SMALL BUSINESS 

INNOVATION 

RESEARCH

Change in Program 

Eligibility Has Had 

Little Impact

Report to Congressional Committees

November 2014

GAO-15-68

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-15-68, a report to 

congressional committees

November 2014

SMALL BUSINESS INNOVATION RESEARCH

Change in Program Eligibility Has Had Little Impact

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 majorityowned 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 majorityowned portfolio companies.

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. 

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.

View GAO-15-68. For more information, 

contact Cindy Brown Barnes at (202) 512-

8678 or brownbarnesc@gao.gov.
Page i GAO-15-68 Small Business Innovation Research

Letter 1

Background 5

Change in SBIR Program Eligibility Has Had Little Impact 7

Most Participating Agencies Have Not Exercised Their Authority to 

Open Their SBIR Programs to Majority-Owned Portfolio 

Companies 11

Conclusion 18

Recommendations for Executive Action 18

Agency Comments and Our Evaluation 19

Appendix I GAO Contact and Staff Acknowledgments 21

Figure

Figure 1: Summary of Majority-Owned Portfolio Company and 

Other Company SBIR Participation in ARPA-E and NIH in 

Fiscal Years 2013 and 2014 9

Abbreviations

ARPA-E Advanced Research Projects Agency-Energy

CDC Centers for Disease Control and Prevention

DOE Department of Energy

HHS Department of Health and Human Services

NDAA National Defense Authorization Act for Fiscal Year 2012

NIH National Institutes of Health

R&D research or research and development

SBA Small Business Administration

SBIR Small Business Innovation Research

Contents

This is a work of the U.S. government and is not subject to copyright protection in the 

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without further permission from GAO. However, because this work may contain 

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Page 1 GAO-15-68 Small Business Innovation Research

441 G St. N.W.

Washington, DC 20548

November 20, 2014

The Honorable Maria Cantwell

Chairwoman

The Honorable James E. Risch

Ranking Member

Committee on Small Business and Entrepreneurship

United States Senate

The Honorable Sam Graves

Chairman

The Honorable Nydia M. Velázquez

Ranking Member

Committee on Small Business

House of Representatives

Starting in 2013, implementation of the National Defense Authorization 

Act for Fiscal Year 2012 (NDAA) enabled agencies to allow small 

businesses that are majority owned by multiple venture capital operating 

companies, hedge funds, or private equity firms (majority-owned portfolio 

companies) to participate in the Small Business Innovation Research 

(SBIR) program. In 1982, Congress established the SBIR program to, 

among other things, stimulate technological innovation related to federal 

agency goals and missions, use small businesses to meet federal 

research or research and development (R&D) needs, and increase 

private sector commercialization of innovations derived from federal 

R&D.1 In fiscal year 2013, federal agencies made more than 4,000 

awards totaling more than $2.1 billion through the SBIR program. Over 

the program’s first two decades, some majority-owned portfolio 

companies participated in SBIR, without any apparent adverse 

consequence for the program’s operation and achievements, according to 

a study by the National Academy of Sciences.2

 1

Small Business Innovation Development Act of 1982, Pub. L. No. 97-219, 96 Stat. 217 

(1982).

However, in 2003, a Small 

Business Administration (SBA) administrative law judge issued a decision 

2

See Committee for Capitalizing on Science, Technology, and Innovation: An Assessment 

of the Small Business Innovation Research Program, National Academy of Sciences, 

Venture Funding and the NIH SBIR Program, Charles W. Wessner, ed. (The National 

Academies Press, Washington, D.C.: 2009). 
Page 2 GAO-15-68 Small Business Innovation Research

holding that such companies were ineligible to receive SBIR awards.3

The NDAA reauthorized the SBIR program through fiscal year 2017 and 

included provisions that allow SBIR participating agencies to permit 

majority-owned portfolio companies to participate in their SBIR 

programs.

The 

decision raised concerns that some portfolio companies were being 

unfairly excluded from SBIR and that important research was not being 

funded. Others supported the decision, contending that small businesses 

without venture capital funding would not be able to compete against 

small businesses with such funding.

4 In December 2012, SBA issued a final rule to implement the 

NDAA provisions and revise SBIR’s eligibility criteria to include majorityowned portfolio companies, which became effective in January 2013.5

 3

To qualify for SBIR awards, small businesses must meet certain SBIR ownership and 

other eligibility criteria, such as being more than 50 percent owned by individuals who are 

U.S. citizens or permanent resident aliens. 13 C.F.R. § 121.702(a). In 2003, an SBA 

administrative law judge issued a decision stating that venture capital firms could not be 

considered “individuals” for the purpose of satisfying the ownership criteria for the 

program. Size Appeal of Cognetix, Inc., SBA No. SIZ-4560 (2003).

