SBIR Mills are draining America’s innovation fund

Author’s note: In Part 1 of this series, Zach Beecher (Partner at Scout Ventures) and I endorsed Sen. Joni Ernst and Rep. Roger Williams for introducing the INNOVATE Act to reimagine the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. In Part 2, I examine the underbelly of those few loud and well-funded critics fixated on keeping SBIR/STTR stuck in the past.

The INNOVATE Act is an opportunity to expand participation for emerging companies and recognize merit through strategic breakthrough awards to propel companies to commercialization. But unfortunately, a small, but vocal group is fighting to block this reform. Why? Because their entire business model depends on the status quo.

Today, “America’s Seed Fund” is being used as a private ATM for a small class of “multi-award winners” (MAWs) instead of maturing into self-sustaining companies. These MAWs routinely win 50-plus SBIR/STTRs awards year after year, claim “small business” status and persist primarily on government grants, crowding out true innovators, and in some cases, partnering with adversaries abroad.

The SBIR Mill business model

Let’s be clear: winning several SBIR awards in a one-year period is a positive outcome for an emerging company. In fact, this is how the SBIR program was designed to operate. Early capital is essential, and no one begrudges a promising firm five to ten awards of non-dilutive capital as it finds product-market-fit for government needs. But when a company’s existence is solely reliant on annually receiving 20-plus SBIR/STTRs for decades, it should be questioned whether that company is meeting the objectives of the program or has the program become their business model.

For example, Physical Sciences Inc. is arguably the largest MAW. Since 1983 (the SBIR/STTR program was enacted in 1982), Physical Sciences have received 1,728 SBIR/STTR awards worth $650 million. In just 2023-2024, it pocketed $83.6 million, according to data that was researched utilizing Obviant, a federal procurement data platform.

To put that in perspective, Physical Sciences has received:

• More SBIR/STTR dollars than all small businesses in 26 states combined since the program began.
  
  
• More DoD SBIR/STTR dollars than the entire Defense Department award totals in 33 states.
  
  
• More DOE SBIR/STTR dollars than all Department of Energy awards in 28 states.
  
  
• More NASA SBIR/STTR dollars than NASA’s totals in 29 states.
  
  

That’s not entrepreneurship — it’s white-collar welfare.

Or consider Triton Systems. Since 1993, it has received 906 awards totaling $365 million. In 2023-2024 alone, $62.6 million in SBIR/STTR money flowed its way. Its haul surpasses the entire SBIR/STTR allocations of 22 states, according to data that was researched utilizing Obviant.

This is not what Congress intended in 1982 when it created SBIR/STTR to “foster and encourage participation by small business concerns in Federal R&D.” Instead of seeding growth, taxpayers have subsidized permanent for-profit research houses whose core competency is grant-writing, not scaling critical technology.

Even more concerning, some of these firms have spun off taxpayer-funded technologies into partnerships with foreign entities, including those backed by the Chinese Communist Party. That is not just wasteful, it is dangerous. This willful slight of hand undermines trust in the program and risks strengthening our adversaries with innovations paid for by U.S. taxpayers.

Answering the defenders of MAWs

Defenders of multi-award winners like to trot out what they call the “Big Lie” — the claim that MAWs don’t commercialize their SBIR work. Their white paper argues that MAWs actually deliver “strong returns,” pointing to a Government Accountability Office-estimated $0.89 commercialization per Phase II dollar and additional untracked impacts like Phase III contracts and acquisitions. On paper, they say, MAWs are the unsung heroes of defense innovation. Respectfully, $0.89 is a poor ratio regardless of your comparison and the taxpayers should demand better.

Beyond the Big Lie which cherry-picks from that GAO report, the reality is it tells a different story. GAO’s independent review in 2024 found that MAWs equate to less than 1% of participants but receive over 10% of Phase II dollars — and they performed below or barely equal to peers on key program goals. MAWs produced fewer patents (3.4% vs. 4–5% for others), weaker private-sector sales and investment per SBIR dollar, and with one exception, none were owned by socially or economically disadvantaged groups. In short, MAWs aren’t driving the broad-based innovation the program was designed for, they’re crowding it out.

