WESTLAKE VILLAGE, Calif. — One tool government agencies can use to nurture innovation is the Small Business Innovation Research grant, but is it a bold enough tool for the Pentagon?
Participants at a Defense News-hosted roundtable in December said no.
The investment research program, which is run by the Small Business Administration, requires federal agencies set aside a certain percentage of their of research and development funds for outside researchers with small firms.
SBIR offers three tiers of R&D funding for new technologies, of $150,000 or less at Phase I, which lasts about six months; up to $1 million at Phase II, or about two years; Phase III funding tests the commerciality of the technology and solicits funding from the private sector.
To Trae Stephens, a partner at the Silicon Valley venture capital firm Founders Fund and the chairman of tech company Anduril Industries, the Pentagon would be better off making a few big bets instead of many smaller investments. He likened it to his experience at a venture capital firm.
“You cannot make money writing $250,000 checks. You cannot build successful companies with tiny bits of revenue. You have to concentrate your investments," Stephens said. “One recommendation that I’ve been trying to push people on is if you think a company is really good, give them $10 million, give them $20 million.”
Investments in SBIR’s range would be “viewed as a distraction” to an innovative startup, said Steve Bowsher, an executive with venture capital firm In-Q-Tel. Without “recurring funding in the double-digit millions of dollars, it’s not a market.”
Since 2011, the law has allowed participation by some businesses that are majority owned by investment companies. But a Dec. 21 Government Accountability Office report found that in past three fiscal years, fewer than 3 percent of grants went to such companies.
“We’ve eliminated companies with the smartest $80 billion of funding, and instead we’ll work with all of the other companies,” Bowsher said of the government.
Defense Innovation Unit’s director of strategic engagement, Mike Madsen, seemed to agree with Stephens that the Defense Department needs a “strategic fund of that magnitude to make those bets pay off.”
“If we could tell ourselves we have a strategy to create one General Atomics a year, can you imagine?” Stephens replied.
A veteran of the firm Palantir, which has jousted with the Pentagon, left Stephens with the perception the government is afraid to play such a major role.
“We’d run into these blockers where decision-makers kind of detested where someone was getting rich doing business with the government,” Stephens said. “Our best capabilities have come from people who have gotten rich doing business with the government.”
Joe Gould is the Congress reporter for Defense News.