Small Business Innovation Research: Information on Awards Made by NIH and DoD in Fiscal Years 2001 through 2004
Published: 2006-04-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Small Business Innovation Research (SBIR) program is a three phase program that increases the use of small businesses to meet federal research needs and encourages commercialization of this research. Venture capital is one source of funding to help commercialize SBIR projects. To receive an award firms must meet ownership and other criteria and awards may exceed dollar guidelines. In 2002, the Small Business Administration (SBA) clarified that majority owners of firms that receive awards must be individuals rather than corporations. Since 2002, controversy has arisen over the extent to which venture capital firms may own SBIR firms. GAO was asked to provide information on SBIR for fiscal years 2001 - 2004. For NIH and DOD, we determined the (1) number and characteristics of awards, (2) number and characteristics of awards above the guidelines, (3) changes in award characteristics after 2002, and (4) factors agencies consider, and data they collect on, SBIR awards. NIH, DOD, and SBA provided technical comments that were incorporated, as appropriate. DOD said our findings were not surprising in light of differences in the markets for SBIR projects. SBA said our findings, though useful, may be misconstrued as suggesting a link between venture capital investment and SBIR eligibility, when no such link exists.
section_title: What GAO Found
paragraphs: During fiscal years 2001-2004, the National Institutes of Health (NIH) and Department of Defense (DOD) made 16,019 SBIR awards valued at $5.3 billion. GAO identified the following characteristics of these awards: (1) most were concentrated in a few states; (2) a few agency component made most of the awards; (3) award amounts ranged from well below the guidelines to significantly above; (4) few awards were made to firms that had received venture capital investment, NIH made more than DOD; and (5) firms that received DOD SBIR awards were relatively small-sized. Overall, from fiscal year 2001 through 2004, about half of NIH awards and 12 percent of DOD awards exceeded the guidelines, and most went to firms that had not received venture capital investment. Awards above the guidelines accounted for 70 percent of NIH's SBIR dollars and 23 percent of DOD's. Agency officials said NIH and DOD made such awards generally to fund relatively expensive research or to ensure high-quality results. Awards above the guidelines to firms that had received venture capital investment accounted for 18 percent of NIH's awards above the guidelines, and about 8 percent of DOD's. At NIH, firms that had received venture capital investment were more likely to receive the largest awards than firms that had not. A similar relationship existed for DOD's phase I awards but not for its phase II awards. Since 2002, when SBA clarified SBIR ownership eligibility criteria, an increasing number of awards have been made to small business firms that had received venture capital investment; such firms have generally received larger awards at NIH and, in the aggregate, a larger share of NIH's and DOD's available SBIR funds. In addition, the average phase II award amount to firms that had received venture capital investment increased by over 70 percent, from about $860,000 in fiscal year 2001 to about $1.5 million in fiscal year 2004. As a result, such firms attracted a greater percentage of NIH's total SBIR dollars each year--about 21 percent on average in fiscal years 2003 and 2004, compared to an average of about 14 percent in fiscal years 2001 and 2002. At DOD we found similar trends, but to a somewhat lesser extent. NIH, DOD, and SBA focus mainly on SBIR eligibility criteria relating to ownership, for-profit status, and the number of employees when reviewing applications. Although applicants self-certify that they meet these criteria, both NIH and DOD make efforts to verify the accuracy of the information prior to making an award. When agency officials are unable to verify the accuracy of an applicant's information, they refer the matter to SBA. Both agencies limit their data collection efforts largely to information about the SBIR award itself, such as award size. Agencies are not required to gather data on characteristics of the firms receiving the awards, such as the presence of venture capital investment; as a result, this information is currently not being collected.

section_title: Letter
paragraphs: As a competitor in the global economy, the United States relies heavily on  innovation through research and development (R&D). The potential of  small businesses to be sources of significant innovation led the Congress to  increase government funding for R&D projects and establish the Small  Business Innovation Research (SBIR) program. The Small Business  Innovation Development Act of 1982 established the SBIR program to,  among other things, stimulate technological innovation related to each  participating federal agency’s goals and mission, use small businesses to  meet federal R&D needs, and increase private sector commercialization of  innovations derived from federal R&D. From its inception in fiscal year  1983, through fiscal year 2004, the SBIR program has awarded over $17  billion to more than 82,000 projects.
Every federal agency with an R&D budget of $100 million or more is  required to establish and operate a SBIR program funded by 2.5 percent of  that agency’s budget for research conducted by others, called extramural  research. Participating agencies make awards and manage their own  programs, while the Small Business Administration (SBA) plays a central  administrative and oversight role. Of the federal agencies with SBIR  programs, two—the National Institutes of Health (NIH) in the Department  of Health and Human Services and the Department of Defense (DoD)— account for the largest share of awards. NIH and DoD generally rely on the  various components within the agency, such as the institutes and centers  within NIH or the military and defense components within DoD, to help  implement the SBIR program and make funding decisions. The extent of  participation by awarding components differs in relation to their size, with  larger components issuing more awards than smaller ones.
SBIR is a three-phased program. During phase I, participating agencies  fund a proposed idea that appears to have commercial potential to more  fully investigate its scientific and technical merit and feasibility. In phase II,  participating agencies fund projects to further develop the idea, again  taking into account its commercial potential. Generally, phase I and II  awards may not exceed $100,000 and $750,000, respectively. However, SBA  has interpreted its statutory authority as providing it the discretion to allow  participating agencies to make larger awards above these guidelines when  appropriate. Funds for all SBIR awards are dispersed contingent upon the  awardee firm successfully achieving planned milestones. In phase III, SBIR  firms are expected to commercialize the resulting product or process, but  with no further SBIR funding. Funding for commercialization may come  from the private sector or from non-SBIR federal dollars. One source of  private sector funding available to SBIR firms to help commercialize SBIR- supported projects is funding from venture capital firms. In return for their  investment in SBIR awardee firms, venture capital firms often receive a  share in the ownership of the firm and, ultimately, any profits that may  result when the project is commercialized.