The act allows but does not require agencies to permit majority-owned 

portfolio companies to participate in their SBIR programs. In order to 

allow such companies to participate, SBIR participating agencies must 

submit a written determination to SBA and Congress, explaining how 

making SBIR awards to such companies will, among other things, induce 

additional venture capital funding of small business innovations and 

4

Pub. L. No. 112-81, Tit. LI, 125 Stat. 1298, 1823 (2011). The NDAA also reauthorized the 

Small Business Technology Transfer program, which was initiated in 1992 for the purpose 

of stimulating a partnership of ideas and technologies between innovative small 

businesses and research institutions through federally funded R&D. Research institutions 

include nonprofit colleges or universities and federally funded research and development 

centers. The Small Business Technology Transfer program is outside the scope of our 

review because SBA’s final rule does not permit majority-owned portfolio companies to 

participate in that program.

5

77 Fed. Reg. 76,215 (Dec. 27, 2012).
Page 3 GAO-15-68 Small Business Innovation Research

substantially contribute to the agency’s mission.6 In addition, the NDAA 

mandates that GAO conduct a study of the impact of requirements related 

to participation in the SBIR program by majority-owned portfolio 

companies and issue a report every 3 years, with the first report due by 

December 31, 2014.7

To address our objectives, we obtained and reviewed the written 

determinations submitted by the agencies to SBA and Congress—that is, 

those submitted by the Department of Energy (DOE) and National 

Institutes of Health (NIH). We also reviewed the NDAA and related 

congressional record and hearings on SBIR; SBA’s proposed and final 

rules implementing the NDAA by revising the eligibility criteria for SBIR, 

including comment letters submitted in response to the proposed rule; 

and SBA’s SBIR Policy Directive, annual reports, and other related 

material. We also reviewed and analyzed SBIR data on solicitations, 

applications, and awards from DOE and NIH during fiscal years 2013 and 

2014, to identify awards made to majority-owned portfolio companies; 

data from the other nine SBIR participating agencies on SBIR awards 

they made during fiscal year 2013; and data on majority-owned portfolio 

This report 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. Our 

analysis of the impact focuses on determining which agencies opened 

their SBIR programs to majority-owned portfolio companies and how 

many of these companies applied for and received SBIR awards.

 6

Specifically, an agency must submit a written determination to the Senate Committee on 

Small Business and Entrepreneurship, the House Committee on Small Business, and the 

House Committee on Science, Space, and Technology at least 30 calendar days before it 

begins making awards to majority-owned portfolio companies. The written determination 

must include four elements that explain how allowing majority-owned portfolio companies 

will: (1) induce additional venture capital, hedge fund, or private equity firm funding of 

small business innovations; (2) substantially contribute to the mission of the federal 

agency; (3) demonstrate a need for public research; and (4) otherwise fulfill the capital 

needs of small business concerns for additional financing for SBIR projects. 15 U.S.C. § 

638(dd)(1)-(2).

7

Pub. L. No. 112-81, § 5142 (codified at 15 U.S.C. § 638a). The NDAA also includes 

provisions that require the participating agencies, in consultation with SBA, to commission 

a study by the National Academy of Sciences to review the SBIR program, including the 

value and quality of the research, economic and non-economic benefits, and jobs created. 

Additionally, the National Research Council has completed studies on the SBIR program 

under previous mandates, including a study on the impact of venture funding at the 

National Institutes of Health.
Page 4 GAO-15-68 Small Business Innovation Research

companies and other small businesses registered with SBA. To assess 

the reliability of these data, we interviewed agency officials about the 

source of the data and data quality control procedures for the data and 

reviewed relevant documentation. We determined the data were 

sufficiently reliable for the purposes of this report. In addition, we 

reviewed studies on SBIR by the National Academy of Sciences, 

Congressional Research Service, and GAO. We interviewed officials from 

SBA and the 11 SBIR participating agencies about SBIR, including SBA’s 

rule implementing the NDAA’s amendments to SBIR’s eligibility criteria 

and their decisions on whether to submit a written determination. We also 

interviewed officials from three industry associations representing small 

businesses or venture capital firms, a researcher from the National 

Academy of Sciences, a venture capital firm, and a consultant about 

SBIR, including the potential impact of expanding SBIR to include 

majority-owned portfolio companies and the potential interest of such 

companies in SBIR. We selected these organizations and individuals to 

interview based on our review of the congressional record and SBIR 

hearings and our discussions with SBA and participating agencies. In 

addition, we interviewed all four majority-owned portfolio companies that 

received SBIR awards from one of the two participating agencies that 

submitted a written determination, as of May 2014, when we made our 

initial data request. Finally, we interviewed four majority-owned portfolio 

companies that registered with SBA but had not yet applied for an SBIR 

award to obtain information on their experiences with SBIR. We selected 

the four companies based on their percent ownership by venture capital 

and area of primary research.

We conducted this performance audit from February 2014 to November 

2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Page 5 GAO-15-68 Small Business Innovation Research

Federal agencies with a budget in excess of $100 million for extramural 

R&D are required to establish and operate an SBIR program.8

The SBIR program includes the following three phases:

In fiscal 

year 2013, agencies participating in the SBIR program were required to 

spend at least 2.7 percent of their extramural R&D budgets on SBIR 

awards. Currently, 11 agencies participate in the SBIR program: the 

Departments of Agriculture, Commerce, Defense, Education, Energy 

(DOE), Health and Human Services (HHS), Homeland Security, and 

Transportation, and the Environmental Protection Agency, National 

Aeronautics and Space Administration, and National Science Foundation. 

