New Law Allows Venture Capital-Backed Small Businesses to Qualify for SBIR and STTR Grants

After years of debate and political maneuvering, Congress last month approved a six-year reauthorization of the Small Business Innovation Research (“SBIR”) and Small Business Technology Transfer (“STTR”) programs that for the first time expressly permits venture capital-backed companies to compete for funds provided by participating agencies.  The reauthorization was included in the National Defense Authorization Act which President Barack Obama signed into law on December 31, 2011.  Since 2008, the SBIR and STTR programs have survived through a series of temporary extensions.    

Each program sets aside government research and development money for small businesses to create and commercialize technology innovations.  Last year, the SBIR program alone distributed approximately $2.5 billion in funding to small businesses, according to government data. 

The SBIR and STTR reauthorization provisions allow for greater participation by venture capital-backed companies in these programs so long as no single venture capital fund holds a 50% or greater stake in the company.  The provisions also permit companies backed by private equity and hedge funds to participate in these programs.  Previously, small companies majority-owned by investment firms did not qualify as small businesses because they were not independently owned. 

Key elements of the provisions include:

• Reauthorizing the programs for six years;
• Allowing small businesses that are owned in majority by multiple venture capital operating companies, hedge funds or private equity firms to compete for up to 25% of SBIR funds distributed by the National Institute of Health, the Department of Energy and the National Science Foundation, and to compete for up to 15% of SBIR funds distributed by other participating federal agencies;
• Increasing both Phase I and Phase II award levels, which have not been raised since 1982. The award guidelines for SBIR and STTR awards are increased from $100,000 to $150,000 for Phase I and from $750,000 to $1 million for Phase II, allowing for an additional Phase II on the same project should it be especially promising;
• Increasing the SBIR program allocation from 2.5 to 3.2% and the STTR allocation from 0.3 to 0.45% over the course of the reauthorization, which allows more access for small businesses to compete for R&D funds.

The reauthorization of the SBIR and STTR programs has been hailed by a number of leading emerging growth technology company and small business organizations, including the Small Business Technology Council (“SBTC”), the Biotechnology Industry Organization (“BIO”) and the National Venture Capital Association (“NVCA”), as addressing the capital raising challenges often faced by early-stage technology oriented companies.