Change in SBIR Program Eligibility Has Had Little Impact

In 2013, HHS and DOE each provided a written determination to SBA and  Congress prior to making SBIR awards to majority-owned portfolio  companies. DOE’s written determination covered one of its two subunits that  participate in SBIR, the Advanced Research Projects Agency-Energy  (ARPA-E), which according to agency officials accounted for about 4  percent of the DOE SBIR awards in fiscal year 2013.officials told us that by opening their SBIR programs to majority-owned   NIH and ARPA-E  portfolio companies, they would help ensure that they received the  highest quality applications with the best scientific research, regardless of  whether a small business has venture capital support. awards made comprise less than 1 percent of NIH’s and ARPA-E’s SBIR  applications and awards. ARPA-E and NIH collectively received a total of  20 applications from majority-owned portfolio companies in fiscal years  2013 and 2014, compared to 11,906 applications from applicants that  were not majority-owned portfolio companies. The representatives said they did not encounter any significant  problems applying for SBIR awards or receiving SBIR funds. Most Participating Agencies Have Not Exercised Their Authority to Open Their SBIR Programs to Majority-Owned Portfolio Companies

Nine agencies have chosen not to open their SBIR programs to majority- owned portfolio companies, and therefore have not submitted a written  determination to do so. All but one of the agencies told us they may reevaluate their decisions in  the future, but generally did not have any specific plans for doing so. Officials at the  Departments of Commerce and Transportation and the Environmental  Protection Agency said they are waiting to see how the change in  eligibility affected ARPA-E and NIH before they reconsider implementing  the change at their own agency. Some Agencies Are Interpreting the Written Determination as a Potentially Stringent Requirement

In our discussions with the nine participating agencies that did not open  their SBIR programs to majority-owned portfolio companies, we found  that six agencies viewed the written determination as a potentially  stringent requirement. The NDAA requires agencies to submit a written  determination to SBA and Congress at least 30 days before making SBIR  awards to majority-owned portfolio companies. SBA reviews these determinations, but it does not  approve or deny them. Officials at the National Science Foundation told us that  they did not have the evidence to support the written determination  outcomes, while a program manager at the Department of Agriculture  said that the requirement is an administrative burden, and if the barrier  was lower, the agency might allow majority-owned portfolio companies to  participate in its SBIR program. The policy directive  essentially uses the same language as the NDAA and does not provide  any specific guidance on what evidence participating agencies may need  to consider to comply with the written determination requirement. According to the SBA officials, SBA  meets routinely with SBIR program managers, and no agency has raised  concerns about the written determination requirement. In its proposed and final rules implementing the NDAA provisions, SBA  stated one potential benefit of the rule is to provide more businesses with  access to the SBIR program, which would increase competition and the  quality of proposals and spur innovation. Nonetheless, by providing additional guidance  on the requirement, SBA could better inform the agencies about the  evidence that they may consider in the written determination to explain  how making SBIR awards to majority-owned portfolio companies will,  among other things, induce additional venture capital or similar funding of  small business innovation and substantially contribute to the agency’s  mission. SBA is not responsible for encouraging or discouraging  agencies to use the new authority and expand eligibility to include  majority-owned portfolio companies, but SBA, as the program  administrator, could be missing an opportunity to help agencies better  understand the evidence required for the written determination, which  could inform agencies’ decisions about whether to expand their program. Recommendations for Executive Action

To help ensure that participating agencies understand the requirements  of the NDAA provisions applicable to allowing majority-owned portfolio  companies to apply for SBIR awards, we recommend that the  Administrator of the Small Business Administration discuss the evidence  required for the written determination with the participating agencies, such  as at their monthly meeting or as part of another outreach effort, and, if  needed, and in consultation with the participating agencies, amend its  SBIR Policy Directive to provide additional guidance. SBA, the  Departments of Health and Human Services, Homeland Security, and  Transportation, and the National Science Foundation provided technical  comments, which we incorporated, as appropriate. Our recommendation addresses this issue, and SBA’s plan to discuss the  written determination with SBIR program managers at a future meeting is  consistent with our recommendation.
Why GAO Did This Study