Although each agency manages its own program, SBA plays a central 

administrative and oversight role.

• In phase I, agencies make awards to small businesses to determine 

the scientific and technical merit and feasibility of ideas that appear to 

have commercial potential. Phase I awards normally do not exceed 

$150,000. For SBIR, work in phase I generally lasts 6 to 9 months.

• In phase II, small businesses with phase I projects that demonstrate 

scientific and technical merit and feasibility, in addition to commercial 

potential, may compete for awards of up to $1 million to continue the 

R&D for an additional period, normally not to exceed 2 years.9

• Phase III is for small businesses to pursue commercialization of

technology developed in prior phases. Phase III work derives from, 

extends, or completes an effort made under prior phases, but it is 

funded by sources other than the SBIR program. In this phase, small 

businesses are expected to raise additional funds from private 

investors, the capital markets, or from non-SBIR funding sources 

within the government. While SBIR funding cannot be used for phase 

 8

Agencies’ R&D programs generally include funding for two types of R&D: intramural and 

extramural. Intramural R&D is conducted by employees of a federal agency in or through 

government-owned, government-operated facilities. Extramural R&D generally is 

conducted by nonfederal employees outside of federal facilities. Agencies are required to 

calculate their extramural R&D budget by subtracting amounts obligated for intramural 

R&D from total obligations for R&D.

9

Agencies may award a second, sequential, phase II award to continue a phase II project.

Background
Page 6 GAO-15-68 Small Business Innovation Research

III, agencies can participate in phase III by, for example, purchasing 

the technology developed in prior phases.10

SBA’s Office of Investment and Innovation is responsible for overseeing 

and coordinating the participating agencies’ efforts for the SBIR program 

by setting overarching policy and issuing policy directives, collecting 

program data, reviewing agency progress, and reporting annually to 

Congress, among other responsibilities. As part of its oversight and 

coordination role, SBA issued an updated SBIR Policy Directive in 

January 2014.11

Each participating agency must manage its SBIR program in accordance 

with program laws, regulations, and the policy directive. Each 

participating agency has considerable flexibility to design and manage the 

specifics of the program, such as determining research topics, selecting 

award recipients, and administering funding agreements. All of the 

agencies follow the same general process to obtain proposals from and 

make awards to small businesses for the SBIR program. At least 

annually, each participating agency issues a solicitation requesting 

proposals for projects in topic areas determined by the agency. Each 

agency uses its own process to review proposals and determine which 

proposals should receive awards. Also, each agency determines whether 

the funding for awards will be provided as grants or contracts.

The directive explains and outlines requirements for 

agencies’ implementation of the SBIR program. The policy directive 

includes information on program eligibility, proposal requirements, terms 

of agreement for SBIR awards, and responsibilities of SBA and 

participating agencies for the program.

The NDAA amended the SBIR program to permit agencies to allow 

participation by majority-owned portfolio companies, and the act imposes 

certain requirements on such companies and participating agencies. As 

discussed, before awarding SBIR funds to majority-owned portfolio 

companies, agencies must submit to SBA and Congress a written 

determination. The NDAA also imposes statutory caps on the percentage 

 10For examples of how one agency has used phase III awards, see GAO, Small Business 

Innovation Research: DOD’s Program Supports Weapon Systems, but Lacks 

Comprehensive Data on Technology Transition Outcomes, GAO-14-96 (Washington, 

D.C.: Dec. 20, 2013). 

11SBA, Office of Investment and Innovation, Small Business Innovation Research (SBIR) 

Program Policy Directive, www.sbir.gov (Washington, D.C.: Feb. 24, 2014). 
Page 7 GAO-15-68 Small Business Innovation Research

of participating agencies’ SBIR funds that may be awarded to majorityowned portfolio companies—25 percent for NIH, DOE, and the National 

Science Foundation, and 15 percent for the other participating agencies. 

If an agency awards more than the percentage of the funds set by the 

statutory cap, the agency must transfer any amount in excess of the cap 

from its non-SBIR R&D funds to the agency’s SBIR funds. Additionally, 

agencies may not use investment of venture capital or investment from 

hedge funds or private equity firms as a criterion for the award of 

contracts under the SBIR program. The NDAA also requires all majorityowned portfolio companies to register as such with SBA and indicate their 

majority-owned portfolio company status in any SBIR application. Finally, 

the NDAA required SBA to update the SBIR Policy Directive to conform to 

NDAA amendments, such as majority-owned portfolio company 

participation in the program.

In 2013, HHS and DOE each provided a written determination to SBA and 

Congress prior to making SBIR awards to majority-owned portfolio 

companies.12 More specifically, HHS’s written determination covered one 

of its four SBIR subunits, NIH, which according to agency officials 

accounted for about 98 percent of the HHS SBIR funds in fiscal year 

2013.13 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 2013.14

 12HHS submitted its determination letter on March 7, 2013, and DOE submitted its letter 

on August 29, 2013. 

