The Evolution of SBIR: From Confronting Japan to Competing with China

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1982: Creating a New Funding Model to Improve American Competitiveness

In 1982, the U.S. Congress passed the Small Business Innovation Development Act, establishing what would become one of the nation’s most enduring tools for technology-based economic growth: the Small Business Innovation Research (SBIR) program. At its core, SBIR sought to provide direct grants to small businesses with the capacity to develop cutting-edge technologies, thereby addressing a mounting fear that the United States was ceding technological leadership to Japan and, to a lesser extent, the Soviet Union.

Japan’s rise was particularly alarming at the time. Through its coordinated “Japan Inc.” model, the Japanese government, financial institutions, and private firms worked in lockstep to dominate global markets in consumer electronics, semiconductors, and automotive technology. The Bank of Japan’s policy of infusing corporations with cheap capital fueled an export-driven economy that rapidly eroded U.S. market share of technology. By contrast, the United States was emerging from a period of stagflation marked by soaring interest rates, peaking near 20 percent, persistent productivity slowdowns, and oil shocks tied to geopolitical instability.

The SBIR program was designed as a brand new approach to fostering American ingenuity by channeling federal research dollars into entrepreneurial ventures that could reassert U.S. technological primacy. Over the decades, it has succeeded in this mission, seeding companies such as Qualcomm, Symantec, Biogen, and iRobot, and injecting over $3 billion annually into the U.S. innovation ecosystem. Unlike other nations, which have struggled to replicate its scale and structure, the U.S. SBIR program stands out as a unique mechanism for marrying American entrepreneurial opportunity with federal R&D priorities.

2025: Reauthorizing SBIR in the Era of China

Today, as Congress considers the reauthorization of SBIR, the United States confronts a competitor far more formidable than Japan in the 1980s: the People’s Republic of China. China’s advance spans nearly every frontier technology. According to the Australian Strategic Policy Institute, the U.S. led the world in 60 of 64 critical technologies at the turn of the millennium; today, China leads in 57 of those 64. From electric vehicles (BYD), to commercial drones (DJI), to frontier AI models such as DeepSeek’s cost-efficient large language model, China has not only matched but in many cases outpaced U.S. innovation. Importantly, China wields advantages like industrial scale, abundant technical talent, vast capital reserves, that Japan never possessed at its height of technological leadership.

The risk is stark: the U.S. could lose its position as the global leader in advanced technology. SBIR, as one of the most direct mechanisms for funding high-risk, high-reward ventures, remains a critical instrument in preventing that outcome.

The INNOVATE Act: A Promising Start to Build Upon

In March 2025, Senator Joni Ernst (R-IA) introduced the INNOVATE Act, a bill proposing SBIR’s reauthorization alongside several significant reforms. The first of these reforms is the creation of a Phase 1A award: a one-time $40,000 grant designed for first-time applicants and supported by a simplified application process. This provision is an important step toward reducing barriers to entry and encouraging more commercial-facing startups to engage with the federal government, particularly those that might otherwise find the contracting system too daunting.

The Act also expands Phase 2 awards, allowing them to reach up to $30 million. These larger awards, however, come with significant conditions: companies must secure matching public or private funding and a commitment from a Department of Defense program to purchase their product. While this requirement provides discipline and ensures that funded companies have a credible path to commercialization, it risks disqualifying precisely the kind of breakthrough startups that have historically driven technological revolutions. Early-stage innovators in fields such as GPS, hypersonics, or artificial intelligence would have struggled to meet these preconditions, especially related to compelling a DoD program manager, who is often used to buying fully formed systems from existing primes, to make a meaningful commitment to purchase. The matching funding contingency also creates a challenge for firms located outside the traditional venture ecosystems of Silicon Valley, Boston, and New York, where raising capital is more difficult. A carefully designed waiver system could mitigate this problem by allowing promising but undercapitalized firms to compete for the larger Phase 2 awards. Still, this portion of the bill needs to be further refined during the policy rollout process.

Another feature of the INNOVATE Act is its focus on safeguarding national security by tightening due diligence on awardees and introducing clawback provisions for firms that pose risks of foreign adversary involvement. While these safeguards may be challenging to implement in practice, they are essential to ensuring that taxpayer-funded innovations do not inadvertently benefit geopolitical rivals.

