Win a Lot of SBIR Awards? The SBA Wants a Third of Your Revenue to Come From Somewhere Else

Thirty-three percent. That’s the share of revenue the SBA now wants its most frequent research-award winners to earn from somewhere other than the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs ^[1]. In a notice published Sept. 2, the agency proposed that any firm with more than 25 Phase II awards in five years show at least 33% non-SBIR revenue in the first year and 50% after that, or lose the ability to propose new early-stage projects for a year ^[1]. If you run a small research shop that lives on these awards, read on. If you’ve won two, you can relax.

What the SBA proposed

A quick translation first. SBIR and STTR are the federal set-asides that pay small companies to do research for agencies. Phase I is the small feasibility award, Phase II is the larger development award, and Phase III is follow-on work paid for with money from outside the SBIR and STTR budgets ^{[1, 4]}.

Here’s the short version of the notice ^[1]:

• Who’s covered: firms with more than 25 Phase II awards, SBIR and STTR combined, across all participating agencies, during the five most recently completed fiscal years, not counting the current one.
• The test: “non-SBIR revenue share,” meaning the percentage of total company revenue over the three most recent completed fiscal years that did not come from Phase I or Phase II funding.
• What counts as non-SBIR: private sales, Phase III awards and other government contracts.
• The bar: at least 33% for the fiscal 2027 assessment, then at least 50% for fiscal 2028 and every year after.
• The penalty: no proposals for a new Phase I or Direct-to-Phase II award (a route that skips Phase I) at any participating agency for one year from the determination.

The SBA says it approved this benchmark for all 11 participating agencies, and that it replaces the one announced in 2013 ^[1]. The standards take effect Nov. 15, 2026, once posted on sbir.gov, and comments are due Oct. 31 ^[1].

How the old yardstick worked

The 2013 benchmark measured something narrower. It applied to firms with more than 15 Phase II awards over 10 fiscal years, leaving out the two most recent, and asked for an average of at least $100,000 in sales or investment per Phase II award, or patents equal to at least 15% of those awards ^[4]. Firms that failed lost Phase I eligibility for a year ^[4].

Congress added a tougher layer in 2022. The SBIR and STTR Extension Act raised the bar for the heaviest users: an average of $250,000 in sales and investment per Phase II award for firms with more than 50 of them, and $450,000 for firms with more than 100 ^[3]. A firm that misses those marks is capped at 20 total Phase I and Phase II awards per agency for a year ^[3].

The new notice changes the question. Instead of tracing sales back to particular projects, it asks how much of the whole company’s revenue comes from outside the two programs ^[1].

How we got here

The programs’ authorization lapsed last October while the Senate Small Business Committee’s leaders disagreed over how to change them, according to the American Institute of Physics’ FYI news service, which in March described a “nearly six-month lapse in solicitations and annual funding” ^[5].

Sen. Joni Ernst (R-Iowa), the committee’s chair, pushed reforms to prioritize “truly small businesses,” FYI reported, and called her proposals “basic safeguards” ^[5]. Sen. Ed Markey (D-Mass.), the ranking member, opposed her bill and pushed for a “clean” one-year reauthorization while a compromise was worked out ^[5]. The final deal left out Ernst’s proposed $75 million lifetime cap on SBIR awards to any one company ^[5]. Markey said dropping those provisions helps small businesses and research institutions, FYI reported, while Ernst said she “could no longer let China win, allow waste to run rampant, fail our warfighters, or let large companies crowd out actual small businesses” ^[5].

President Trump signed the compromise, the Small Business Innovation and Economic Security Act, on April 13 ^[2]. It extends both programs through Sept. 30, 2031, and keeps the 2022 tougher standards for experienced firms alive through that date as well ^[2].

The tension behind this notice came up in that debate. Erin Neal, a partner at Velocity Government Relations who works with Defense Department and NASA awardees, told FYI that “You’re not going to sell hypersonic missiles at Walmart,” and that it’s “difficult to figure out where the commercial market is for some of these products” ^[5]. The SBA’s definition speaks partly to that: Phase III awards and other federal contracts count on the non-SBIR side, not just private sales ^[1].

Does this apply to you?

Probably not, unless SBIR is your business model. Crossing the trigger takes 26 or more Phase II awards over five years, an average of more than five Phase II wins a year ^[1]. Three hypotheticals:

A hypothetical sensor startup with four Phase II awards. It is well under the trigger, so the benchmark doesn’t touch it, whatever its revenue mix ^[1].

The SBA’s own example firm. The notice describes a company with 30 Phase II awards from fiscal 2022 through 2026, which would face the June 1, 2027, determination ^[1]. Over three years it had $4,000,000 in revenue: $800,000 in private sales, $300,000 from a Phase III award and $100,000 from another government contract ^[1]. That’s $1,200,000, or 30%, and it fails the 33% bar ^[1]. By this column’s arithmetic, it would have needed $1,320,000 of non-SBIR revenue to pass in 2027, and it would need $2,000,000 under the 50% rule that starts with the fiscal 2028 assessment.

A hypothetical defense software firm with 26 Phase II awards and big Phase III contracts. If Phase III and other agency work already make up half its revenue, it clears both bars ^[1]. The thing to get right is the paperwork: the SBA’s formula depends on which dollars are Phase III and which are Phase I or II ^[1].

One more detail. The penalty named in the notice covers new Phase I and Direct-to-Phase II proposals ^[1]. It doesn’t mention awards a firm already holds.

What to do now

If you’re near the line, start with the count, then the math. Pull your Phase II awards, all agencies combined, for fiscal years 2022 through 2026 ^[1]. If the total tops 25, figure your non-SBIR revenue share for the last three completed fiscal years, the same way the SBA’s example does ^[1].

Then decide whether to comment. Here the SBA has no choice about asking: the Small Business Act requires notice and comment before a performance standard takes effect ^[1]. That’s a contrast with the SBA rule I covered Monday, which ended the agency’s voluntary comment policy for loan and contract rules. Comments go by mail to Joshua Carter, Associate Administrator for the Office of Investment and Innovation, and must arrive by Oct. 31 ^[1].

My view on process: one company-wide percentage is easier to check than a decade of project-by-project sales tracing. Whether 50% is the right number for firms whose main customer is the government is a fair question to put in a comment.

What I’m keeping an eye on

Oct. 31 and Nov. 15. The comment deadline, then the date the SBA says the standard takes effect on sbir.gov ^[1]. Watch for changes between this notice and the final version.

How the two standards fit together. The 2022 law’s $250,000 and $450,000 tiers for firms above 50 and 100 Phase II awards are still on the books through 2031 ^{[2, 3]}. The notice doesn’t say how the SBA will apply both ^[1].

— Sally