Small Business Innovation Research: Better Data and Clarity on Eligibility of Venture Capital-Owned Businesses Are Needed
Fast Facts
Agencies make Small Business Innovation Research awards to help small businesses bring their technologies to market. In this Q&A report, we review agencies' awards to businesses owned by venture capital firms, hedge funds, or private equity firms.
These awards increased substantially in FYs 2021-2023—largely due to awards from DOD. But DOD found reliability issues with its data on such firms, so the extent of the increase is unknown.
And some agencies may not understand when small businesses owned by these firms are eligible for the program.
We made related recommendations to DOD and the Small Business Administration, which oversees the program.
Highlights
What GAO Found
For decades, the Small Business Innovation Research (SBIR) program has provided federal funding to small businesses for technology development and commercialization. In fiscal year (FY) 2022, the 11 participating federal agencies made over 5,000 SBIR awards to small businesses valued at nearly $4 billion. In 2011, Congress amended the Small Business Act to give participating agencies the authority to make SBIR awards to certain small businesses that are majority owned by multiple venture capital operating companies (VCOC), hedge funds, or private equity firms (i.e., "qualified small businesses"). Agencies that use this authority must first submit a written determination to the Small Business Administration (SBA), which oversees the SBIR program, and certain congressional committees. Four agencies have used this authority to include qualified small businesses in their SBIR programs.
Only two of those agencies—the Departments of Defense (DOD) and Health and Human Services—made SBIR awards to qualified small businesses in FY 2021 through 2023. Despite this, the number of awards to such businesses and the dollars awarded to qualified small businesses appear to have increased substantially compared to the prior 6 years. The increase is largely due to Air Force's use of the authority beginning in FY 2021. However, the full extent of the increase is unknown; as a result of GAO's review, DOD uncovered reliability issues with the data used to identify its SBIR awards to qualified small businesses. DOD is taking steps to address data reliability, but these steps did not include processes to monitor the effectiveness of its efforts. Without quality data, DOD may report inaccurate information to SBA and may have difficulty meeting requirements to track its use of the authority to make awards to qualified small businesses.
Most agencies in the SBIR program have not used the authority to make SBIR awards to qualified small businesses. However, GAO found that some of these agencies may be inappropriately excluding some small businesses owned by VCOCs, hedge funds, or private equity firms that are eligible to participate in their SBIR programs without the agencies submitting a written determination to SBA and Congress. SBA updated its regulations in June 2016 and made other efforts to clarify eligibility rules for such businesses. Nonetheless, not all agencies were aware of the information SBA provided or fully understood VCOC-owned companies' eligibility, and officials from some of the agencies said eligibility issues related to small business ownership are potentially confusing. Without fully understanding the eligibility of companies owned by some VCOCs, hedge funds, or private equity firms, agencies may continue to inappropriately exclude certain companies from applying for and potentially receiving awards—contrary to SBIR program regulations and SBA guidance.
Why GAO Did This Study
Small businesses have been a major source of technology development in the U.S. economy but can face challenges obtaining the funding and investment needed to fully develop and commercialize their technologies. The SBIR program was established to increase the participation of small innovative companies in federally funded research and development. Eleven participating federal agencies make SBIR awards to small businesses. To qualify for awards, businesses must meet certain ownership and other eligibility criteria. The Small Business Act, as amended, authorizes agencies to allow participation in their SBIR programs by qualified small businesses.
The Small Business Act includes a provision for GAO to conduct a study of agencies' use of this authority and submit a report to Congress every 3 years. GAO's previous reports covered FY 2013 through 2020. This Q&A report, the fourth report in the series, provides information from FY 2021 through 2023 on the extent to which the 11 agencies in the SBIR program have elected to include qualified small businesses and the factors that have influenced these decisions.
GAO reviewed agencies' data on SBIR awards to qualified small businesses from FY 2021 through 2023, analyzed SBIR solicitations and other documents, and interviewed SBIR program officials from SBA and the 11 participating agencies.
Recommendations
GAO is making two recommendations, one to DOD and one to SBA. GAO is recommending that DOD monitor the effectiveness of its efforts to address the reliability issues in its data used to identify DOD's SBIR awards to qualified small businesses. GAO is recommending that SBA take further steps to ensure that all agencies understand the eligibility of small businesses with differing levels of VCOC, hedge fund, or private equity ownership to participate in SBIR. DOD agreed with our recommendation. SBA disagreed with our recommendation, stating it already clarified eligibility in this area. However, we maintain that further steps are still needed to ensure all agencies fully understand the SBIR program regulations and do not inappropriately exclude eligible businesses.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Defense | 1. The Secretary of Defense should ensure that the DOD SBIR/STTR Program Office in OUSD(R&E) or other appropriate entity monitors the effectiveness of the recent efforts to improve the quality of the data used to identify its SBIR awards to "qualified small businesses" (awarded under 15 U.S.C. § 638(dd)), including through periodic evaluations of the accuracy of DOD's data in identifying awards to such businesses. (Recommendation 1) |
When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
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| Small Business Administration | 2. The Administrator of the SBA should take steps—such as clarifying the SBIR policy directive or eligibility guide or suggesting model language for SBIR solicitations—to ensure that all agencies participating in the SBIR program fully understand the eligibility of small businesses with differing levels of ownership by VCOCs, hedge funds, or private equity firms. (Recommendation 2) |
When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
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