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For Context: This is triple the number of proposals even the largest venture capital (VC) firms can responsibly handle.
OBTW, these large, well-established VC firms (like Sequoia and A16Z) have highly-trained full-time teams dedicated to screening proposals and deploying capital in a responsible manner to maximize the return-on-investment probability.
Meanwhile, the DoD—dealing with three times as many company pitches—predominately relies on part-time volunteers to sift through the mountains of SBIR proposals.
The sheer volume of Phase I proposals drives a proposal writing process that is so onerous and byzantine that it supports an entire niche industry of third-party advisors to help companies craft administratively correct packages.
This clogs the system, consumes resources, and detracts from focusing on the actual small business innovation opportunities.
Ditch the machine gunner spray and pray tactic and start acting like a sniper: Conduct recon, perform target analysis and go after the right targets. It’s what the professionals do.
Flaw #2: It’s not Innovation
The purpose of Phase I is for the government to pay a small company to research the scientific and technical feasibility of a new concept or idea.
While it’s nice to think of this as a germinator stage or even innovation research, it’s really just government-subsidized market research.
How can you can tell: Look at the contract value ($50-250K) and period of performance (6 months). In 2019, the average Phase I SBIR award was $117K.
No investment firm in the world is giving a company that minuscule amount of money over that short period of performance to do anything meaningful, let alone innovative.
Flaw #3: It’s not R&D
There is a precise definition the federal government uses to quantify what is Research & Development (read this for our summary on R&D and Budget Activities).
Turns out, Phase I SBIR does not meet the standards set by the National Science Foundation (or the IRS) to even qualify as “R&D.”
Using the generally-accepted framework, SBIR Phase I activities are what happen before 6.1 Basic Research begins.
What Now
It’s time to kill the Phase I SBIR and focus on responsibly deploying capital and doing so with reasonable volume.
This would reduce a ton of burden on the DoD, freeing up resources to embrace one authority Congress has already granted the Pentagon: the Direct to Phase II (DP2) program. This authority permits the DoD to award a Phase II contract to a company without first awarding them a Phase I contract.
This would effectively make DP2 programs the first tranche for small business innovation for defense and align the SBIR program to what the capital markets do.
Unlike SBIR, the results are undeniable: the commercial sector has been out-pacing government R&D for 30+years. Why: Because they are delivering innovation and returns on investments.
Parting thought: If this construct existed in 2019 and SBIR Phase I proposals were eliminated, the data shows that 200 more Phase II awards averaging $1.1m could have been granted to small businesses with no extra federal funding spent.
It may have even saved some money. In 2019, the DoD spent $26m on SBIR program administrative overhead, presumably in large part to deal with the 9,000+ unnecessary Phase I proposals. Ouch.
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