To qualify for SBIR awards, small business firms must meet certain SBIR  ownership and other eligibility criteria, such as being 51 percent or more  owned by individuals who are U.S. citizens or permanent resident aliens.  Over the last several years, some controversy has arisen over whether SBIR  awards can be made to small businesses whose majority owners are  venture capital firms. In the fall of 2002, SBA provided additional  clarification of the ownership criteria but did not specifically address the  role of venture capital firms. 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. However, these events have raised concerns that small  businesses that are majority-owned by venture capital firms are being  unfairly excluded from participating in the SBIR program, and as a result,  important research is not being funded and conducted. Others contend that  small business firms that had not received venture capital investment are  being excluded from the program because they are unable to compete  against firms with venture capital investment that may, as a result of the  venture capital investment, have access to greater management expertise  and resources.
In this context, you asked us to review the SBIR awards NIH and DoD  made from fiscal year 2001 through 2004, including those made to firms  whose majority owners were venture capital firms, and the agencies’  processes for determining eligibility. Because information on the degree of  venture capital ownership is confidential and proprietary, and not available  from the public or private sources we contacted, we could not directly  respond to your inquiry. Instead, as agreed with your offices, this report  provides information on those small business firms that had received  venture capital investment at any time through fiscal year 2004, and also  received an SBIR award in fiscal year 2001 through fiscal year 2004.  Specifically, we determined (1) the total number and key characteristics of  NIH’s and DoD’s phase I and phase II awards, including the geographic  location of awardee firms, agency component making the award, amount of  the award, presence of venture capital investment in the awardee firm, and  number of employees working for the SBIR firm and its affiliates; (2) the  number and key characteristics of NIH’s and DoD’s phase I and phase II  awards that were above the guidelines, including the reasons the awards  exceeded the guidelines; (3) changes, if any, in award characteristics, for  awards above and below the guidelines, that occurred following SBA’s  clarification of—and ruling on—the ownership criteria regarding venture  capital ownership; and (4) the factors NIH, DoD, and SBA consider when  determining eligibility for SBIR awards, and the data these agencies collect  about SBIR awardees and applicants.
To conduct our work, we interviewed NIH, DoD, and SBA officials about  their procedures and any changes that occurred from fiscal years 2001  through 2004. We reviewed agency documentation on awards, award  selection and funding, eligibility determinations, and the data elements that  are collected during the eligibility process. We also interviewed officials  from organizations that represent venture capital investors and  biotechnology firms to obtain their views on the SBIR program and venture  capital investment.
To determine the total number of phase I and phase II awards and the key  characteristics of these awards, we obtained data from NIH and DoD for all  SBIR awards made during fiscal years 2001 through 2004. These data  included award amounts projected at the time the award was made as well  as additional funding and supplemental amounts issued subsequent to the  award, which allowed us to provide information on awards that originated  in fiscal years 2003 and 2004 but which may not be completed until 2005 or  later. As a result, our data differ from information provided in agency  reports on the amounts distributed in any specific fiscal year. We also  obtained data from two private sector firms, Innovation Development  Institute (IDI) and Dow Jones-Venture One, to determine which awardee  firms received venture capital investment before receiving an SBIR award  between fiscal years 2001 and 2004. Initially, we selected IDI because its  database included information that supplemented agency data on SBIR  awardee firms. IDI’s database included information on venture capital  investments in SBIR awardee firms that was compiled from published  information such as company press releases. Subsequently, we obtained  data from Dow Jones-Venture One to help corroborate, and supplement as  necessary, the IDI data. We selected Dow Jones-Venture One because its  database on venture capital investment is compiled and updated with  information from both venture capital investors and the firms that receive  the investment. These data do not indicate the length of time venture  capital investment remained in the awardee firm. We interviewed key  officials at IDI and Dow Jones-Venture One about their databases. We  assessed the reliability of relevant fields in the databases and found them  sufficient for our review.
To assess any differences that occurred following SBA’s October 2002  clarification of ownership criteria and its May 2003 decision related to  venture capital ownership in SBIR firms, we compared NIH and DoD data  on awards made from October 1, 2000, through September 30, 2002, with  data on awards made from October 1, 2002, through September 30, 2004.  We used the combined data set to compare NIH and DoD awards from the  two time periods in terms of the key characteristics described above. See  appendix I for more details about our scope and methodology. We  conducted our work in accordance with generally accepted government  auditing standards.
subsections: section_title: Background
paragraphs: Of the eleven agencies that currently have SBIR programs, two—NIH and  DoD—account for the largest share of awards. Large agencies, such as  NIH and DoD, generally rely on the various components within the agency  such as the 23 participating institutes and centers within NIH and the 10  participating military and defense components within DoD, to help  implement the SBIR program and make funding decisions. Agencies  decide what type of research to fund, solicit and review applications for  technical and scientific merit, verify that the applicant meets eligibility  criteria, select which projects to fund, and decide the size of the award.  Awards can be made to successful applicants in the form of grants,  contracts, or cooperative agreements. SBA plays a key administrative and  oversight role, such as issuing policy directives and annual reports for the  program and monitoring agencies’ annual funding allocations. Once an  award has been issued, awarding agency staff monitor the progress of work  on the project.
The Small Business Innovation Development Act of 1982 established a  three-phased structure for the SBIR program. During phase I, participating  agencies fund a proposed idea that appears to have commercial potential to  more fully investigate its scientific and technical merit and feasibility. Work  on the phase I project is generally not to exceed 6 months. During phase II,  participating agencies fund projects to further develop the idea, generally  over a 2-year period, again taking into account its commercial potential.  During phase III, firms are expected to commercialize the resulting product  or process using other federal or private sector funds, but with no further  SBIR funding. Unlike phases I and II, phase III has no general limits in time  or dollar amounts. In addition to phase I and II awards, NIH and DoD also  make awards through a streamlined process—known as fast track—for  projects with high commercial potential. Both agencies use an expedited  review process for fast track applications. However each agency operates  its program differently. For example, to qualify for DoD’s fast track awards,  firms that have received phase I awards must obtain commitments for  outside funding that DoD will match while NIH’s program considers  information on phases I and II simultaneously and does not involve  matching funds. In addition, the two agencies account for their fast track  awards differently. NIH maintains data on fast track awards separately  from its data on phase I and II awards. At DoD, fast track awards are  included in the phase I and phase II awards data. Funding for fast track  awards, which comprise a small portion of each agency’s SBIR awards, are  not subject to specific dollar limits. Funds for all awards are dispersed  contingent upon the awarded firm successfully achieving planned  milestones.
