Policy

Defense Tech, SBIR, and the Government’s Funding Fracas

Image: National Park Service

Ladies and gentlemen, we have a double whammy of fun today. Not only has the long-anticipated government shutdown commenced, but SBIR/STTR reauthorization also lapsed at midnight. That’s two big blows for defense startups: the Pentagon can’t issue new obligations without an appropriation, and the biggest non-dilutive funding channel for small firms just went dark. Buckle up. 

Shutdown shock: In case you are just waking up from hibernation, our famously well-run Congress failed to pass a last-minute continuing resolution (CR) to keep the government open for business. Put simply, unless an activity is legally “excepted,” like a national security emergency or cases where a contract delay would create an imminent risk to human life or property, that means no new Pentagon obligations until new funding arrives. 

Luckily, the DoD published a handy guide to the shutdown this morning. Here’s the gist of it: 

  • Contractors performing under a contract (or contract option) awarded prior to the shutdown may continue to provide services up to the limit of the obligated funds if they don’t require access to Government facilities, active involvement of Government personnel, or the use of additional government resources.
  • New contracts (including contract renewals or extensions, issuance of task orders, exercise of options) and new funding increments may not be executed unless the cost is covered by the contractor or the contractor is supporting an excepted activity.
  • If the contract isn’t excepted and requires additional funding and/or active involvement of furloughed Federal employees, a stop work order or the termination of the contract may be required.

The highest priorities for the Pentagon during the shutdown period are the Southern border and Middle East operations, Golden Dome, depot maintenance, shipbuilding, and critical munitions. Contract efforts supporting these activities can occur during a shutdown when drawing from funds that remain available for excepted operations on a case-by-case basis. 

RIP SBIR: Shutdowns are never ideal for startups, but especially not when they’re paired with a lapse of SBIR and STTR reauthorization. The SBIR/STTR programs, known together as “America’s Seed Fund,” must be reauthorized by Congress every three years and provide around $4B for a whole bunch of small- and medium-sized companies each year, more than half of which goes to our little corner of the defense innovation world. 

The government takes no equity or IP ownership through SBIR/STTR funding, which makes them an ideal source of R&D support for startups getting off the ground and prepping for commercialization or procurement. 

A bipartisan bill to reauthorize the programs passed unanimously in the House on September 15th and is sitting with the Senate, which now has bigger fish to fry. Until that happens, sayonara SBIR. That means:

  • A pause on new solicitations and awards.
  • A halt on new award options and increments. 
  •  Constrained Phase III (sole-source) authority unless deemed exempted or essential.

Startups with already-funded SBIR/STTR awards can continue work if the money’s been disbursed (fun shutdown combo), but don’t hold out hope for any new obligations until reauthorization or an alternative bill, like the INNOVATE Act, is passed. 

SBIR Skeptics: SBIR is a bit of a hot topic in the defense tech world. In a recent op-ed backing the INNOVATE Act, Shield Capital’s David Rothzeid and Scout Ventures’ Zach Beecher blasted SBIR as a “private ATM” for ‘Multi-Award Winners’ (MAWs) that “routinely win 50-plus awards year after year.” They pointed to Physical Sciences Inc.—which, by their tally, has racked up 1,700+ awards worth ~$650M since 1983—as the worst offender. Less than 1% of participants qualify as MAWs, but they’ve taken home over 10% of Phase II dollars, according to the GAO.

That imbalance, they argue, undermines SBIR’s intent as a launchpad for new entrants and makes it look more like a subsidy for professional proposal shops, many of which have ties to foreign entities.

The INNOVATE Act, endorsed by Sen. Joni Ernst (R-IA) and Rep. Roger Williams (R-TX), aims to reauthorize and reform the federal SBIR/STTR programs in part by:

  • Extending SBIR/STTR through FY 2028.
  • Defaulting to fixed-price contracts for SBIR/STTR awards and implementing a $75M cap on total lifetime awards.
  • Adding “Strategic Breakthrough Awards” (large Phase II) up to $30M, with matching funds and end-user commitment, to bridge the “valley of death,” along with small $40,000 micro-awards reserved for first-time applicants. 

Rothzeid and Beecher argue these fixes would put the “seed” back in America’s seed fund. Others, like NDIA, say the programs provide “vital pathways for bringing innovative technologies from small businesses into the hands of US warfighters,” arguing that they’ve “yielded a 22-to-1 return while strengthening national security” within the DoD. 

Needless to say, none of this reauthorization or reform is happening until the government shutdown ends. “The Department expects that once authority is restored, solicitations will move quickly,” the Department of War’s Office of Small Business Innovation wrote on LinkedIn. “Use this time to strengthen your pipeline, assess capability alignment with the strategic and tactical needs of the Department, refine your customer relationships, and stay engaged.”

“Once” seems like the operative word in that sentence—only time will tell how long that’ll be and what (if any) reforms are attached.

Startup friends, here’s to hoping Congress can get its act together so the innovators can keep innovating (on top of returning the government to a semi-functioning status). Fun times ahead.