Small Business Innovation Research: Change in Program Eligibility Has Had Little Impact
Published: 2014-11-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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 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. 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 majority-owned portfolio companies.
section_title: What GAO Found
paragraphs: 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.
section_title: What GAO Recommends
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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   However, in 2003, a Small  a study by the National Academy of Sciences.Business Administration (SBA) administrative law judge issued a decision  holding that such companies were ineligible to receive SBIR awards.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.
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.  In December 2012, SBA issued a final rule to implement the  NDAA provisions and revise SBIR’s eligibility criteria to include majority- owned portfolio companies, which became effective in January 2013.
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  substantially contribute to the agency’s mission. 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. 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.
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  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.
subsections: section_title: Background
paragraphs: Federal agencies with a budget in excess of $100 million for extramural  R&D are required to establish and operate an SBIR program. 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.
The SBIR program includes the following three phases:  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.
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  III, agencies can participate in phase III by, for example, purchasing  the technology developed in prior phases.
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. 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.
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 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  of participating agencies’ SBIR funds that may be awarded to majority- owned 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 majority- owned 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.
section_title: Change in SBIR Program Eligibility Has Had Little Impact
paragraphs: In 2013, HHS and DOE each provided a written determination to SBA and  Congress prior to making SBIR awards to majority-owned portfolio  companies. 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. 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.officials told us that by opening their SBIR programs to majority-owned   NIH and ARPA-E  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.
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. through September 2014 (end of fiscal year 2014), these subunits issued  68 SBIR solicitations, of which 56 were open to majority-owned portfolio  companies. 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.
From October 2012 (start of fiscal year 2013)
NIH 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. 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.In addition, NIH made awards to 10 majority-owned portfolio companies  that consisted of 7 phase I awards, and 3 phase II awards.
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  research. The representatives said they did not encounter any significant  problems applying for SBIR awards or receiving SBIR funds.
section_title: Most Participating Agencies Have Not Exercised Their Authority to Open Their SBIR Programs to Majority-Owned Portfolio Companies
paragraphs: Nine agencies have chosen not to open their SBIR programs to majority- owned 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.
subsections: section_title: Agencies Cite Various Reasons for Electing Not to Participate
paragraphs: 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  companies in their SBIR program.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.
They also said that the agency’s
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.
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  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  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 majority- owned 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 majority- owned 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  ownership. 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.  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.  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.
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 majority- owned 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. Officials from three of 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.
section_title: Some Agencies Are Interpreting the Written Determination as a Potentially Stringent Requirement
paragraphs: 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. 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.
Committee for Capitalizing on Science, Technology, and Innovation: Venture Funding  and the NIH SBIR Program, 2009. 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. Some agencies may be  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.
section_title: Conclusion
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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  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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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  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.
section_title: Appendix I: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.