SBIR and STTR Reauthorization and the Future of Small Business Innovation

Critical Questions by Jerry McGinn, Alek Jovovic, and A.J. Dilts

Published March 17, 2026

On March 3, 2026, the United States Senate unanimously passed legislation to reauthorize the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs through fiscal year 2031. The bill, named the Small Business Innovation and Economic Security Act, emerged from months of bipartisan negotiations led by Senator Joni Ernst (R-IA) and Senator Ed Markey (D-MA). In her comments on a CSIS panel in September 2025, Senator Ernst spoke to the importance of not only renewing SBIR and STTR authorities but also reforming the programs to better fuel technology-focused firms and entrepreneurs crucial to the U.S. industrial base. To this end, the new SBIR and STTR legislation strengthens federal support for firms' commercialization of their products, encourages new small businesses to receive funds, and improves data collection to better measure award outcomes. However, the bill must pass the House of Representatives to become law, and challenges remain for SBIR and STTR to catalyze the long-term growth of small businesses and convert U.S. technological advancements into national security advantages.

Q1: What are the SBIR and STTR programs?

A1: Since their creation in 1982 and 1992, respectively, SBIR and STTR have earned the label "America's Seed Fund," distributing nearly $6 billion annually in recent years across 11 federal agencies to U.S. small businesses and startups pursuing innovative technologies. Coordinated by the Small Business Administration, the SBIR and STTR programs direct federal funds to small businesses to drive innovation, commercialize research findings, and fulfill government research and development (R&D) needs in areas like health, energy, and defense. In the 1970s, technological competition abroad and economic stagnation at home heightened national anxiety over U.S. industry's difficulty translating research discoveries into commercial successes. U.S. officials searching for solutions believed that small businesses, with their higher risk tolerance than larger firms and greater incentive to commercialize than universities, were uniquely suited within the country's industrial ecosystem as engines of innovation.

Yet then, and today, small businesses received significantly less federal financing than larger firms. Congress formed the SBIR program to bridge this funding gap in a bill that President Ronald Reagan signed into law in 1982. A decade later, lawmakers established the STTR program, encouraging early-stage businesses to partner with academic institutions and bring technological discoveries to market.

Federal agencies administer their own SBIR and STTR programs by setting aside a portion of their external R&D budgets. Eleven federal agencies currently participate in the SBIR program, and six provide funding through STTR. The Department of Defense (DOD), including the Army, Navy, and Air Force, the Defense Logistics Agency, and the Defense Advanced Research Projects Agency, provides at least 2,250 individual SBIR and STTR awards each year. In fiscal year 2023, these contracts totaled nearly $3 billion, or roughly half of all SBIR and STTR obligations.

For-profit, American-owned entities with 500 or fewer employees and a location in the United States are eligible for SBIR and STTR funds. Recipients range from spinouts of university and lab research, such as iRobot, venture capital-backed technology startups like Shield AI, and established, small commercial firms with deep expertise in a technical domain, like Creare LLC.

Agencies issue SBIR and STTR awards through a three-phase framework. Phase I funds determine the technical feasibility of a firm's innovation before larger Phase II awards help develop prototypes. The goal of Phase III is to transition the technology out of the federal R&D pipeline and into actual use, either in the commercial market or within the government.

Q2: What are examples of the SBIR and STTR programs successfully driving small business innovation?

A2: SBIR and STTR programs fund more than 4,000 small businesses annually. They have resulted in over 70,000 patents, 700 public companies created, and $41 billion in venture capital investments made. Over a 23-year period, SBIR and STTR contracts from the DOD alone supported an average of 65,578 jobs per year.

Before growing into a world-leading telecommunications company, Qualcomm received eight SBIR Phase I awards and four Phase II awards during its first five years of operation. Administered through the DOD and National Science Foundation in the late 1980s, these awards helped the firm develop a new type of semiconductor for wireless communications that would power most cell phones. Cofounder Irwin Jacobs credited the SBIR awards for serving a dual function-not just capital, but also "stamps of approval" to private investors.

The South Dakota-headquartered environmental firm OctaFlex represents another SBIR and STTR success story. In 1998, the family-owned business won a Navy SBIR award to develop portable wash-down and decontamination solutions that could protect groundwater while cleaning military vehicles. Combined with a second DOD SBIR award, OctaFlex engineered a modular, efficient wash-down facility that has decontaminated military vehicles returning from overseas, has saved millions of taxpayer dollars, and could have wide-ranging applications like chemical-biological attack responses.

More recently, the Boston-based startup TeraDAR received Army and Air Force SBIR contracts to develop terahertz sensing technology for visibility and threat detection applications in U.S. military vehicles and aircraft. SBIR funds have given the firm both credibility in the defense sector and a foundation for scaling into the commercial automotive market.

Q3: What challenges have the SBIR and STTR programs faced?

A3: SBIR and STTR awards are designed to steer companies toward a commercial or government buyer in Phase III, so the programs do not award funding in this final stage. This focus on transition makes sense, but it exposes firms to the "valley of death," or the fraught transition between prototype development and commercial or government deployment, for the small businesses that receive SBIR and STTR awards.