NIH and ARPA-E 

officials told us that by opening their SBIR programs to majority-owned 

13HHS has four subunits that participate in SBIR: (1) the Administration for Children and 

Families; (2) Centers for Disease Control and Prevention (CDC); (3) Food and Drug 

Administration; and (4) NIH. NIH’s mission is to improve the health of humans. NIH is the 

largest source of funding for medical research in the world, and is made up of 27 institutes 

and centers that each has a specific research agenda. More than 80 percent of NIH’s 

budget goes to more than 300,000 research personnel at over 2,500 universities and 

research institutions. CDC submitted its written determination letter on July 30, 2014, and 

expects to begin making awards during fiscal year 2015. Thus, CDC is not part of this 

review.

14ARPA-E’s mission is to reduce U.S. dependence on energy imports, reduce U.S. 

energy-related emissions, improve energy efficiency across all sectors of the U.S. 

economy, and ensure that the United States maintains a technological lead in the 

development and deployment of advanced energy technologies.

Change in SBIR 

Program Eligibility 

Has Had Little Impact
Page 8 GAO-15-68 Small Business Innovation Research

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. In addition, NIH 

officials said that allowing majority-owned portfolio companies to 

participate in SBIR would increase the flexibility for SBIR companies to 

seek additional investment sources that would help support SBIR’s goal 

of commercialization. As part of its written determination, NIH cited a 

2009 National Academy of Sciences study, whose findings suggested 

that the most commercially promising companies were those that were 

repeatedly selected by both NIH for their promising technologies and by 

venture capital investors for their commercial potential.15

A few majority-owned portfolio companies have participated in SBIR since 

SBA’s final rule implementing the NDAA’s changes to the SBIR eligibility 

requirements took effect in January 2013. NIH and ARPA-E opened their 

solicitations to majority-owned portfolio companies in April 2013 and June 

2013, respectively.16 From October 2012 (start of fiscal year 2013) 

through September 2014 (end of fiscal year 2014), these subunits issued 

68 SBIR solicitations, of which 56 were open to majority-owned portfolio 

companies.17

In response to their SBIR solicitations open to majority-owned portfolio 

companies, ARPA-E and NIH received a small number of applications 

from such companies and made several awards to them. As shown in 

figure 1, majority-owned portfolio company applications received and 

More specifically, ARPA-E opened one solicitation to 

majority-owned portfolio companies that covered both fiscal years 2013 

and 2014, and NIH opened 55 solicitations to majority-owned portfolio 

companies during fiscal years 2013 and 2014.

 15Committee for Capitalizing on Science, Technology, and Innovation: Venture Funding 

and the NIH SBIR Program, 2009.

16NIH and ARPA-E, along with SBA, have used various means to inform majority-owned 

portfolio companies about the eligibility changes in their SBIR programs. On its SBIR 

website, SBA identifies the agencies that have opted to allow majority-owned portfolio 

companies to participate in their SBIR programs. According to NIH and ARPA-E officials, 

their solicitations now specifically state that majority-owned portfolio companies may 

participate. Further, NIH officials told us that they e-mailed approximately 15,000 

subscribers, announcing the change in their agency’s eligibility requirements.

17NIH and ARPA-E provided us with data for fiscal year 2014 before subjecting the data to 

their review process in preparation of their annual reports, which are typically due to SBA 

by March 15, 2015. As a result, our data may differ slightly from the data in their annual 

reports. 
Page 9 GAO-15-68 Small Business Innovation Research

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. In addition, these two 

subunits made 12 SBIR awards to majority-owned portfolio companies. 

Specifically, ARPA-E made 2 SBIR awards to two majority-owned 

portfolio companies, which included one phase I award to one company 

and another award that included multiple phases to another company.18

Figure 1: Summary of Majority-Owned Portfolio Company and Other Company SBIR 

Participation in ARPA-E and NIH in Fiscal Years 2013 and 2014

In addition, NIH made awards to 10 majority-owned portfolio companies 

that consisted of 7 phase I awards, and 3 phase II awards.

Note: Solicitations opened to majority-owned portfolio companies also were open to other eligible 

companies, while some solicitations opened to other eligible companies were not open to majorityowned portfolio companies.

 18ARPA-E can make two types of combined awards: (1) combined phase I/phase II 

awards may be funded up to $1,725,000 with a period of performance up to 36 months 

and (2) combined phase I/phase II/phase II sequential awards may be funded up to 

$3,225,000 and may have a period of performance up to 48 months.
Page 10 GAO-15-68 Small Business Innovation Research

