The Small Business Innovation and Research Program Can’t Fail What it Doesn’t Track
The primary objective of the Small Business Innovation and Research (SBIR) program is to increase government innovation and increase opportunities for woman and minority-owned businesses. However, substantial gaps in data collection and program evaluations have made determining success a difficult endeavor. The Small Business Administration (SBA) and Congress will need to improve mechanisms for collecting data on project outcomes, establish a framework for evaluating diversity, and increase funding for SBIR internal and external evaluations.
Minorities Remain Minorities
The SBIR program has strong small business representation as 48 percent of approved projects have four or fewer employees. Government agencies sourced applications for 842 different topics in 2011 to more than 2,000 in 2018. Participation is consistently increasing from both business and government parties, and funding is targeting small businesses.
Narrowing the numbers to woman and minority-owned businesses, the number of awards provided increased more than 150% from 1992 to 2005. The majority of awards went to women-owned businesses. However, considering the overall increase in awards given, woman and minority-owned businesses have stagnated between 15 to 20 percent of all Phase I awards. Since businesses cannot apply directly to be part of Phase II funding, this continues to stagnate participation from marginalized groups throughout the SBIR program.
Mandatory Optional Funding
Private venture capital is prevalent in businesses that are successfully funded by SBIR. More than half (56%) have both venture capital and SBIR funding. SBIR funding is used to fund technological development that make small businesses a more palatable risk to large venture capital investors. Additionally, venture capital is used to improve an SBIR applicant’s commercial potential—giving privately-backed small businesses a leg up in the SBIR evaluation process.
While the interplay between stacking funding options may improve a small business’ chance of getting awarded an SBIR grant or contract, it may create unintentional barriers for the women and minorities it seeks to support. In 2019, women received an all time high of 2.8% of all venture capital funding. During the pandemic, this dropped to 2.3% in 2020. The slice of women founders with venture capital is already quite small before funneling through the SBIR review process.
Racial and ethnic diversity within venture capital firms is also embarrassingly low and unrepresentative of the growth in graduates of color in advanced sciences and engineering degrees. Black, Latine, and Middle Eastern founders make up just over 5% of all venture capital recipients. The vast majority of venture funded businesses are located in Silicon Valley and started by ivy league educated founders which are selected through another system that favors white, high-income cis men.
Recommendations
Data Tracking and Program Evaluation
The SBA and participating government agencies need data collection and program evaluations that provide insight into the small businesses receiving grants and contracts and their eventual product outcomes. There will need to be multiple metrics that reflect the necessary project failures as part of a program that takes big risks to fuel innovation, but this does not negate the need for defining what success means. With diversity as a key goal of the SBIR program, more needs to be understood about how people from marginalized groups engage with entrepreneurship and funding. Critically, defining who is a “minority” and how this is defined separately from being a woman needs to be updated to reflect intersectional and gender non-conforming identities. This will require seeking out business owners from marginalized groups in different industries to understand the nuanced barriers they face.
Formal mechanisms are also urgently needed. Advisory boards that bring together SBIR and federal agency leadership, scientists, technologists, and experts from other relevant fields should provide accountability and consistent recommendations for continual improvement. The SBA and federal agencies should provide transparent results to Congress on their core impact areas of innovation, small business support, and diversity. Each agency should provide evaluations on how the program works for their specific organization and share their improvements and recommendations broadly. While the SBIR program has managed to be an impactful tool for fueling innovation, it has had little oversight and accountability.
Pre-Application Improvements
There are opportunities to improve not only diversity within SBIR programs, but throughout venture capital investments as well. Early interventions that introduce interested small business owners to venture capital firms, expand their technical development networks, or partner them with academics can increase their chances of being awarded and SBIR contract or grant. Several businesses develop research papers, processes, and findings that are shared across the academic and government communities. Improving knowledge sharing ahead of the SBIR application could improve accessibility of critical knowledge and skills to start a technology focused business.
Assessment criteria for applications should be diverse and flexible to meet the needs of vastly different agencies, but to address systemic barriers to participation from woman and minority-owned businesses. If the result is that nearly half have previous venture capital, understanding how SBIR acceptance criteria may reinforce the necessity of additional funding. Some of the top funded businesses ($10 million or more) have received multiple SBIR awards and could imply that wealth begets wealth. This concentration of funding in a handful of successful small businesses contradicts the theory that diverse perspectives promote innovation.
Good But Not Great
The SBIR program holds a lot of potential to infuse innovation through mobilizing small businesses around common scientific and technological goals. These projects created the Internet and contributed to a vast portfolio of scientific advancements. However, the program falls short of its promise to diversity and hasn’t bothered to track its failing progress toward that endeavor.