Receipt of a phase II award is contingent upon successful completion of a  phase I award. Firms may receive phase II awards from the same agency  that funded their phase I award or from a different participating agency.  Successful commercialization during phase III may immediately follow  completion of the phase II project, or may not occur for several years, or  much later; drug development and medical products and processes that  require extensive testing and federal regulatory approval before marketing  fall into this final category.
Funding for commercialization may come from the private sector or from  non-SBIR federal sources. Venture capital firms that typically invest in new  or existing firms with the potential for above-average growth are one  source of private sector funding available to small businesses that would  like to commercialize their SBIR-supported projects. Venture capital firms  may seek to invest in small businesses that have received SBIR awards  because, in exchange for their venture capital, they receive an ownership  stake in the business and, ultimately, a share of any potential profits that  result when the SBIR-supported project is commercialized.
Generally, phase I and phase II awards may not exceed $100,000 and  $750,000, respectively. SBA has interpreted its statutory authority as  providing it with discretion to allow agencies to make awards above these  guidelines, when appropriate, if they provide written justification to SBA  after doing so. For example, in 2001, SBA granted NIH a waiver that  allowed it to routinely make awards above the guidelines for unusually  expensive research, such as medical treatment and drug research.  Similarly, DoD makes awards above the guidelines on a case-by-case basis  according to certain criteria, such as whether the cost was determined to  be reasonable and necessary to ensure a high-quality product.
To compete for SBIR awards, firms must meet size, ownership, and other  eligibility criteria. For example, eligible firms must (1) be organized as for- profit firms that operate primarily within, or contribute significantly to, the  U.S. economy; (2) be 51 percent or more owned by individuals who are U.S.  citizens or permanent resident aliens; and (3) have, with their affiliates, no  more than 500 employees. Under current law, applicants self-certify their  eligibility and face potential criminal and civil penalties for misrepresenting  the status of their firm in order to obtain an SBIR award. Although firms  may receive multiple phase I and II SBIR awards for different projects— either from the same or from different participating agencies—firms may  not receive multiple awards for work that is essentially the same.
NIH and DoD follow similar procedures to select applicants and determine  their eligibility for an SBIR award. (See fig. 1.) Specifically, each agency  consults its various awarding components to develop research topics that  further the agency’s mission, and periodically announces SBIR project  opportunities through a solicitation to seek funding for research on those  topics. Before the date applications are due, both agencies encourage  potential applicants to contact agency staff to discuss any questions they  may have, including questions about their eligibility. As of December 2005,  both agencies require applicants to file electronically, and to register with  the Central Contractor Register database. Submitted applications are  reviewed internally for administrative completeness, and those that do not  comply with the requirements may be rejected or take longer to review.
At NIH, appropriately completed applications are assigned to a scientific  review group and a potential funding component to undergo a two-step  external peer review. The scientific review groups evaluate each  application for scientific and technical merit, and commercial potential;  assign scores; and subject meritorious applications to a second review. The  National Advisory Council or the board of the awarding component then  evaluates the applications for scientific merit, factoring in the scientific  review groups’ scores and relevance to the awarding component’s mission  and goals, and recommends applications to be funded. The members of the  scientific review groups and the National Advisory Council or the board of  the awarding component are nonfederal scientists, physicians, and  engineers who are recognized authorities in their field. In contrast, at DoD,  after an application has been forwarded to the appropriate awarding  component, internal agency staff review the scientific and technical merit  and the commercial potential of the application, and make decisions about  which ones to fund.
Once officials at each awarding component decide which of the  meritorious applications to fund, both NIH and DoD largely rely on  information that the applicant provides and certifies as accurate to  determine eligibility, although each agency makes some effort to  independently corroborate the self-certified information. To help conserve  limited staff resources and provide a more timely determination, both NIH  and DoD verify the eligibility of only those firms that submit applications  deemed meritorious by their review process.
In recent years, the ownership criteria have come under increased scrutiny,  particularly with regard to majority ownership of SBIR awardee firms by  venture capital firms. Specifically, in 2001, an SBA administrative law judge  issued a decision clarifying that the terms “individuals” and “citizens” in the  SBIR criteria meant only natural persons, not entities such as corporations.  Subsequently, in the fall of 2002, SBA both revised its SBIR policy directive  and provided additional informal clarification to participating agencies  regarding the ownership criteria, but did not specifically address the role of  venture capital firms or other corporations. Then in 2003, the same 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.
section_title: Key Characteristics of NIH’s and DoD’s SBIR Awards for Fiscal Years 2001 through 2004
paragraphs: During fiscal years 2001 - 2004, NIH and DoD made a total of 16,019 SBIR  awards valued at $5.3 billion. This section discusses the following key  characteristics that we identified for these awards: (1) total number and  value of the awards made, (2) geographical distribution of the awards  made, (3) agency components making the awards, and (4) size of firms  receiving the awards. In addition, this section provides detailed  information on the key characteristics of those awards that were made to  firms that had received venture capital investment.
subsections: section_title: Total Number and Value of NIH’s and DoD’s SBIR Awards for Fiscal Years 2001 through 2004
paragraphs: From fiscal year 2001 through 2004, NIH and DoD issued a combined total  of 11,146 phase I awards, totaling about $1.3 billion, and 4,675 phase II  awards, totaling about $3.8 billion. As shown in table 1, during fiscal years  2001 - 2004, DoD made twice as many awards as NIH totaling over $3.2  billion.
However, NIH awards were, on average, larger than the DoD awards. We  found the following at NIH:  Phase I awards averaged $162,537, with a median of $100,658, and  ranged from $61,750 to $1.7 million, with about 90 percent falling  between $96,000 and $489,000.