ARPA-E and NIH officials told us that it was too early for them to evaluate 

the impact of including majority-owned portfolio companies in their SBIR 

programs—such as how the composition of applicants and awardees 

might change—but said that this change has not created any 

administrative problems or burdens. The officials from both subunits told 

us that they did not encounter any challenges completing their written 

determination, updating their data systems, and monitoring their 

compliance with the statutory cap. ARPA-E is the only DOE subunit using 

the majority-owned portfolio company funding option, and so under the 

statute, it could potentially award up to 25 percent of DOE’s total SBIR 

funds to such companies. DOE and ARPA-E officials told us they 

administer the cap at the subunit level—meaning that ARPA-E may 

award up to 25 percent of its SBIR funds to majority-owned portfolio 

companies. According to ARPA-E officials, for fiscal year 2013, ARPA-E 

made approximately $7 million in SBIR awards, of which about $1.7 

million (or nearly 25 percent of its SBIR awards) was awarded to a 

majority-owned portfolio company. For fiscal year 2014, ARPA-E officials 

told us that the subunit was just under its fiscal year 2014 internal cap of 

25 percent of its SBIR funds. NIH consists of 27 institutes and centers, 

and 24 institutes and centers participate in the SBIR program. NIH 

officials told us that they are applying the 25 percent statutory cap to each 

institute and center. Officials told us that NIH as a whole was not close to 

its 25 percent statutory cap for fiscal year 2014, having awarded about 

$4.5 million to majority-owned portfolio companies, which was about 0.68

percent of the agency’s $663 million SBIR award obligations for fiscal 

year 2014.

Representatives from four majority-owned portfolio companies that 

received NIH or ARPA-E SBIR awards told us that their SBIR awards 

have allowed them to conduct new research that would otherwise not 

have been undertaken. For example, one representative said that venture 

capital firms often view R&D for new projects that they have not funded 

as a distraction from a firm’s focus on commercializing a product and his 

company would have faced difficulties conducting its research without 

SBIR funding. Additionally, representatives from these four companies we 

interviewed told us that receiving an SBIR award can be viewed as 

validating the merit of their research, which can attract additional venture 

capital funds and improve their ability to commercialize their SBIR 
Page 11 GAO-15-68 Small Business Innovation Research

research. The representatives said they did not encounter any significant 

problems applying for SBIR awards or receiving SBIR funds.19

Nine agencies have chosen not to open their SBIR programs to majorityowned portfolio companies, and therefore have not submitted a written 

determination to do so. Specifically, as of September 2014, the 

Departments of Agriculture, Commerce, Defense, Education, Homeland 

Security, and Transportation; Environmental Protection Agency; National 

Aeronautics and Space Administration; and National Science Foundation 

had not taken such action. The awards from these nine agencies, along 

with those from the programs within HHS and DOE that chose not to 

allow portfolio company participation, accounted for about 71 percent of 

the nearly $2.1 billion SBIR awards in fiscal year 2013.

Officials from the nine agencies generally told us that the decision not to 

open their programs to portfolio companies was made at the program 

level for each agency. They said the decision was based largely on 

internal discussions among SBIR staff and, in some cases, staff from 

other departments, and did not involve any formal analyses. The 

explanations that agency officials told us during our interviews for not 

submitting a written determination were as follows.

• Department of Agriculture: An official said that the Department viewed 

other administrative changes mandated under the NDAA as a higher 

priority, given the low level of interest from majority-owned portfolio 

 19These comments were consistent with findings from our prior work in which we found 

that venture capital firms are not typically interested in funding research covered by the 

SBIR program because such investments are high risk and typically have slow returns. 

We also reported that receiving an SBIR award served as a “stamp of approval” to venture 

capital firms, which means that venture capital firms may be more willing to fund projects. 

Our 2012 report summarized three reasons that explain why venture capital is not 

interested in this type of research: (1) Private investors consider these projects too high 

risk for investment, even for concepts with promising technological potential; (2) venture 

capital firms seek more rapid returns on investment and closely analyze a project’s 

potential return on investment over time, a factor that influences their decisions to invest in 

projects that are in later stages of development and closer to commercialization; (3) 

venture capital firms may not be comfortable investing in new energy technologies, noting 

the historical lack of successful venture capital investments in these types of projects. See 

GAO, Department of Energy: Advanced Research Projects Agency-Energy Could Benefit 

from Information on Applicants’ Prior Funding, GAO-12-112 (Washington, D.C.: Jan.13, 

2012).

Most Participating 

Agencies Have Not 

Exercised Their 

Authority to Open 

Their SBIR Programs 

to Majority-Owned 

Portfolio Companies

Agencies Cite Various 

Reasons for Electing

Not to Participate
Page 12 GAO-15-68 Small Business Innovation Research

companies in their SBIR program.20

• Department of Commerce: Officials said that they viewed other 

administrative changes—such as changes to its proposal evaluation 

process—as a higher priority than the majority-owned portfolio 

company funding option. Also, the officials stated that they were 

concerned that adopting the funding option could lead to a significant 

increase in the number of proposals, and if that happened, there 

would be a corresponding decrease in the percentage of proposals 

receiving SBIR awards, given the small size of the agency’s SBIR 

program compared to other federal agencies’ programs. Officials said 

the agency will be in a better position to understand the possible 

results of implementing the funding option and can better prepare the 

agency’s SBIR program once they see how the change impacts other 

agencies.

They also said that the agency’s 

SBIR awards are smaller than other agencies’ awards, such as the 

Department of Defense and NIH, and majority-owned portfolio 

companies are most interested in the agencies offering the largest 

awards.