Perhaps the highest impact change relates to curtailing the phenomenon of “SBIR mills”—firms that win dozens of awards without generating meaningful commercialization. By capping the total lifetime award value for any single firm at $75 million, and by requiring companies with more than twenty-five Phase 2 awards to maintain at least a one-to-one ratio of SBIR to non-SBIR revenue, the legislation attempts to free resources for newer entrants.

Targeting SBIR mills may, however, have unintended consequences that affect our national security. These firms represent a major part of the U.S. research and industrial complex and they often work closely with government and larger prime contractors on sophisticated programs. Government program managers in government often view these firms as a way to advance research agendas, which although not the mandate of the SBIR program, does contribute to the nation’s scientific knowledge base. SBIR mills also employ thousands of PhD and Masters-level technologists. As pressure is applied to their employers, this technical talent may migrate to non-governmental missions. For instance, it is a shame to create an incentive for a researcher working on national security topics to seek employment working on commercial-facing web applications due to fear of being laid off. While the benefits of imposing caps on awards may outweigh the downsides, there should be a recognition that firms receiving large amounts of SBIR awards do play a role in our industrial process.

FedTech’s Perspective: Strengthening SBIR for the Future

Drawing on over a decade of experience supporting more than 1,000 companies that have collectively raised nearly $5 billion in capital, FedTech offers several recommendations for strengthening SBIR beyond the reforms already proposed. First, Congress must recognize that the overall budget for SBIR is no longer adequate to meet the scale of today’s challenges. With annual funding of roughly $4 billion, SBIR pales in comparison to the $200 billion global venture capital market. If the U.S. government seeks to attract the most promising startups, SBIR must represent a competitive, even preferred, source of financing. Simply put, we need to fund more companies each year with larger dollar amounts.

A second recommendation based on FedTech’s experience supporting ventures is to better coordinate topic creation across government. We need a unified focus in supporting key technologies areas like: AI, quantum computing, hypersonics, unmanned systems and cyber security. At the early stages of development, the same solution that is funded by the Air Force could just as easily benefit the Army or NASA. The SBIR program needs to be regarded as a national pool of resources versus being stovepiped to specific agencies. The SBA has done work in this direction already but having a unified strategy must be further encouraged through legislation.

A third recommendation builds upon the INNOVATE Act’s vision for more flexibility in the award process. Building on the opportunity of the Phase 1A program, there’s a substantial opportunity to reform the experience small companies have when proposing, negotiating and performing for the government. Let’s reduce the time it takes for the government to evaluate, provide feedback and make awards. Several agencies have moved to always open RFPs that do away with the quarterly or bi-annual cycle process. Always-open RFPs should be mandated by congress and there needs to be a substantial focus on creating a far faster evaluation and award process. SBIR awardees often remark that it takes up to nine months between submitting an application and receiving their first instalment of funds. For a young company that is choosing between a source of private capital that can be gained over a lunch discussion with an investor and an SBIR, the choice can be very difficult. The government should invest in the infrastructure required to allow SBIR to operate at a much faster pace in identifying companies, evaluating proposals and making awards.

Fourth and finally, the INNOVATE Act should also dramatically scale the Technical and Business Assistance (TABA) program. This program provides consulting support, paid by the government, to companies in conjunction with their award. FedTech has been a proud provider of services ranging from market research to CMMC compliance and seen firsthand the progress these firms can make when they have the right support. Many SBIR awardees are early stage firms that lack the operational systems and processes required to scale. TABA has proved to be a valuable asset to these firms, giving them a bench of experts and mentors. There’s an opportunity to increase TABA budgets and standardize service offerings across agencies. The simultaneous challenges of growing a small business and executing on a SBIR award make TABA a welcome addition to the young company’s experience.

Conclusion: Meeting the Moment

The reauthorization of SBIR in FY26 is more than a routine legislative exercise. It is a strategic decision about America’s role in the 21st-century technology race. The program was born in 1982 amid fears of Japanese dominance; today, the challenge posed by China is broader, deeper, and more urgent. The INNOVATE Act represents an important step forward, but its promise will only be realized if reforms are paired with bold increases in budget, streamlined processes, and a vision of SBIR as a national, not fragmented, innovation engine. In an era where global technological leadership underpins both economic prosperity and national security, SBIR may be the single most direct lever the federal government has to shape the future.