Recent Research: SBIR companies support critical national needs

Over the past 40 years, many people involved in SBIR and empirical analysts in the research, finance, and technology sectors have said SBIR awardees, as a group, are uniquely important for America’s innovation goals. Research presented in a recent NBER working paper provides further evidence backing up those claims and reveals SBIR companies may be preferable for innovation productivity and efficiency—particularly for advancing strategic national, social and environmental goals—to innovation-oriented companies simply backed by venture capital, the finance instrument most often tracked for evidence of innovation success or progress.

Researchers Kyle R. Myers, Lauren Lanahan, and Evan Johnson write in “Small Business Innovation Applied to National Needs” that SBIR-backed businesses produce three times more patents per firm and nearly eight times the federal contract engagement than their VC-based counterparts, yet SBIR firms have 15% lower employment figures. 

SBIR winners also were found to have less revenue than VC-backed firms. While not a comparable measure to profitability, revenue metrics often drive VC based business models with aspirations of attracting future investments or successful exit opportunities for the investors through mergers, acquisitions or public offerings.

The researchers used newly matched data on SBIR awards and venture capital investments to investigate the strategies and outcomes of SBIR-backed businesses, including the role of small businesses in addressing national technological needs. The authors explored the SBIR program's impact on innovation, commercialization, and federal procurement, and discussed how government support can effectively bridge the gap between social and private returns on investment.

According to the authors, the differences in outcomes between SBIR-backed businesses and VC-backed businesses suggest that SBIR firms are directed towards technologies that are critical to the funding agencies and/or have high potential societal value, while VC firms focus on broader, scale-focused growth strategies. They surmise that the appetite for risk is generally higher in smaller organizations, leading them to excel in developing innovations for small-scale, uncertain, and well-defined problems. In contrast, larger organizations are better suited for high-cost projects with clear potential for future contracts. ​The paper also points out that small businesses can contribute significantly to larger networks or systems despite their individual scale, including, for example, the creation of components of fighter jets and Mars rovers.

The authors linked SBIR, VC, procurement, and patenting outcomes at the firm level. The dataset included over 10,000 unique businesses, which the authors were able to match across different data sources, including, the National Establishment Time Series (NETS), SBIR Awards data, Crunchbase, USPTO’s PatentsView and the Federal Procurement Data System. The final data source in the list allowed the research team to estimate how SBIR funding might influence the ability of businesses to secure federal contracts and affect the value of those contracts.

Drawing from their findings of SBIR driving more innovation productivity and VC-backed firms capturing more revenue, the authors then turn to suggesting a need for collaboration among small businesses, venture capitalists, and government agencies to more exploit the different attributes each brings to innovation driven to support critical national long-term competitiveness. ​

Finally, the authors suggest that future evaluations of the SBIR program should focus on idea-level outcomes rather than just firm-level metrics, so as to better understand the program's impact on innovation and society. Traditional metrics of revenue or jobs created don’t fully capture the full contribution that SBIR firms make in meeting national needs.

This page was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.