• Department of Defense: Officials said that the agency does not have 

the evidence to support that allowing majority-owned portfolio 

companies in SBIR would achieve the outcomes required to be 

specified in the written determination, such as substantially 

contributing to the agency’s mission. Officials also said they do not 

believe that there is much interest from venture capitalists in investing 

in firms that would be eligible to receive SBIR phase I and phase II 

awards.

• Department of Education: Officials said that the agency does not have 

an official reason why it did not elect to exercise the majority-owned 

portfolio company funding option. They told us that majority-owned 

portfolio companies have not approached the agency about its SBIR 

 20In addition to changing SBIR’s eligibility requirements, the NDAA made several key 

changes to the SBIR award process, SBIR program administration, and fraud, waste, and 

abuse prevention procedures. For the award process, the act requires agencies to make 

SBIR award decisions within a certain amount of time after the close of the solicitation. For 

program administration, the act’s new requirements include creating and setting forth the 

policies for the new pilot program that permits agencies to use SBIR money for 

administration of the SBIR program and setting forth the new reporting and data collection 

requirements. Finally, the act included amendments relating to fraud, waste, and abuse, 

such as requiring small businesses to certify they are meeting the program’s requirements 

during the life cycle of the funding agreement. 
Page 13 GAO-15-68 Small Business Innovation Research

program for many years; thus, they did not see a reason to use the 

funding option.

• Department of Homeland Security: Officials said that they viewed 

other administrative changes mandated under the NDAA as a higher 

priority and that they had not yet conducted the research to provide 

evidence that majority-owned portfolio companies would achieve the 

outcomes required to be outlined in the written determination 

requirement. The officials also said that the agency’s SBIR topics are 

narrowly defined to respond to the technology gaps in the agency’s 

operating components. As a result, they said there is a lack of 

scalability for the general market; therefore, their SBIR program does 

not generally draw attention and interest from the venture capital 

community. The officials said, however, that they are working to gain 

greater partnership interest with industry to make these technologies 

more desirable in commercial markets, which may gain interest from 

the venture capital community.

• Department of Transportation: Officials said that they were concerned 

that opting in could increase the number of SBIR applications, which 

would impact the agency’s resources and ability to meet the SBIR 

award timelines. Officials need additional time to consider the 

potential impact of opening its SBIR program up to majority-owned 

portfolio companies and how the agency can best manage that 

impact. The officials also told us that the agency has not had any 

majority-owned portfolio companies express interest in its SBIR 

program, as of March 2014 when we held our interview, so officials 

did not see a pressing reason to immediately opt-in.

• Environmental Protection Agency: Officials said that the agency 

currently receives many SBIR proposals and can only fund a small 

number of them; thus, they did not need a new pool of applicants for 

the program, especially considering that majority-owned portfolio 

company applicants could be small businesses that have better 

funding since they are more than 50 percent owned by venture capital 

operating companies, hedge funds, or private equity firms. They told 

us that the agency would have to do a rigorous and detailed analysis 

to complete the written determination and do not know what factors 

they would consider to make the decision.

• National Aeronautics and Space Administration: Officials said that the 

agency does not have statistically verifiable evidence to support that 

allowing majority-owned portfolio companies into its SBIR program 

would achieve the outcomes required to be enumerated in the written 

determination. The officials told us that firms with majority ownership 

by venture capital may have a low level of interest in their SBIR 
Page 14 GAO-15-68 Small Business Innovation Research

program because of the long length of the research projects in this 

field.

• National Science Foundation: Officials told us that they generally did 

not believe they have the evidence to support that allowing majorityowned portfolio companies into its SBIR program would achieve the 

outcomes required to be enumerated in the written determination. For 

example, they told us that the agency already has an extensive 

relationship with the venture capital and the angel investor 

communities through SBIR, so they did not believe opting in would 

address the need for publicly funded research. Officials also said that 

the National Science Foundation is not an acquisition agency, so such 

action would not substantially contribute to the agency’s mission. 

Finally, the officials told us that majority-owned portfolio companies 

have not expressed interest in the agency’s SBIR program.

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. For 

example, officials at the Department of Transportation said they could not 

determine the specific factors they would review when they reconsider 

their decision, because it is too early in the implementation of the 

provision to see what factors would affect their decision. 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. SBIR program managers at the 

Department of Defense told us that they do not plan to reevaluate their 

decision as they do not see a benefit in allowing such companies to 

participate in SBIR.