Phase II awards averaged $934,643, with a median of $763,719, and  ranged from $150,593 to about $6.5 million, with about 90 percent falling  between $542,000 and $1.8 million.
Fast track awards averaged $1.1 million, with a median of $850,000, and  ranged from $96,514 to $9.6 million, with about 90 percent falling  between $173,000 and $2.5 million.
In contrast, at DoD, we found the following:  Phase I awards averaged $89,504, with a median of $99,000, and ranged  from $36,595 to $449,000, with about 90 percent falling between $68,000  and $120,000.
Phase II awards averaged $771,362, with a median of $747,622, and  ranged from $69,997 to about $4.4 million, with about 90 percent falling  between $450,000 and $1.2 million.
section_title: Geographical Distribution of NIH’s and DoD’s SBIR Awards for Fiscal Years 2001 through 2004
paragraphs: While a firm in every state received at least one SBIR award from both NIH  and DoD, a small number of states accounted for most of the awards.  Specifically, about 70 percent of all SBIR awards and dollars awarded went  to firms in 10 states, although the states differed between NIH and DoD.  Moreover, firms in these states also submitted about 70 percent of the  phase I and II applications at NIH, and phase I applications at DoD. DoD  does not maintain comparable information on phase II applications by  state. For example, at NIH and DoD, small businesses from California and  Massachusetts submitted about a third of the applications and received  about a third of the awards and a third of the dollars awarded. Tables 2 and  3 provide information on the geographical distribution of NIH’s and DoD’s  total SBIR applications and awards for the top 10 states for fiscal years  2001 through 2004; detailed information on the distribution of applications,  awards, and awarded dollars among all states is presented in appendix II  for NIH and appendix III for DoD.
section_title: NIH and DoD Agency Components Making SBIR Awards for Fiscal Years 2001 through 2004
paragraphs: At both NIH and DoD a small number of awarding components accounted  for most of the SBIR awards and dollars awarded. Specifically, 4 of NIH’s 23  participating institutes and centers accounted for about half of the SBIR  awards and dollars. The National Cancer Institute had the largest share at  NIH, accounting for almost 20 percent of the SBIR awards and dollars.  Table 4 shows the total SBIR awards and dollars associated with these four  NIH awarding components. For information on the distribution of SBIR  awards and dollars among all participating NIH components, see appendix  II.
Similarly, four of DoD’s ten awarding components accounted for more than  80 percent of the SBIR awards and dollars awarded, with the Air Force and  the Army together accounting for 43 percent of awards and just over half of  the dollars. Table 5 shows the total SBIR awards and dollars awarded  associated with these four DoD awarding components. For more  information on the distribution of SBIR awards and awarded dollars among  all participating DoD components, see appendix III.
section_title: Characteristics of NIH and DoD SBIR Awards Made to Firms that Had Received Venture Capital Investment
paragraphs: Firms that had received venture capital investment received a relatively  small percentage of the NIH and DoD SBIR awards, although they received  a somewhat larger percentage of awards from NIH than DoD. As shown in  table 6, at NIH, firms that had received venture capital investment received  about 18 and 14 percent of the phase I and II awards, respectively,  accounting for about 18 percent of the agency’s total SBIR dollars.
As shown in table 7, at DoD about 7 percent of phase I and II awards were  made to firms that had received venture capital investment. These awards  accounted for about 7 percent of the dollars DoD awarded to SBIR firms.
Awards to firms that had received venture capital investment were  generally concentrated in the same states and in the same agency  components as for all SBIR awards. At NIH, the 10 states that accounted for  close to 70 percent of the total SBIR dollars also accounted for about 77  percent of the dollars to firms that had received venture capital investment.  Likewise, at NIH, the four awarding components that issued about half of  the SBIR dollars also accounted for 73 percent of the dollars to firms that  had received venture capital investment. At DoD, the 10 states that  accounted for 73 percent of the total dollars awarded to SBIR firms also  accounted for about 70 percent of the dollars to firms that had received  venture capital investment. In addition, the four awarding components that  issued 85 percent of the dollars also issued 82 percent of the dollars to  firms that had received venture capital investment.
In contrast, awards to firms that had not received venture capital  investment were more widely distributed, although small businesses in  every state received at least one SBIR award from NIH and DoD.  Specifically, we found that in 17 states, none of the firms that had received  SBIR awards from NIH had received venture capital investment. For  example, awardee firms in Nebraska, Vermont, and Delaware each  accounted for less than 1 percent of NIH’s SBIR dollars, and none of the  firms in these states had received venture capital investment. For DoD, we  found that in 21 states, none of the firms that had received SBIR awards  had received venture capital investment. For example, awardee firms in  Nevada, Tennessee, and Rhode Island each accounted for about 1 percent  or less of the dollars DoD awarded, and none of the firms in these states  had received venture capital investment. Detailed information on the  geographical distribution of applications, awards, and dollars awarded to  firms that had received venture capital investment is presented in appendix  II for NIH and appendix III for DoD.
section_title: Size of SBIR Firms That Received Awards from DoD
paragraphs: The firms that received DoD SBIR awards were, on average, relatively  small-sized firms. Half of the firms had 20 or fewer employees, as reported  by awardees at the time they applied for SBIR awards. DoD SBIR awardee  firms that had received venture capital investment were also small-sized,  on average, but about 30 percent larger than firms that had not received  such investment. We could not determine the size of SBIR awardee firms  for NIH, because the agency does not maintain comparable information on  the number of employees at awardee firms.
section_title: Few Awards above the Guidelines Were Made to Firms That Had Received Venture Capital Investment Although These Firms Tend to Receive Larger Awards
paragraphs: While about half of NIH awards and 12 percent of DoD awards were above  the guidelines, less than 20 percent of such awards at NIH and about 8  percent at DoD went to firms that had received venture capital investment.  However, at NIH, we found that firms that had received venture capital  investment were more likely than firms that had not received such  investment to receive the largest awards. A similar relationship existed for  DoD’s phase I awards but not for its phase II awards. While the data,  overall, indicate a relationship between firms that had received venture  capital investment and high award amounts, they do not indicate whether  the presence of venture capital investment was the reason the firms  received an SBIR award. Awards above the guidelines were generally  concentrated in the same states and made by the same awarding agency  components as were awards that were within the guidelines.
