Earlier this month, the U.S. Navy announced a significant overhaul of its Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, with a renewed emphasis on speed, efficiency, and commercialization. The changes are intended to accelerate how quickly innovative technologies move from concept to deployment, which is unsurprising given the U.S. Department of War’s (DOW) focus on speed and supporting the warfighter. As these reforms begin to take shape, small business contractors should make efforts to assess their commercialization readiness while balancing their compliance requirements.
Overview of the New Approach
Historically, the SBIR and STTR programs have served as critical entry points for small businesses to develop and transition innovative technologies in support of defense missions. These programs provide phased funding to support research, development, and eventual commercialization of technologies aligned with agency needs. However, the Navy’s new approach appears to shift the focus. While still meant to serve as entry points for small businesses, there is greater emphasis on reducing administrative burdens and accelerating the transition timeline from initial award to operational use.
The most notable changes include:
- Increased emphasis on commercialization and private-sector investment, which include the Navy holding private capital events for the purpose of securing outside funding.
- Introduction of training programs such as “Navy Launch,” which focus on customer discovery and commercialization strategy development for participating small businesses.
- The Navy small business office preparing to support the new portfolio acquisition executive structure.
Implications
These changes signal a meaningful shift in how the Navy evaluates and supports innovation. In our Warfighting at Warp Speed series, we’ve discussed the emphasis that the DOW has placed on speed and supporting the warfighter; the Navy is unsurprisingly aligned with this mission, and for small businesses who rely on these programs, the emphasis on speed and commercialization will have significant effects.
First, companies that are able to demonstrate clear pathways to commercialization—including private investment or dual-use application—may be better positioned for success under the new framework. Conversely, firms focused solely on early-stage research without a defined transition strategy may face roadblocks.
Second, the push for fast timelines could compress proposal preparation and development cycles. While this may reduce uncertainty in the short-term for the Navy to get deliverables, speed may lead to mistakes in the long run, particularly with systems that require extensive testing.
Finally, these changes may encourage more industry involvement from businesses who are not ordinarily in the government contract space. Specifically, this could lead to an increase in private equity firms investing in companies they believe can commercialize, thereby changing the competitive landscape.
Private Equity Involvement
With an increased interest in private capital assisting small businesses involved in these programs, private equity firms who want to seize these opportunities should understand a few key rules.
Investment firms can participate in the SBIR and STTR programs by structuring their investments in ways that avoid triggering ownership-based affiliation, since these are still small business programs where the participating company must be a “small business.” Therefore, any outside capital that invests in an awardee must consider ownership and affiliation issues. For example, venture capital (VC), hedge funds, and private equity (PE) firms can own more than 50% of an SBIR awardee, but no single firm may own a majority interest; this rule does not apply to the STTR program. And beyond ownership thresholds, investments must also be designed to avoid bases of affiliation.
For the most part, the standard small business affiliation rules track the affiliation rules here, such as ownership, common management, identity of interest, etc. For instance, placing shared executives across portfolio companies can create affiliation. However, the regulations provide important safe harbors. An SBIR or STTR awardee is not automatically affiliated with other portfolio companies of a VC, hedge fund, or PE firm solely due to share investment, particularly when the firm holds only a minority stake. Additionally, Small Business Investment Companies that invest in SBIR or STTR awardees are exempted from affiliation. Taken together, these rules enable investment firms to support SBIR and STTR awardees through minority investments, advisory roles, and arm’s-length commercial relationships while preserving the awardee’s eligibility, but only if structured appropriately.
Private equity and other investment firms should become more familiar with these rules due to the increased interest and opportunities developing for their involvement in up-and-coming small businesses.
Key Takeaways
- Small businesses should assess commercialization readiness. Companies participating in or pursuing SBIR/STTR award should evaluate whether their technologies have clear, actionable commercialization pathways. This includes identifying potential customers and private funding sources. Additionally, given the Navy’s emphasis on speed, small businesses should be prepared for shorter development cycles and faster decision-making. Internal compliance controls should be reevaluated accordingly.
- Engage early with program stakeholders. It is entirely possible that the Navy, and other components of the DOW, will continue to revamp their SBIR and STTR programs. In order to achieve the best outcome, proactive engagement with Navy program offices and acquisition officials will be critical during implementation.
- Monitor ongoing implementation. As the Navy will host private capital events and provide trainings on commercialization, this will provide small businesses with a glimpse into the Navy’s execution of their thinking toward speed and deliverables.
As the Navy continues to reshape its SBIR and STTR programs, the shift toward speed and commercialization represents the DOW’s commitment to efficiency and supporting the warfighter. If you have questions regarding the Navy’s overhaul of the SBIR/STTR programs, please contact Cy Alba, Adel Mansour, or another member of PilieroMazza’s Government Contracts practice group.