SBIR and STTR efforts also suffer from a lack of standardized measurements of progress after firms receive Phase I and Phase II awards. An absence of metrics makes it extremely difficult to measure the programs' ultimate outcomes, obscures the federal government's understanding of how it may best accelerate technological innovation, and opens SBIR and STTR to critics who doubt the programs' value.

A third issue, the growth of so-called SBIR mills, is often cited as an obstacle to SBIR and STTR effectiveness. These companies have received multiple rounds of support from SBIR and STTR funds year after year, maintaining their small business status instead of maturing out of eligibility. Some argue that the current programs favor applicants skilled in early-stage innovation but disinterested in commercializing their solutions, fail to further the programs' core objectives, slow the commercialization of advanced research, and crowd out new companies from receiving needed SBIR and STTR capital. Yet analysis from the Government Accountability Office suggests that the concern may be overstated. From FY 2011 to FY 2020, the 22 discrete businesses that received 50 or more Phase II awards represented less than 1 percent of all Phase II awardees during that time span. Others argue that multiple award winners play an important role in growing expertise and providing the government with consistent returns on investment in narrow, highly technical capability areas.

Q4: Why did congressional authority for SBIR and STTR lapse, and what did that mean for the programs and the industrial base?

A4: On September 30, 2025, the SBIR and STTR programs' congressional authorization expired after a debate on the U.S. Senate floor between Senator Markey and Senator Ernst. Senator Markey argued for a one-year extension of SBIR and STTR authority under existing legislation before reforming the programs, while Senator Ernst insisted on immediate reforms before reauthorization.

As a result of the lapse, federal agencies have been prohibited from issuing new SBIR and STTR solicitations or committing new funds. This puts at risk thousands of small businesses at critical points in their early development, potentially leading to layoffs and suspended research in industries such as healthcare and defense. Maj. Gen. Stephen Purdy, acting space acquisition head for the Department of the Air Force, for example, said he was "very concerned" about the pause of SBIR grants to commercial companies that comprise the Space Force's industrial base. Purdy also highlighted the importance of SBIR and STTR funds for signaling government interest and long-term demand to private equity and venture capital investors. The interruption of SBIR and STTR thus removes this crucial demand signal at a moment of rising geopolitical competition and need for industrial capacity.

Q5: What was the legislative solution, and what is its impact on the programs?

A5: The Small Business Innovation and Economic Security Act addresses Senator Ernst's desire for structural SBIR and STTR changes to drive small businesses' commercialization and Senator Markey's concern that more radical reforms would harm the programs' smallest participants. To help firms transition to Phase III, the bill establishes a novel "strategic breakthrough award" that allows agencies to make awards up to $30 million and enhances training for federal agencies' acquisition officials as they contract with businesses in Phase III. The legislation also mandates improved SBIR and STTR data collection practices, including better tracking of firms' progression to Phase II and Phase III. The act also requires that agencies set a cap on the number of proposals a small business can submit to the SBIR and STTR programs on either a per-fiscal-year, per-solicitation, or per-topic basis. To reduce risks of adversarial foreign investment, the bill strengthens and more explicitly defines the due diligence review process for small businesses' foreign ownership and financial ties.

This legislative initiative arrives at a critical moment for the U.S. industrial base. The health of small businesses that provide key components, technology, and services to prime defense contractors is essential to preventing supply-chain bottlenecks, fueling innovation, and increasing production. As security competition in the Indo-Pacific and conflicts in the Middle East and Europe strain U.S. stockpiles, SBIR and STTR reforms will be called on to close the valley of death, foster new entrants to the industrial base, and translate SBIR and STTR investments into key capabilities for U.S. national security needs.

Q6: What challenges remain for SBIR and STTR funds to fuel innovation within the industrial base?

A6: SBIR and STTR awards support diverse types of small firms, each with distinct levels of ambition and unique challenges. Not all recipients seek to scale and commercialize their products; rather, they may seek to develop innovative products or software for a narrow, consistent group of government customers. For these companies, SBIR and STTR awards may best facilitate success by supporting the licensing or selling of intellectual property to a larger firm that is better equipped to manufacture and field the technology at scale.

For those firms that do seek to capture significant market share on their own, SBIR and STTR awards can be necessary but not sufficient conditions for success. Evolving from prototype to production also demands workforce training, resilient supply chains, robust manufacturing capacity, and predictable, multiyear demand signals from buyers willing to commit to long-term procurement. While SBIR and STTR can catalyze firms' growth, early-stage capital is one piece within a more holistic U.S. industrial policy arsenal capable of building and sustaining U.S. small businesses.

Having moved through the Senate, the U.S. House of Representatives must now approve the SBIR and STTR reauthorization bill to end over six months of halted support to thousands of small businesses. With the legislation's final enactment, the reformed SBIR and STTR programs will be better equipped to convert investments into innovation and technological advancements into national security advantages.

Jerry McGinn is director of the Center for the Industrial Base and senior fellow with the Defense and Security Department at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Aleksandar (Alek) Jovovic is deputy director at the Center for the Industrial Base and a senior fellow in the Defense and Security Department at CSIS. A.J. Dilts is a research assistant for the Center for the Industrial Base at CSIS.

If you are interested in learning more about this topic, explore CSIS's Executive Education course All About the Base: Acquisition Crash Course.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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