truly align with the pace and scale of private investments. Recommendations include:
- Expanding STRATFI’s Duration and Funding: The four-year limitation and $15 million funding cap should be adjusted. A framework offering two increasingly substantial awards, spaced two years apart, would help maintain investor trust.
- Adjusting Matching Fund Criteria: Current regulations permit companies to count prior investments as matching funds. Legislation should mandate that matching funds be secured post-award notification, thereby encouraging additional investment commitments as a direct result of the award.
- Broadening Access Across Military Branches: STRATFI, currently limited to the Department of the Air Force, should be made accessible to acquisition executives in all military branches to fully capitalize on the burgeoning innovation landscape.
A Path Forward
Crucially, implementing these changes does not necessitate sweeping acquisition reforms. Many of the proposed modifications are already encapsulated within the Strategic Breakthrough Funding outlined in the INNOVATE Act. This program aims to elevate matching caps to $30 million, diminish bureaucratic hurdles, and enhance funding accessibility across the DoD.
