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The paradox of U.S. government R&D funding: Barriers for non-U.S. owned firms

April 18, 2024
in Science
The paradox of U.S. government R&D funding: Barriers for non-U.S. owned firms
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For non-U.S. owned space companies looking to access government funding, the question of eligibility for programs like the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants is a complex and critical consideration. 

Ownership structure is a primary factor in determining qualification, creating a paradox where the U.S. government seeks to drive domestic innovation, yet sets stringent requirements that can exclude foreign-owned firms. Understanding the nuances of SBIR/STTR eligibility is key for international space companies aiming to tap into this valuable source of R&D funding.

At the forefront of U.S. grant initiatives are the SBIR and STTR programs. Managed by the Small Business Association (SBA), they are the bread and butter of government R&D funding, aimed at fueling commercial innovation that aligns with U.S. interests. With participation from 11 government agencies, funding is dominated by the Department of Defense, which contributes $2 billion annually. 

Within the DoD, the Space Force and Air Force identify capability gaps and relay them to AFWERX, which is a key awarder of SBIR/STTR space technology grants. SpaceWERX is an extension of AFWERX.  

Last year, AFWERX awarded $1.2 billion in SBIR/STTR grants, directing $259 million into the space technologies and satellites category which selected 221 companies. Noteworthy grants supported advancements in enhanced imaging, sensor processing, in-space servicing, optical communications, propulsion technologies, and satellite operations.

Eligibility requirements

While the Space Force and Air Force frequently utilize SBIR/STTR grants for space-related technologies, other DoD branches less commonly issue grants in this area, although they occasionally back programs that benefit from these technologies. Furthermore, NASA annually distributes approximately $200 million in similar grants. Meanwhile, agencies like the National Science Foundation sporadically invest in space technology through their funding allocations.

SBIR/STTR programs offer phase 1 and phase 2 grants up to $300,000 and $2 million, respectively. The ultimate goal is to secure a phase 3 contract which is a more significant government contract outside the scope of SBIR/STTR funding. Many companies snag phase 2 or 2 awards, but struggle to secure a phase 3 contract, often described as crossing the “valley of death”. 

SBIR/STTR eligibility hinges on being a profit-driven, U.S.-based entity, with no more than 500 employees, and predominantly owned and controlled by U.S. citizens or permanent residents. 

While the first two criteria are generally straightforward, the ownership requirement contains many nuances, detailed extensively in the SBIR compliance guide. One example presented in the guide is a U.S. capitalized company with U.S. investors, yet not meeting the requirements based on the mix of company and venture capital ownership percentages. 

Joint ventures restricted

Creative structures such as joint ventures are restricted. Furthermore, all R&D for the program, including work performed by subcontractors, must occur within the U.S. This can be challenging for companies with R&D teams predominantly overseas. In certain cases, the Department of Defense may also have concerns about work performed by non-U.S. nationals. Additionally, there are limitations on the extent of subcontracting allowed.

To ensure that the company does not waste effort on opportunities for which it is ineligible, it is important to emphasize that all SBIR/STTR programs share the same eligibility requirements.

This highlights a scenario where the U.S. government craves new innovation but sets barriers via ownership stipulations, contrasting with other nations open to R&D funding with less stringent conditions. 

According to the SBA, the goal is to enhance the likelihood of stimulating innovative activities within the U.S. A counter argument is that allowing non-U.S. owned companies to participate in the programs create new U.S. jobs and cultivate fresh innovations, yet the technology is still protected because of the mandate that R&D activities occur within the U.S. and comply with export regulations.

This situation may evolve as the U.S. government becomes increasingly receptive to working with non-U.S. owned companies. However, for now, if a company does not satisfy the current ownership requirements, there are some potential options.

Create a new U.S. entity with a majority U.S. owner and the company as a minority shareholder. While theoretically feasible, it raises a lot of considerations relative to the potential SBIR/STTR grant benefits, such as investment, valuation, ownership, control, cost, subcontractor limitations, U.S. R&D work, and export regulations.

Collaborate with an existing U.S. owned commercial firm that would serve as the primary applicant for SBIR/STTR grants. A potentially smoother route than the first, yet still layered with considerations around subcontracting limitations, R&D execution and export regulations.

Skip SBIR/STTR grants. There are alternative routes into the government market that avoid the ownership and stateside R&D requirements, though they require additional legwork. This strategy involves directly targeting a phase 3 contract, skipping the SBIR/STTR process.

While SBIR and STTR grants can be tactically advantageous for companies that naturally meet the criteria, they are not guarantees of success. One potential drawback of these grants is that they might divert attention from a company’s main goals. Furthermore, many venture capitalists are wary of companies that become SBIR “mills” — businesses that rely heavily on government grant funding without achieving significant commercial success.

More importantly, companies should objectively assess their operational capabilities in relation to U.S. government demand and appropriations, focusing on a strategy to reach the top of the mountain instead of getting stuck in the valley of death.

Jerry Welsh, founder and chief executive of Exec One, provides mentorship to space industry CEOs and founders. 

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