Key Takeaways:
In April 2021, the Department of Defense released an internal report stating that China is taking advantage of the Small Business Innovation Research (SBIR) program.
Due to the national security implications of the study, the five-year renewal of the SBIR program and related Small Business Technology Transfer (STTR) program to further U.S. technological innovation and development have halted.
The SBIR, which is the nation’s largest innovation program, will cease to exist in September 2022 if its contract is not renewed.
What’s New?
In April 2021, the Department of Defense released an internal report stating that China is taking advantage of the Small Business Innovation Research (SBIR) program. This program is a federally-funded initiative in conjunction with the Small Business Administration to provide high-tech small businesses with the funds needed for government-related research and development in the form of government grants and sometimes contracts (1). Now, on the year of its 40th anniversary, the SBIR may cease to exist if it is not renewed before its contract expires in September 2022 due to the report that was made available to the Wall Street Journal in May 2022. Since this is the nation’s largest innovation program, its dissolution threatens the future of technology innovation in America.
Digging Deeper
With the account provided by the Wall Street Journal regarding the April 2021 report released by the U.S. Department of Defense, we can glean some knowledge on why this study puts the SBIR in jeopardy for being discontinued. The report examines how the Chinese government institutions recruited U.S. startups funded by the SBIR program, which support the efforts of the People’s Liberation Army, which is the military sector of the Chinese Communist Party (The People’s Republic of China).
The Pentagon provided specific examples of program participants breaking-up their companies because they were recruited by the Chinese government via talent programs, as well as SBIR recipients giving the funding that the U.S. federal government provided them with to support the Chinese government’s defense spending (2). On numerous occasions, it appears that the Chinese government has taken advantage of the SBIR’s existence. Not only does the funding U.S. startups receive to benefit the U.S. government actually benefit the People’s Republic of China, but the dissolution of promising U.S. startups robs the U.S. of innovation and moves the intellectual property into Chinese hands.
The Controversy
Rather than calling for the dissolution of the SBIR, the Pentagon report calls for greater vetting of U.S. startups that could be susceptible to Chinese influence. However, due to the national security implications of the study, the five-year renewal of the SBIR and related Small Business Technology Transfer (STTR) program to further U.S. technological innovation and development have halted since being introduced into the House of Representatives on June 22, 2022 (3). Many believe that the program should remain unchanged, citing the failed tariff war on China during the Trump Administration, emphasizing that “cutting ties between China and the U.S. in the tech industry is not effective and will benefit no one…it will dampen the innovation prospects of U.S. startups” (4). However, many believe that the only way the SBIR should continue is through more strenuous vetting. One such proponent of harsher vetting standards is Republican Senator Joni Ernst of Iowa, who also sits on the Small Business Committee, stating that “we can and should take serious steps to compete with the Chinese Communist Party, but pouring billions of dollars into research and development with little oversight or accountability is not the answer” (2).
Taking a Step Back
In the report by the Pentagon, they indicated that they see the Chinese government targeting U.S. startups once they “demonstrate capabilities, knowledge, and/or placement and access to federal grants or investments” (2). However, it is also important to zoom out and consider the scope that this report covers. Out of the over 10,000 startup applicants and recipients examined, only 8 possible Chinese government affiliations were uncovered during their research. The information uncovered is concerning, but the question remains on whether it constitutes further company evaluation by the SBIR and possible STTR, or if doing so would inhibit the technology innovation these programs are intended to promote.
Conclusion:
While the future of the long-standing SBIR is uncertain, we at MACH37 stand firm to our commitment to empower technological innovation. That is why we have a devoted accelerator program for early stage startup companies who are developing cyber related products and services and are ready to take their business to the next level through expanding their networks, learning key business approaches and seeking investment. We encourage those interested in being part of the cybersecurity and technological startup community to apply here to be part of the cyber change that MACH37 represents.
**Disclaimer: MACH37 does not have any concrete information about the future of the SBIR and/or the STTR and predictions included herein should be taken accordingly.
Who Are We?
VentureScope works with creative entrepreneurs, venture capital investors, and large private and public sector organizations around the world that are trying to solve interesting problems. Our team has extensive and unique experience launching new business ventures, investing in promising startups, running startup accelerators, and providing strategic innovation and general management consulting services to large private and public sector organizations. We’re on the pulse of emerging and over-the-horizon technology and are tracking their growth and development against important industry problems to inform our deal flow and give you exceptional advice. MACH37 is our start-up accelerator designed to facilitate the creation of the next generation of cyber product companies.
References:
1 - https://www2.ed.gov/programs/sbir/faq.html
2- https://www.wsj.com/articles/pentagons-china-warning-prompts-calls-to-vet-u-s-funding-of-startups-11652014803
3 - https://www.congress.gov/bill/117th-congress/house-bill/4033/all-actions?s=1&r=1
4 - https://www.globaltimes.cn/page/202205/1265205.shtml
5 - https://www.worldipreview.com/news/us-v-china-ip-row-intensifies-as-senators-weigh-in-15459 (Image)