The SBIR program provides grants and contracts to small businesses to develop and commercialize innovative technologies. The 2011 SBIR reauthorization included a provision that gave agencies the option to allow majority-owned portfolio companies to participate in SBIR. SBA issued a rule to implement the statutory provision, which became effective in January 2013. The reauthorization act requires agencies to submit a written determination to SBA and Congress, explaining how such awards will, among other things, significantly contribute to the agency's mission, before making SBIR awards to majority-owned portfolio companies.
The reauthorization mandated GAO to review the impact of this provision every 3 years. This is the first report under the mandate, and it examines (1) the impact of allowing majority-owned portfolio companies to participate in agency SBIR programs and (2) the extent to which agencies have elected to expand their SBIR programs to include majority-owned portfolio companies. GAO reviewed agency rules, policies, and other documents; analyzed SBIR data; and interviewed program officials from SBA and the 11 participating agencies, industry associations, and majority-owned portfolio companies.

What GAO Found

Two of the 11 agencies participating in the Small Business Administration's (SBA) Small Business Innovation Research (SBIR) program—the Department of Health and Human Services (HHS) and the Department of Energy (DOE)—opted to open part of their SBIR programs to small businesses that are majority-owned by multiple venture capital or similar firms (majority-owned portfolio companies), allowing such companies to apply for and receive SBIR awards. Specifically, HHS's National Institutes of Health (NIH) and the Department of Energy's Advanced Research Projects Agency-Energy (ARPA-E) opted to allow such companies to participate. For fiscal years 2013 and 2014, NIH and ARPA-E collectively received 20 applications from majority-owned portfolio companies and made 12 SBIR awards to them, totaling about $7.9 million. SBIR applications received and awards made to these companies comprise less than 1 percent of NIH and ARPA-E's SBIR applications and awards. NIH and ARPA-E officials said the change to allow majority-owned portfolio companies to apply for SBIR awards helps ensure that their SBIR programs receive the best research proposals.
For various reasons, the remaining nine agencies participating in SBIR have not submitted a written determination to allow them to make SBIR awards to majority-owned portfolio companies. According to officials from these agencies, they did not conduct any formal analysis but considered various factors, such as whether the change would significantly increase the number of applications, what administrative resources would be required to implement the change, and whether they had the evidence needed to prepare a written determination. All but one of the agencies told GAO that they may reevaluate their decision in the future, but did not have any specific plans for doing so. Officials from several agencies said that they wanted to see how the change in eligibility affected NIH and ARPA-E before implementing the change at their agencies.
GAO also found that some agencies viewed the written determination as a potentially stringent requirement. For their written determinations, NIH and ARPA-E did not conduct any independent research on majority-owned portfolio companies (nor were they specifically required to do so), but NIH cited related research. In contrast, six agencies viewed the written determination as potentially requiring independent analysis. Five agencies told GAO that they did not have the evidence or research needed to support a written determination, and another agency said it might consider opting in if it were easier to do so. According to SBA, the written determination is a notification letter that SBA reviews but does not approve or deny. SBA officials said they meet routinely with SBIR program managers, and this issue has not been raised. SBA updated its SBIR Policy Directive to include the written determination requirement but essentially used the same language as the reauthorization act without providing any specific guidance. In SBA's rule implementing the reauthorization act, SBA stated the rule's potential benefit is to provide more businesses with access to the SBIR program, which could increase competition and the quality of proposals and spur innovation. SBA is not responsible for encouraging or discouraging agencies to expand eligibility to include such companies, but SBA also has not discussed the issue with them. SBA could be missing an opportunity to help agencies better understand the evidence required for the written determination, which could inform the agencies' decisions whether to expand their program.

What GAO Recommends

GAO recommends that SBA discuss the written determination requirement with participating agencies and, if needed, provide additional guidance. SBA generally agrees with the recommendation and plans to discuss the written determination requirement at a future program managers meeting.