Although some agencies considered the potential interest of majorityowned portfolio companies in their SBIR programs in making their 

decision on whether to submit a written determination, gauging such 

interest can be difficult. Information on the degree of venture capital 

ownership in a company is confidential and proprietary and not reported 

to any public databases. Most participating agencies historically have not 

tracked whether applicants or awardees have venture capital funding. As 

specified in the Policy Directive, agencies must require awardees to 

certify their eligibility at the time of the award, including certifying whether 

they are majority-owned portfolio companies, but the agencies generally 

do not collect any detailed information on an applicant’s or awardee’s 
Page 15 GAO-15-68 Small Business Innovation Research

ownership.21 In 2009, the National Academy of Sciences reported that 

between 4 percent and 12 percent of the small businesses that won SBIR 

phase II awards from NIH between 1992 and 2002 were majority-owned 

portfolio companies; however, the study did not provide any information 

on majority-owned portfolio company participation at other agencies.22

Additionally, in 2006, we found that approximately 17 percent of NIH 

awards and 7 percent of the Department of Defense awards went to small 

businesses that had venture capital investment, but this study did not 

differentiate between majority- and minority-owned portfolio companies.23

Data are not publicly available to gauge the interest of majority-owned 

portfolio companies in the SBIR program, but industry representatives 

indicated that such companies may not be aware of the program change 

and could be interested in the program. A representative from an industry 

association representing venture capitalists told us that because majorityowned portfolio companies have been unable to participate in SBIR 

previously, many of them may not be aware of the change in program 

eligibility at some agencies. Representatives from three industry 

associations told us that venture capital investment in R&D has 

diminished over the past decade, and representatives from two of these 

associations said the SBIR program is very attractive to majority-owned 

portfolio companies because it allows them to apply for SBIR awards to 

fill the gap in R&D funding. We selected a nonprobability sample and 

interviewed four of the majority-owned portfolio companies that registered 

with SBA but had not applied for an SBIR award.

SBA requires companies that apply for SBIR awards to register on its 

Company Registry and indicate whether they are majority-owned portfolio 

companies. As of September 2014, 153 majority-owned portfolio 

companies had registered with SBA and they accounted for less than 2 

percent of the total number of small businesses registered with SBA.

24

 21ARPA-E reported that applicants are required to report venture capital funding on the 

“ARPA-E Other Sources of Funding” form. In addition, awardees report postaward venture capital funding in their quarterly reports submitted to ARPA-E.

Officials from three of 

22Committee for Capitalizing on Science, Technology, and Innovation: Venture Funding 

and the NIH SBIR Program, 2009.

23GAO, Small Business Innovation Research: Information on Awards Made by NIH and 

DOD in Fiscal Years 2001 through 2004, GAO-06-565 (Washington, D.C.: Apr. 14, 2006).

24We used a multi-step procedure to select companies that ranged in percentage of 

ownership by venture capital, and were not in the biotechnology or electricity industries, as 

these areas were covered by NIH and DOE solicitations.
Page 16 GAO-15-68 Small Business Innovation Research

the firms said that they had not seen an SBIR solicitation that fit their type 

of research, while officials from one firm said they still were working to 

determine their eligibility for the program.

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. Pursuant to the NDAA, the 

written determination must explain how the use of the authority to allow 

such companies to participate in the SBIR program will (1) induce 

additional venture capital, hedge fund, or private equity firm funding of 

small business innovations; (2) substantially contribute to the agency’s 

mission; (3) demonstrate a need for public research; and (4) otherwise 

fulfill the capital needs of small business concerns for additional financing 

for SBIR projects.25

In their written determinations, NIH and DOE supported their explanations 

largely based on their experience with SBIR and general knowledge 

about majority-owned portfolio companies. They did not conduct any 

independent research on majority-owned portfolio companies, which is 

not specifically required by NDAA, but NIH cited a 2009 study conducted 

by the National Academy of Sciences on its SBIR program.

According to SBA officials, the written determination 

is a notification letter, serving to inform SBA and Congress of the 

agency’s plans. SBA reviews these determinations, but it does not 

approve or deny them.

26

 2515 U.S.C. § 638(dd)(2).

Officials 

from NIH and DOE told us that they did not have any issues preparing 

their written determination letter. In contrast, several other agencies 

viewed the written determination as a potentially stringent requirement 

that necessitated independent analyses. For example, officials at the 

National Aeronautics and Space Administration said that they did not 

have statistically verifiable evidence that majority-owned portfolio 

company participation would produce the written determination outcomes, 

and officials at the Department of Homeland Security told us they did not 

26Committee for Capitalizing on Science, Technology, and Innovation: Venture Funding 

and the NIH SBIR Program, 2009.

Some Agencies Are 

Interpreting the Written 

Determination as a 

Potentially Stringent 

Requirement
Page 17 GAO-15-68 Small Business Innovation Research

have enough data to show that such companies would be interested in its 

SBIR program. Likewise, officials at the Department of Defense told us 

that they generally did not have the evidence to support that allowing 

majority-owned portfolio companies would achieve the written 

determination outcomes, and officials at the Environmental Protection 

Agency said they would need to conduct a rigorous analysis to make the 

determination. 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 other three participating agencies did 

not discuss any issues with the written determination requirement.

As required under the NDAA, SBA updated its SBIR Policy Directive in 

response to the NDAA’s reauthorization of, and amendments to, the SBIR 

program. Specifically, SBA revised the policy directive to include, among 

other things, the written determination requirement. 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. SBA 

officials told us that the agency’s role with the participating agencies is to 

provide a forum for all of the program managers to discuss SBIR, 

including the new majority-owned portfolio company funding option. The 

officials said that SBA has not tried to encourage or discourage agencies 

to adopt the new funding option. According to the SBA officials, SBA 

meets routinely with SBIR program managers, and no agency has raised 

concerns about the written determination requirement. Similarly, most 

SBIR program managers told us that they have not had any discussions 

with SBA about whether they should allow majority-owned portfolio 

companies to participate in their programs, and that they meet monthly 

with SBA and periodically communicate with SBA officials through 

telephone calls and e-mail.