subsections: section_title: Number and Value of NIH and DoD SBIR Awards That Were above the Guidelines
paragraphs: From fiscal years 2001 through 2004, 2,674 of the 5,061 SBIR awards made  by NIH exceeded the guidelines. These awards totaled about $1.4 billion  and accounted for 70 percent of NIH’s SBIR dollars. During the same time  period, 1,302 of the 10,958 SBIR awards made by DoD exceeded the  guidelines. These awards totaled $743 million and accounted for 23 percent  of the dollars DoD awarded. Table 8 shows the total number and dollar  value of the SBIR awards made by NIH and DoD during fiscal years 2001 -  2004 that were both within and above the guidelines.
At NIH we found the following:  Phase I awards that exceeded the guidelines averaged $223,106, with a  median of $153,138, and ranged from just over $100,000 to $1.7 million,  but about 90 percent were $595,000 or less.
Phase II awards above the guidelines averaged $1.1 million, with a  median of $924,914, and ranged from just over $750,000 to $6.5 million,  but about 90 percent were $2.1 million or less.
Fast track awards above the guidelines averaged $1.5 million, with a  median of $1,151,979, and ranged from just over $850,000 to $9.6 million,  but about 90 percent were $3.4 million or less.
Although NIH does not retain data centrally on the reason individual  projects exceeded the SBA guidelines, it generally makes such awards for  research in specific fields, such as biotechnology, that is relatively costly to  conduct. In 2001, SBA granted NIH a waiver that allows the agency to issue  awards that exceed the guidelines without reporting data on individual  projects. In the waiver, SBA recognized that NIH routinely issues awards  for particularly expensive technologies. During the review process,  external peer reviewers also assess the reasonableness of cost estimates  before agency officials make awards above the guidelines.
At DoD, we found the following:  Phase I awards that exceeded the guidelines averaged $122,312, with a  median of $119,911, and ranged from just over $100,000 to $448,796, but  about 90 percent were $142,000 or less.
Phase II awards above the guidelines averaged $1.2 million, with a  median of $1 million, and ranged from just over $750,000 to $4.4 million,  but about 90 percent were $2.0 million or less.
At DoD, the two main reasons awards exceeded the guidelines were that  (1) extra funds were needed to ensure a high-quality investigation of a  proposed idea and (2) the amount above the guidelines included non-SBIR  program funds. These non-SBIR funds, called mission funds, are not  included in DoD’s calculation of its 2.5 percent obligation to fund the SBIR  program. For example, a DoD component, such as the Army, Navy, or Air  Force, may add mission funds to a SBIR project if it decides that the project  may help support its programmatic goals. Moreover, it is DoD’s policy to  encourage its awarding components to match these and other non-SBIR  dollars with SBIR dollars. At DoD, about half of phase II awards above the  guidelines have received mission funds from awarding components.
section_title: Extent to Which NIH and DoD SBIR Awards above the Guidelines Were Made to Firms That Had Received Venture Capital Investment
paragraphs: At both NIH and DoD, most of the awards that exceeded the guidelines  went to firms that had not received venture capital investment. As shown in  table 9, only 18 percent of awards above the guidelines at NIH and only  about 8 percent of awards above the guidelines at DoD went to firms that  had received venture capital investment.
While firms that had received venture capital investment received a small  share of the total SBIR awards, these firms were generally more likely than  firms that had not received such investment to receive the largest awards  from NIH. Specifically, firms that had received venture capital were twice  as likely as firms that had not received such investment to receive phase II  awards from NIH greater than $1 million, which accounted for about 37  percent of NIH’s phase II dollars; these firms were about six times more  likely to receive phase II awards greater than $2.5 million, which accounted  for about 7 percent of the phase II dollars.
Similarly, for DoD phase I awards, we found that firms that had received  venture capital investment were more likely to receive awards above the  guidelines than firms that had not received such investment. However, this  relationship did not hold true for DoD’s phase II awards. We found that  phase II awardee firms that had received venture capital were less likely to  receive large awards than firms that had not received such investment.
While the data, overall, indicate a relationship between firms that received  venture capital investment and high award amounts, by themselves the  data do not indicate whether the presence of venture capital was the  reason these firms received such large awards. Many factors can influence  the willingness of venture capital firms to invest funds in small businesses.
NIH and DoD awards that exceeded SBA’s guidelines were generally  concentrated in the same states and in the same agency components as  were all SBIR awards. At NIH, the 10 states that received close to 70  percent of the total SBIR dollars also received 72 percent of the dollars for  awards above the guidelines. Likewise, at NIH, the four components that  awarded about half of the SBIR program dollars accounted for 54 percent  of the awards above the guidelines. At DoD, the 10 states that received 73  percent of the total dollars awarded also received about 74 percent of the  awards above the guidelines. In addition, the four DoD agency components  that awarded 85 percent of the dollars also awarded about 89 percent of the  awards above the guidelines. Detailed information on the geographical and  agency component distribution for awards that were above the guidelines,  as well as awards that were within the guidelines, and their associated  dollars is presented in appendix II for NIH and appendix III for DoD.
section_title: SBA’s Ownership Clarification Does Not Appear to Have Reduced Program Participation by Firms That Had and Had Not Received Venture Capital Investment
paragraphs: During fiscal years 2001 - 2004, participation in NIH’s and DoD’s SBIR  programs substantially increased for both types of firms—those that had,  and those that had not, received venture capital investment. However, we  did observe the following differences in the awards made by NIH and DoD  over the 4-year period including the 2 years before and the 2 years after  SBA provided additional clarification of the ownership criteria in October  2002:  Overall participation in the SBIR program by firms that had received,  and that had not received, venture capital investment increased.  However, firms that had received venture capital investment were added  to the program at a significantly higher rate than those that had not. For  example, at NIH, over the 4-year period, we noted that participation by  firms that had received venture capital investment grew at a rate of 42  percent, compared to 19 percent for those that had not received this  type of investment.
