To compete for SBIR awards, firms must meet size, ownership, and other  eligibility criteria. Key Characteristics of NIH’s and DoD’s SBIR Awards for Fiscal Years 2001 through 2004

During fiscal years 2001 - 2004, NIH and DoD made a total of 16,019 SBIR  awards valued at $5.3 billion. Characteristics of NIH and DoD SBIR Awards Made to Firms that Had Received Venture Capital Investment

Firms that had received venture capital investment received a relatively  small percentage of the NIH and DoD SBIR awards, although they received  a somewhat larger percentage of awards from NIH than DoD. Few Awards above the Guidelines Were Made to Firms That Had Received Venture Capital Investment Although These Firms Tend to Receive Larger Awards

While about half of NIH awards and 12 percent of DoD awards were above  the guidelines, less than 20 percent of such awards at NIH and about 8  percent at DoD went to firms that had received venture capital investment. A similar relationship existed for  DoD’s phase I awards but not for its phase II awards. Number and Value of NIH and DoD SBIR Awards That Were above the Guidelines

From fiscal years 2001 through 2004, 2,674 of the 5,061 SBIR awards made  by NIH exceeded the guidelines. These awards totaled about $1.4 billion  and accounted for 70 percent of NIH’s SBIR dollars. Extent to Which NIH and DoD SBIR Awards above the Guidelines Were Made to Firms That Had Received Venture Capital Investment

At both NIH and DoD, most of the awards that exceeded the guidelines  went to firms that had not received venture capital investment. Specifically, firms that had received venture capital were twice  as likely as firms that had not received such investment to receive phase II  awards from NIH greater than $1 million, which accounted for about 37  percent of NIH’s phase II dollars; these firms were about six times more  likely to receive phase II awards greater than $2.5 million, which accounted  for about 7 percent of the phase II dollars. For example,  over the 4-year period, the number of awards that DoD made to firms  that had received venture capital investment increased by 167 percent,  compared to a 65 percent increase in awards to firms that had not. For example, at DoD, the total number of applications  in fiscal years 2001 and 2002 was 22,139 and the total number of  applications received in fiscal years 2003 and 2004 was 33,922. NIH, DoD, and SBA Focus Largely on Select Eligibility Criteria and Collect Limited Data on SBIR Awardees

NIH, DoD and SBA focus primarily on criteria relating to ownership, for- profit status, and the number of employees to determine a firm’s eligibility  for the SBIR program and take steps to verify eligibility information  provided by applicants. When NIH or DoD officials are unable to ensure the  accuracy of an applicant’s information, they refer the matter to SBA. Each agency limits its data collection  efforts largely to information about the SBIR award itself, such as award  size and location of the principal investigator, and does not collect  information on certain characteristics of the firms receiving the awards,  such as the presence of venture capital investment. Although agencies rely largely on applicants to self-certify that they meet  the SBIR program’s eligibility criteria, both NIH and DoD make additional  efforts to ensure the accuracy of the information provided by applicants  prior to making an award. NIH only provided technical comments that we have  incorporated, as appropriate. Moreover, DoD did  not find the results of our analysis surprising in light of differences in  markets for SBIR projects supported by NIH and DoD. SBA noted in its  comments that while the information in the report may be useful, it could  be misconstrued as suggesting a link between the presence of venture  capital investment and SBIR ownership criteria when such a link does not  exist. Scope and Methodology

In conducting our work, we interviewed officials at the National Institutes  of Health (NIH), the Department of Defense (DoD), and the Small Business  Administration (SBA) about their procedures in place, and any changes  that occurred during the time period of our review—fiscal years 2001  through 2004.
Why GAO Did This Study

The Small Business Innovation Research (SBIR) program is a three phase program that increases the use of small businesses to meet federal research needs and encourages commercialization of this research. Venture capital is one source of funding to help commercialize SBIR projects. To receive an award firms must meet ownership and other criteria and awards may exceed dollar guidelines. In 2002, the Small Business Administration (SBA) clarified that majority owners of firms that receive awards must be individuals rather than corporations. Since 2002, controversy has arisen over the extent to which venture capital firms may own SBIR firms. GAO was asked to provide information on SBIR for fiscal years 2001 - 2004. For NIH and DOD, we determined the (1) number and characteristics of awards, (2) number and characteristics of awards above the guidelines, (3) changes in award characteristics after 2002, and (4) factors agencies consider, and data they collect on, SBIR awards. NIH, DOD, and SBA provided technical comments that were incorporated, as appropriate. DOD said our findings were not surprising in light of differences in the markets for SBIR projects. SBA said our findings, though useful, may be misconstrued as suggesting a link between venture capital investment and SBIR eligibility, when no such link exists.

What GAO Found

During fiscal years 2001-2004, the National Institutes of Health (NIH) and Department of Defense (DOD) made 16,019 SBIR awards valued at $5.3 billion. GAO identified the following characteristics of these awards: (1) most were concentrated in a few states; (2) a few agency component made most of the awards; (3) award amounts ranged from well below the guidelines to significantly above; (4) few awards were made to firms that had received venture capital investment, NIH made more than DOD; and (5) firms that received DOD SBIR awards were relatively small-sized. Overall, from fiscal year 2001 through 2004, about half of NIH awards and 12 percent of DOD awards exceeded the guidelines, and most went to firms that had not received venture capital investment. Awards above the guidelines accounted for 70 percent of NIH's SBIR dollars and 23 percent of DOD's. Agency officials said NIH and DOD made such awards generally to fund relatively expensive research or to ensure high-quality results. Awards above the guidelines to firms that had received venture capital investment accounted for 18 percent of NIH's awards above the guidelines, and about 8 percent of DOD's. At NIH, firms that had received venture capital investment were more likely to receive the largest awards than firms that had not. A similar relationship existed for DOD's phase I awards but not for its phase II awards. Since 2002, when SBA clarified SBIR ownership eligibility criteria, an increasing number of awards have been made to small business firms that had received venture capital investment; such firms have generally received larger awards at NIH and, in the aggregate, a larger share of NIH's and DOD's available SBIR funds. In addition, the average phase II award amount to firms that had received venture capital investment increased by over 70 percent, from about $860,000 in fiscal year 2001 to about $1.5 million in fiscal year 2004. As a result, such firms attracted a greater percentage of NIH's total SBIR dollars each year--about 21 percent on average in fiscal years 2003 and 2004, compared to an average of about 14 percent in fiscal years 2001 and 2002. At DOD we found similar trends, but to a somewhat lesser extent. NIH, DOD, and SBA focus mainly on SBIR eligibility criteria relating to ownership, for-profit status, and the number of employees when reviewing applications. Although applicants self-certify that they meet these criteria, both NIH and DOD make efforts to verify the accuracy of the information prior to making an award. When agency officials are unable to verify the accuracy of an applicant's information, they refer the matter to SBA. Both agencies limit their data collection efforts largely to information about the SBIR award itself, such as award size. Agencies are not required to gather data on characteristics of the firms receiving the awards, such as the presence of venture capital investment; as a result, this information is currently not being collected.