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.27

 2777 Fed. Reg. 75,215, 76,223 (Dec. 27, 2012) (final rule); 77 Fed. Reg. 28,520, 28,526 

(May 15, 2012) (proposed rule).

Some agencies may be 
Page 18 GAO-15-68 Small Business Innovation Research

viewing the evidence required for the written determination differently, 

and may view the written determination as a potentially stringent 

requirement. SBA officials told us that they are not statutorily required to 

advise participating agencies on what evidence they should consider in 

their written determination. 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. As a result, agencies would be better positioned if they choose 

to reevaluate their decision on whether to use the majority-owned 

portfolio company funding option, which most agencies plan to do in the 

future.

The effect of the NDAA provisions allowing SBIR participating agencies to 

permit majority-owned portfolio companies to participate in their SBIR 

programs has been limited, because the majority of participating agencies 

have opted not to open their SBIR programs to such companies. As the 

administrator of the SBIR program, SBA updated its SBIR Policy Directive 

to conform to the amendments made by NDAA but did not provide 

specific guidance on the evidence participating agencies may consider to 

comply with the written determination requirement. At the same time, NIH 

and DOE were able to complete their written determinations, which SBA 

reviewed. Although the other participating agencies have not asked SBA 

for additional guidance on the written determination requirement, SBA 

also has not discussed the issue with them, such as at their monthly 

meetings or as part of other outreach efforts. As a result, agencies may 

be uncertain about the evidence necessary to support the written 

determination and may view the determination as a potentially stringent 

requirement. 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.

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 

Conclusion

Recommendations for 

Executive Action
Page 19 GAO-15-68 Small Business Innovation Research

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.

We provided a draft of this report to the Secretaries of Health and Human 

Services, Agriculture, Commerce, Defense, Education, Energy, 

Homeland Security, and Transportation; the Administrators of the Small 

Business Administration, the Environmental Protection Agency, and the 

National Aeronautics and Space Administration; and the Director of the 

National Science Foundation for review and comment. 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.

SBA SBIR officials provided comments on a draft of our report through an 

e-mail from their GAO liaison on October 29, 2014. In these comments, 

SBA stated that it intends to discuss the written determination with SBIR 

program managers at a future program managers meeting. However, 

SBA stated it is not required by statute to advise participating agencies on 

what evidence they should consider in their written determination. We 

clarified this in the final report. Additionally, SBA said the SBIR Policy 

Directive contains guidance on what the written determination must 

include, and participating agencies have not requested more detailed 

guidance on the written determination.

We maintain that our findings and recommendation on providing guidance 

on the written determination are appropriate. As we noted above, SBA 

may not be required by law to advise agencies on the evidence they may 

use to support the written determination, but SBA could be missing an 

opportunity as program administrator to help agencies make a more 

informed decision about whether to expand their SBIR program. SBA 

notes that the SBIR Policy Directive contains guidance on the written 

determination and no agency has requested more detailed guidance. 

However, we found that participating agencies were viewing the evidence 

required for the written determination differently. Specifically, six of the 

nine agencies that have not opted to expand their program viewed the 

written determination as potentially stringent, possibly requiring 

independent analysis, while the two agencies that opted to expand their 

program viewed the written determination as a less stringent requirement. 

Our recommendation addresses this issue, and SBA’s plan to discuss the 

Agency Comments 

and Our Evaluation
Page 20 GAO-15-68 Small Business Innovation Research

written determination with SBIR program managers at a future meeting is 

consistent with our recommendation.

We are sending copies of this report to the Secretaries of Health and 

Human Services, Agriculture, Commerce, Defense, Education, Energy, 

Homeland Security, and Transportation; the Administrators of the Small 

Business Administration, the Environmental Protection Agency, and the 

National Aeronautics and Space Administration; the Director of the 

National Science Foundation; the appropriate congressional committees; 

and other interested parties. The report is available at no charge on the 

GAO website at http://www.gao.gov. If you or your staff members have 

any questions about this report, please contact me at (202) 512-8678 or 

brownbarnesc@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

GAO staff who made key contributions to this report are listed in appendix 

I.

Cindy Brown Barnes

Director, Financial Markets and

Community Investment
Appendix I: GAO Contact and Staff 

Acknowledgments

Page 21 GAO-15-68 Small Business Innovation Research

Cindy Brown Barnes, (202) 512-8678 or brownbarnesc@gao.gov

In addition to the contact named above, Richard Tsuhara (Assistant 

Director), Kathleen Boggs (Analyst-in-Charge), Hilary Benedict, William 

Chatlos, Alma Laris, Marc Molino, Patricia Moye, Christopher Murray, and 

Jennifer Schwartz made key contributions to this report. 

Appendix I: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(250774)
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