The total number of awards made by NIH and DoD to both types of  firms in the 2 years after the clarification was greater than the number of  awards made before the clarification. However, the rate at which  awards were made to firms that had received venture capital investment  was significantly greater than the rate at which awards were made to  firms that had not received venture capital investment. For example,  over the 4-year period, the number of awards that DoD made to firms  that had received venture capital investment increased by 167 percent,  compared to a 65 percent increase in awards to firms that had not. More  specifically, the number of awards to firms that had received venture  capital increased from 270 in the 2 years before the clarification to 477  in the 2 years after. Whereas, awards to firms that had not received  venture capital increased from 4,154 in the 2 years before the  clarification to 6,057 in the 2 years after.
For firms that had and had not received venture capital investment, the  average dollar value of awards generally increased at NIH, but  decreased or remained about the same at DoD over this 4-year period.  For example, at NIH, although both types of firms received increasingly  larger phase II awards between fiscal years 2001 and 2004, the awards to  firms that had received venture capital investment were substantially  larger than those to firms that had not received this kind of investment.  Specifically, in the 2 years before the clarification, phase II awards to  firms that had received venture capital investment averaged about  $885,000 compared to over $1.3 million in the 2 years following, while  awards to firms that had not received venture capital averaged less than  $860,000 before the clarification compared to less than $950,000 after  the clarification.
The number of awards that were above the guidelines increased  significantly at NIH after the clarification but decreased at DoD. For  example, from 2001 to 2004, the number of awards above the guidelines  increased by 45 percent at NIH from about 600, on average, in the 2  years before the clarification to about 730, on average, in the 2 years  after. In contrast, at DoD, these awards decreased by 26 percent, from  about 351 on average, in the 2 years before the clarification to about 300,  on average, in the 2 years after the clarification.
Firms that had received venture capital investment received an  increasing share of total dollars awarded at both NIH and DoD although  the change at DoD was significantly less. For example, at NIH, in the 2  years prior to the clarification, firms that had received venture capital  investment were awarded about 14 percent of total SBIR program funds,  and in the 2 years following the clarification this share had increased to  about 22 percent. At DoD, firms that had received venture capital  investment received 6 percent, on average, of the dollars awarded in the  2 years before the clarification and 7 percent, on average, in the 2 years  following the clarification.
At both NIH and DoD, 10 states accounted for the majority of dollars  awarded both before and after the clarification. However, the  concentration of NIH’s dollars awarded to firms that had received  venture capital investment increased somewhat in the 10 states  following the clarification, while the concentration of DoD’s dollars  awarded to such firms in the 10 states decreased somewhat.
Four agency components generally accounted for the majority of dollars  awarded and dollars awarded to firms that had received venture capital  investment both before and after the clarification. At both NIH and DoD,  the concentration of the dollars awarded by the four agency  components to firms that had received venture capital investment  increased following the clarification but to a lesser extent at DoD.
Finally, the number of applications received by both NIH and DoD  continued to increase following the SBA clarification. Both agencies  experienced a significant growth in the number of applications received  in the 2 years after the clarification compared to the 2 years preceding  the clarification. For example, at DoD, the total number of applications  in fiscal years 2001 and 2002 was 22,139 and the total number of  applications received in fiscal years 2003 and 2004 was 33,922.  According to officials responsible for the SBIR program at NIH and  DoD, the quality of the applications for SBIR awards increased or  remained the same during the 4-year period. However, because the  number of applications received increased at a faster rate than the  agencies' SBIR budgets, the percentage of the applications funded by  NIH and DoD has generally decreased.
Tables 10 through 22 provide detailed data for NIH’s and DoD’s SBIR  awards broken out by fiscal year from 2001 to 2004.
section_title: NIH, DoD, and SBA Focus Largely on Select Eligibility Criteria and Collect Limited Data on SBIR Awardees
paragraphs: NIH, DoD and SBA focus primarily on criteria relating to ownership, for- profit status, and the number of employees to determine a firm’s eligibility  for the SBIR program and take steps to verify eligibility information  provided by applicants. When NIH or DoD officials are unable to ensure the  accuracy of an applicant’s information, they refer the matter to SBA. After  SBA makes an eligibility determination, it makes information about the  firms it finds ineligible available on its Web site, but does not always  indicate that the determination was for SBIR purposes. NIH makes  information on ineligible firms centrally available to participating agency  components while DoD does not. Each agency limits its data collection  efforts largely to information about the SBIR award itself, such as award  size and location of the principal investigator, and does not collect  information on certain characteristics of the firms receiving the awards,  such as the presence of venture capital investment.
Officials at NIH, DoD, and SBA told us that they focus largely on three SBIR  criteria in their eligibility reviews—ownership, size in terms of the number  of employees, and for-profit status of SBIR applicants. However, they also  stated that they consider information on the full range of criteria, such as  whether the principal investigator is employed primarily by the applying  firm, and the extent to which work on the project will be performed by  others. Both NIH and DoD rely on applicants to self-certify that they meet  all of the SBIR program’s eligibility requirements as part of their SBIR  applications. At NIH, applicants certify they meet the eligibility criteria by  completing a verification statement when NIH notifies them that their  application has been selected for funding but prior to NIH making the  award. The verification statement requires applicants to respond to a series  of questions to certify they meet SBA’s eligibility criteria relating to for- profit status, ownership, number of employees, where the work will be  performed, and the primary employment of the principal investigator,  among others. NIH also refers applicants to its notice of SBIR funding  opportunities, known as a solicitation, for more detail on SBA’s eligibility  requirements. NIH will not issue an award until it receives and accepts the  applicant’s responses to the verification statement. At DoD, the cover sheet  for each SBIR application requires applicants to certify they meet SBA’s  eligibility criteria. The cover sheet also refers applicants to DoD’s  solicitation that details the requirements. As with NIH, DoD will not fund  applications if the questions on the cover sheet are not answered. Both NIH  and DoD warn applicants of the civil and criminal penalties for making  false, fictitious, or fraudulent statements. In addition to the eligibility  criteria provided in the agency’s solicitations, NIH and DoD support  periodic conferences during which potential applicants can learn about  SBIR eligibility criteria, and both agencies post eligibility requirements on  their Web sites.
