Is SBIR a Government Venture Fund?

Abstract

The federal government's well-known Small Business Innovation Research (SBIR) program funds small businesses that are developing and commercializing innovative new technology. It is commonly regarded as a "government venture fund." This label is unfortunate. Within the U.S., it has caused the SBIR program to be criticized both for competing with private ven- ture capital funds (VCs) and for wasting scarce taxpayer resources on small businesses that, according to some detractors, are not as successful at generating innovation as venture capital (VC)-backed companies. These criticisms divert attention from SBIR program successes, generate unnecessary drama during congressional SBIR reauthorization debates, and sideline important opportunities to improve the SBIR program. Outside the U.S., the "government venture fund" concept disguises the very real differences between the SBIR program and VCs, potentially undermining the effectiveness of government initiatives to promote innovation. There are actually few similarities between the SBIR program and VCs—aside from the fact that both provide comparable amounts of seed-stage funding to small technology firms. As a matter of public policy, it needs to be clearly understood that the SBIR program is not a government venture fund, does not compete with VCs, and has objectives of national economic and soci- etal importance that do not conflict with those of private-sector investors. This paper begins by comparing the number and size of SBIR and VC seed-stage investments in the U.S. Then it contrasts their very different objectives, company selection criteria, staging of investments, obligations imposed on recipient companies, and metrics used to measure success.