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

Letter

Background

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.

Key Characteristics of NIH’s and DoD’s SBIR Awards for Fiscal Years 2001 through 2004

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.

Total Number and Value of NIH’s and DoD’s SBIR Awards for Fiscal Years 2001 through 2004

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.

Geographical Distribution of NIH’s and DoD’s SBIR Awards for Fiscal Years 2001 through 2004

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.

NIH and DoD Agency Components Making SBIR Awards for Fiscal Years 2001 through 2004

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.

Characteristics of NIH and DoD SBIR Awards Made to Firms that Had Received Venture Capital Investment

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.

Size of SBIR Firms That Received Awards from DoD

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.

Few Awards above the Guidelines Were Made to Firms That Had Received Venture Capital Investment Although These Firms Tend to Receive Larger Awards

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.

Number and Value of NIH and DoD SBIR Awards That Were above the Guidelines

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.

Extent to Which NIH and DoD SBIR Awards above the Guidelines Were Made to Firms That Had Received Venture Capital Investment

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.

SBA’s Ownership Clarification Does Not Appear to Have Reduced Program Participation by Firms That Had and Had Not Received Venture Capital Investment

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.

NIH, DoD, and SBA Focus Largely on Select Eligibility Criteria and Collect Limited Data on SBIR Awardees

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.

Agency Comments and Our Evaluations

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.

Scope and Methodology

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.

Comments from the Department of Defense

Comments from the Small Business Administration

GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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.