Although agencies rely largely on applicants to self-certify that they meet  the SBIR program’s eligibility criteria, both NIH and DoD make additional  efforts to ensure the accuracy of the information provided by applicants  prior to making an award. At NIH, officials in participating institutes and  centers conduct Web searches, check press releases, and may request  documentation from applicants to verify information on their eligibility  status, including, but not limited to, information on ownership, size,  principal investigators, board members, location, e-mail addresses, and  affiliations with other firms. In addition, NIH officials search published  information on such features as venture capital investments, and whether  the applicant has been purchased by another company or changed its  name, as well as internal information on whether NIH has received other  grant applications from the applicant. NIH officials review this information,  among other things, to identify potential concerns regarding the applicant’s  eligibility status. For example, an “.edu” e-mail extension could indicate  that the principlal investigator is primarily employed by a university rather  than by the applicant, as required by SBIR criteria. If no concerns arise,  NIH deems the company eligible. However, when concerns cannot be  resolved, NIH officials contact the applicant to ask a standard list of  questions. Currently, the list of questions varies by institute and center, but  according to NIH officials, the agency is in the process of creating a  uniform list of eligibility questions to be used throughout NIH. NIH officials  also told us that it has incorporated eligibility training into the curriculum  for its SBIR staff.
At DoD, prior to making an award, officials check the information  applicants provided in the application cover sheet for consistency with the  eligibility information applicants entered into the Central Contractor  Registration database that is required for all applications, and the Online  Representations and Certifications Application system that is required for  phase II applications. According to DoD officials, most discrepancies  between information on the cover sheets and in the databases occur  because the applicant was purchased by another company, the e-mail  addresses have changed, or the principal investigator appears to be a full- time employee of an educational institution. To resolve discrepancies, DoD  officials may choose to contact the applicant, or search on the Web for  information. Typically, officials told us, DoD awarding components work  with firms to answer their eligibility questions and help ensure that they  prepare the necessary documentation properly. In addition, DoD  encourages self-policing by applicants by posting the names of recent SBIR  awardees on its Web site so that competitors can raise any eligibility  concerns they may have. However, Office of Naval Research officials said  competing firms seldom raise concerns, usually only one per year, and that  typically the concern is related to whether the awardee firm has been  purchased by another company.
When officials at either NIH or DoD have unresolved concerns about the  accuracy of an applicant’s eligibility information, they refer the matter to  SBA to make an eligibility determination. Upon receipt of a letter from the  agency detailing its concerns, SBA officials contact the applicant, ask them  to re-certify their eligibility status, and may request additional  documentation on the criteria of concern. For example, SBA officials may  request articles of incorporation and information on the distribution of  ownership to determine whether the applicant was at least 51 percent  owned by qualified individuals. Upon making a determination of eligibility,  SBA then notifies the official at the inquiring agency, and the applicant, of  its decision. Further, SBA makes the information about firms it finds  ineligible publicly available on its Web site so that all participating agencies  and the public can access the information. However, SBA does not  currently require its eligibility officials to include information on the Web  site identifying whether or not the determination was for SBIR purposes.  An SBA official told us the agency plans to include such information on its  Web site more systematically before the end of fiscal year 2006.
NIH and DoD take different approaches to retaining and sharing  information on firms found ineligible by SBA. At NIH, when SBA notifies  the referring agency official that it has deemed an SBIR applicant as  ineligible, the official notes the determination in the applicant’s file.  However, according to NIH officials, in response to the May 2003 SBA  decision, NIH also began centrally tracking firms SBA found ineligible, as  well as firms that self-selected themselves as ineligible and withdrew their  applications at some point in the review process. The agency makes this  information available to all of its institutes and centers that make SBIR  awards. In addition, agency officials told us that, if during the eligibility  review process, a firm was determined to be ineligible for an SBIR award,  NIH advises the applicant to be recertified by SBA before applying for  additional awards. In contrast, DoD retains information on firms  determined to be ineligible in the applicants’ files and does not have a  centralized process to share the information across DoD awarding  components. However, DoD officials said it is common practice for  awarding components to share such information electronically.
For the most part, NIH and DoD limit their data collection efforts largely to  information about the SBIR awards they make. Key information the  agencies track includes the phase, date, and amount of the award; the  geographic location of the awardee firm and principal investigator; and  contact information. Currently, the agencies do not maintain detailed data  on (1) applicants that the agencies decided not to select for funding, (2) the  reasons applicants were not selected for funding, and (3) characteristics of  the firms receiving the awards, such as the presence of venture capital  investment or the extent of ownership by venture capital firms or  otherentities. Moreover, neither NIH nor DoD systematically categorizes  SBIR projects by the industry represented or by the specific type of  research, such as whether the research is for a process or product or  whether the research is for software or therapeutic devices. However, both  agencies categorize projects by the general research topics listed in each  agency’s solicitation.
section_title: Agency Comments and Our Evaluations
paragraphs: We provided NIH, DoD, and SBA with a draft of this report for their review  and comment. NIH only provided technical comments that we have  incorporated, as appropriate. DoD agreed that because data on ownership  are not publicly available, it is not possible to determine the extent to  which venture capital firms own SBIR awardee firms. Moreover, DoD did  not find the results of our analysis surprising in light of differences in  markets for SBIR projects supported by NIH and DoD. SBA noted in its  comments that while the information in the report may be useful, it could  be misconstrued as suggesting a link between the presence of venture  capital investment and SBIR ownership criteria when such a link does not  exist. While we understand SBA’s concern, we believe that our report  clearly states that we used venture capital investment as a proxy for  venture capital ownership because ownership data are proprietary and  confidential or not readily available. We also explicitly note in the report  that no causal link can be inferred from the data. Both DoD and SBA also  provided technical comments that we incorporated, as appropriate. The  comments from DoD and SBA are included in this report as appendixes IV  and V, respectively.