Some MAW defenders dismiss reform and have brazenly called the INNOVATE Act “DEI for VCs,” claiming efforts to attract first-time entrants, diversifying the award base, and leveraging private capital to accelerate technology amount to favoritism. But GAO’s own data reveal that MAWs have delivered little in the way of diversity, commercialization, or innovation spillover. If anything, the status quo is the real handout: entrenched incumbents with proposal-writing machines masquerading as small businesses while hoarding government grant funding year after year.

And when pressed, defenders resort to strawman arguments. In a recent Federal News Network piece, Kenan Ezal of Toyon Research Corporation, a self-admitted SBIR Mill, argued that critics misunderstand the burden of operating in classified environments, pointing out that Sensitive Compartmented Information Facilities (SCIFs) are expensive and that his firm “loses far more proposals than it wins” — about one out of six Phase I submissions. But losing more than you win is irrelevant when you flood the system with proposals. A one-in-six success rate is still a winning strategy when you can afford to submit hundreds of bids, yielding dozens of contracts and tens of millions annually. The GAO confirmed that just 22 firms captured over 10% of Phase II dollars between 2011–2020. That concentration is the definition of “wired.” And as for SCIFs, every company serious about meaningful DOD work eventually needs a facility clearance. Most SBIR awards are about $1 million, well below the type of highly classified work that truly requires extensive infrastructure. Classification costs are no justification for decades of dependence on SBIR.

Similarly, former Navy SBIR director Bob Smith claimed the problem is not with MAWs but with the department’s acquisition system, arguing that SBIR “still runs up against the Valley of Death” and Ernst’s bill wrongly expects SBIR itself to get companies across. This is exactly backwards. The Valley of Death exists because agencies lack clear signals about which technologies to scale. That is why the INNOVATE Act introduces “strategic breakthrough awards” — building on what the Air Force and Space Force originated with TACFI and STRATFI — to resource promising projects and push them across the valley. Pairing government’s “big swings” with private capital opportunities is how you grow the next generation of technology companies. If MAWs were truly solving the Valley of Death, GAO data would show strong commercialization and private-sector follow-on. Unfortunately, it does not.

Alarmingly, the stakes could not be clearer. A recent Council on Global Competition and Innovation report shows that while America led in 60 of 64 critical technologies in the early 2000s, today America leads in just seven. China now dominates 57 — from AI and biotech to energy and advanced manufacturing — because they excel at turning R&D into commercial and strategic advantage, sometimes off of stolen U.S. IP. SBIR/STTR reform alone won’t solve this crisis, but pouring billions into MAWs that historically underdeliver is exactly the kind of wasted time, energy and resources the government can no longer afford.

Why the INNOVATE Act matters

The INNOVATE Act introduces commonsense reforms, like caps on total lifetime awards, opportunities for first-time recipients and strategic breakthrough awards to help scale across the Valley of Death.

These reforms shift the program from subsidy to portfolio. Instead of feeding a handful of mills, SBIR/STTR can once again serve its intended purpose: seeding technologies until they can stand on their own.

Critics say this will “kick out” experienced firms. I say: good. If after 30 years and hundreds of millions in grants you still rely on SBIR/STTR grants, the problem is not the program, it’s the business model.

A better path forward

Government funding should be a catalyst, not a crutch. By broadening participation, incentivizing commercialization and pairing taxpayer dollars with private capital, we will see more entrants across the country, more competition in the industry base, increase in private capital helping scale promising technology to accelerate economic security, and ultimately more jobs across the country.

As the September reauthorization deadline approaches, Congress faces a clear choice: preserve a system that subsidizes a few “SBIR Mills,” or reform it to unleash America’s next wave of innovators.

Sen. Ernst and Rep. Williams have charted the right path. It won’t be easy as entrenched interests rarely go quietly, but the stakes are too high for half-measures.

It is time to refocus SBIR/STTR on its original mission: fostering breakthrough technologies that deliver lasting impact for our defense, economy and society. To do that, we must root out the mills and give real entrepreneurs their shot at America’s seed fund.