We are sending copies of this report to the Director of the National  Institutes of Health, the Secretary of Defense, the Administrator of the  Small Business Administration, and other interested parties. We will make  copies available to others upon request. In addition, this report will be  available, at no charge, on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-3841 or mittala@gao.gov. Contact points for our Offices of  Congressional Relations and Public affairs may be found on the last page of  this report. Key contributors to this report are listed in appendix VI.
section_title: Scope and Methodology
paragraphs: In conducting our work, we interviewed officials at the National Institutes  of Health (NIH), the Department of Defense (DoD), and the Small Business  Administration (SBA) about their procedures in place, and any changes  that occurred during the time period of our review—fiscal years 2001  through 2004. We reviewed agency documentation on awards, award  selection and funding, eligibility determinations, and the data elements that  are collected during the eligibility process. We also interviewed officials  from organizations that represent venture capital investors and  biotechnology firms to obtain their views on the Small Business Innovation  Research (SBIR) program and venture capital investment.
To determine the total number and key characteristics of SBIR awards, we  obtained data from NIH and DoD for all awards made during fiscal years  2001 - 2004. Specifically, we asked for funding data on all SBIR awards that  originated in fiscal years 2001 through 2004 and excluded data on funding  to awards that originated before and after our time frame. These data  included award amounts projected at the time the award was made and  supplemental amounts issued subsequent to the award. We compared these  data to data on funds actually issued to awardee firms to ensure that the  projections were reasonable. We based our analysis on the projected  amounts combined with supplemental funds, which allowed us to provide  information on awards that originated in fiscal years 2003 and 2004 but  which may not be completed until 2005 or later. However, for NIH fast track  awards, we based our analysis on the actual dollars NIH spent on the award  as of September 30, 2005. We did not analyze awards NIH made as  contracts, which were a small portion of NIH’s awards, because certain  data elements essential for our analysis were not available. We interviewed  key officials at NIH and DoD about their databases. We assessed the  reliability of relevant fields in the agencies’ databases and found them  sufficient for our review. Our assessment included tests of the data itself as  well as reviews of internal quality control procedures. We used analytic  software to identify the following key characteristics of awards made by  NIH and DoD: the number of firms receiving these awards; geographic  location of these firms; agency components making the awards; the  amounts of the awards; and for DoD, the number of employees working for  the SBIR firms and their affiliates.
We also obtained data from two private sector firms, the Innovation  Development Institute (IDI) and Dow Jones-Venture One. Initially, we  selected IDI because its database included information that supplemented agency data on SBIR awardee firms. IDI’s database included information on  venture capital investments in SBIR awardee firms that was compiled from  published information such as company press releases. Subsequently, we  obtained data from Dow Jones-Venture One to help corroborate, and  supplement as necessary, the IDI data. We selected Dow Jones-Venture One  because its database on venture capital investment is compiled and  updated with information from both venture capital investors and the firms  that receive the investment. We interviewed key officials at IDI and Dow  Jones-Venture One about their databases. We assessed the reliability of  relevant fields in the databases and found them sufficient for our review.  Our assessment included tests of the data itself as well as reviews of  internal quality control procedures.
We combined data from NIH and DoD with data from the private sector  sources to identify firms that had received venture capital investment at  any time before they received an SBIR award in our time frame. In a small  number of cases, the venture capital investment occurred as early as 1980,  although most occurred in or after 1990. Specifically, at both agencies  combined, 93 percent of SBIR firms first received venture capital  investment between 1990 and 2004, 6 percent first received investment  between 1985 and 1989, and 1 percent first received investment earlier than  1985. The private sector data did not include information on whether the  venture capital investment was still present in the firm at the time of the  SBIR award, or whether the venture capital firms were majority owners.  We used analytic software to determine the number of awards made, the  amounts of the awards, the percentage of applications receiving awards,  and how the awards were distributed geographically. Similarly, to identify  the number of phase I and phase II awards that were above the guidelines  and their key characteristics, we used analytic software on the agency data  and the combined data to identify firms that had received venture capital  investment by the time they received an SBIR award above the guidelines  in our time frame.
In our analyses, we express differences in the likelihoods of receiving  awards that exceeded SBA’s guidelines by using odds ratios. An odds ratio  is generally defined as the ratio of odds of an event occurring in one group compared to the odds of it occurring in another group. In our analyses, the  event of interest was receiving an award that exceeded SBA’s guidelines  versus one that did not. We computed odds ratios to indicate the difference  between firms that had and firms that had not received venture capital  investment in the likelihood of receiving awards that (1) exceeded SBA’s  guidelines at all, and (2) exceeded the guidelines by large amounts. For  example, the odds that a firm that had received venture capital investment  received an NIH phase II award above $1 million were .499 while the odds  that a firm that had not received venture capital investment received such  an award were .244. Therefore, the ratio of those two odds was 2.045 (.499 /  .244), indicating that firms that had received venture capital investment  were 2.045 times (about 2 times) more likely to receive phase II awards  over $1 million than firms that had not received such investment.
To assess any differences that occurred to awards both above and below  the guidelines following SBA’s October 2002 additional clarification of the  SBIR ownership criteria and its May 2003 decision that addressed  ownership of SBIR firms by venture capital firms, we compared NIH and  DoD data on awards made from October 1, 2000, through September 30,  2002, with data on awards made from October 1, 2002, through September  30, 2004. We used the combined data set to compare NIH and DoD awards  from the two time periods in terms of the key characteristics described  above. We conducted our work in accordance with generally accepted  government auditing standards.
section_title: Comments from the Department of Defense
section_title: Comments from the Small Business Administration
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Cheryl Williams (Assistant  Director), Stephen Cleary, Curtis Groves, Annamarie Warman Lopata,  Gregory Marchand, Marcus Oliver, Alison O’Neill, G. Gregory Peterson, and  Anne Rhodes-Kline made key contributions to this report.