Disclaimer: The views expressed in this work represent the personal views and conclusions of the authors writing in their personal capacity and do not reflect the official position of the Stanford Space Law Society.

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Introduction

Since its creation in 2019 by the Department of the Air Force, the Strategic Funding Increase (STRATFI) program has become an important funding mechanism to help small businesses bridge the so-called valley of death — the phase between prototype and operational deployment in defense innovation.[1] STRATFI is a derivative program under the Small Business Innovation Research (SBIR) program that allows companies to catalyze up to $60M in funding, usually at a time in a company’s development cycle where their products and/or services require significant capital to complete development but are still too immature to compete for other significant government contracts. Conceptually, STRATFI combines a set of otherwise underutilized authorities under the SBIR framework to grant awards up to ten times larger than traditional SBIR funding opportunities.[2] Contrary to traditional SBIR programs, STRATFI awards require matching funds to be provided by a combination of non-SBIR federal contracts and private investment. As Congress considers the reauthorization of the SBIR program, including the potential inclusion of a DoD-wide, scaled version of STRATFI called Strategic Breakthrough Funding, legislators also have an important opportunity to clarify the intent and goals of the overall SBIR program.[3] As discussed below, uncertainty in the guiding purpose and intent of the program has historically diminished its potential impact. This reauthorization cycle has the potential to address these uncertainties in a manner that will propel the program into its fiftieth year and well beyond.

Origins of the Small Business Innovation Research Program

Created through the Small Business Development Act of 1982, the SBIR program is funded as a set-aside by federal agencies with extramural research & development (R&D) budgets above a given threshold.[4] Although each such agency administers its own SBIR program, the Small Business Administration (SBA) serves as a clearinghouse, publishing policies to codify congressional intent and monitoring compliance. The overall level of available funding varies by agency, but, for the Department of Defense (DoD), the SBIR program has resulted in more than $35 billion in contract awards since its inception.[5] SBIR’s current set-aside rate of 3.2% equates to over $2 billion in annual awards by DoD, making it one of the largest pools of DoD development funding not tied to individual line items within the congressional appropriations process.[6][7]

The architects of the SBIR program intended to harness the innovation potential and agility of small businesses to meet federal R&D needs, particularly in accelerating new technology to tackle pressing national security challenges. Importantly, the original SBIR legislation anticipated that the program would need periodic evaluation to best meet its objectives. Hence, Congress introduced a sunset clause, whereby the program would require congressional reauthorization every several years.^[8] This occurred previously in 1986^[9], 1992^[10], 2000^[11], 2011^[12], 2017^[13], and 2022.^[14] The current legislative authorities for the program expire in September 2025.[15]

The initial program structure was set in three phases.[16] Phase I was meant to focus on determining basic concept feasibility, anticipated at a level of effort of roughly six months by an individual. Phase II was intended to support several full-time employees working 18 to 24 months on research & development. Phase III was commercialization. Phases I and II were to be completed using SBIR set-aside funds. However, the program is intended for private investment and/or non‑SBIR government program dollars to support the final steps to commercialization in Phase III.

The Original Sin—Lack of Clear Program Objectives

From the beginning, this structure exposed a fundamental tension in the program between research and development. Research is amenable to relatively fixed grant levels. Providing several researchers, likely in a university setting, with several years of funding will undoubtedly advance the state of knowledge on a specific topic. Yet, research, in and of itself, is never really “complete.” Conversely, development advances through discrete milestones as a product or capability becomes ready for delivery to a customer. Subsequently, the product may be improved on a cyclical basis. Compared to those for research, the resources required for development vary drastically depending on the type of product or service.

Although the initial SBIR legislation and accompanying Small Business Administration Policy Directive spoke of both research and development, there was no clear guidance on defining the success of the overall program.[17] Was the primary goal to fund a large number of financially‑limited initiatives working to advance fundamental basic research one more step out of the laboratory? Or was the goal to support the development of a smaller number of advanced, novel operational capabilities to government users? Or some explicit combination of the two? The differing timelines and investment requirements of these pathways challenged a one-size-fits-all approach.

Initially, there were guidelines, but no strict limits, on the amounts of individual awards, perhaps to allow the various participating agencies flexibility in determining their own success criteria for the program. As stated in the initial 1982 Small Business Administration (SBA) Policy Directive:

The SBIR legislation does not establish limitations on dollar amounts of Phase I or Phase II awards. The legislative history clearly envisions a large number of relatively small awards of “up to $50,000” and “up to $500,000” for Phase I and II, respectively. While no specific limitations on dollar amounts for Phase I or II are established by this policy directive and while it is recognized that some research or R&D projects will require larger awards, agencies should strive to plan SBIR projects so that the majority of Phase I awards will be $50,000 or less and the majority of Phase II awards will be $500,000 or less.[18]

Similarly, the initial Policy Directive stated that, in general, a Phase I effort should not take more than six months, and a Phase II effort generally not more than two years. This broad program latitude was tightened slightly the following year to include a notification requirement for certain awards. In particular, the 1983 revision of the SBA Policy Directive included phrasing that, “[within] 30 days after the award of any funding agreement exceeding $50,000 for Phase I or $500,000 for Phase II, the agency SBIR representative shall provide the SBA with written justification of such action.”[19]

The first several reauthorization cycles largely sidestepped any refinement of the overall program goals or clarification of the relative importance of promoting research versus development.

SBIR Program Evolution

Beginning in the early 2000s, several factors prompted more significant program reevaluation and evolution.

The first factor was the growing presence of venture capital-backed companies in the pool of SBIR applicants. Throughout the 1980s and early 1990s, venture-backed companies were mostly found within the semiconductor and related industries. However, towards the turn of the century, venture-backed companies began to expand more significantly into biotechnology, internet technologies, and ultimately national security applications.[20] By nature, venture-backed companies seek to 1) maximize non-dilutive sources of capital and 2) grow from, initially, small businesses into large businesses. Both of these characteristics stressed the traditional concept of a small business for SBIR purposes.

This underlying tension broke into the open with the publication of the 2002 Policy Directive, where the SBA proposed a new rule that to be eligible for SBIR participation, a small business must be “at least 51 percent owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States.”[21] Through the process of finalizing the proposed rule, the SBA further clarified that venture capital firms did not meet the definition of an “individual” for purposes of SBIR eligibility. Suddenly, this effectively excluded from the SBIR program any company where a single venture fund owned a majority of the company—a relatively common situation even for early-stage companies that would otherwise meet the SBA definition of a small business.

A series of congressionally mandated National Research Council (NRC) reports constituted a second major factor that prompted a deeper reexamination of the SBIR program in the decade following the turn of the century. The SBIR reauthorization of 2000 called for an evaluation of the program as it approached its twentieth year. This resulted in a series of wide-ranging studies across the participating agencies, including DoD. In the DoD study, the NRC provided varied recommendations, including encouraging flexibility in both the implementation of the two initial SBIR phases as well as Phase III, which supports commercialization.[22] For instance, the study recommended that, “[in] some cases, pilot programs may require waivers from SBA for activities not otherwise permitted under the SBA guidelines. SBA should be encouraged to take a highly flexible view of all agency proposals for pilot programs.”[23] In particular, the report called for allowing participating agencies to use a portion of their extramural research & development funds for the administration of their SBIR program.[24]

Both of these developments spurred debate on the overall nature of the SBIR program and the optimal pathways to meeting its fundamental objectives. Congress initially took up the following reauthorization in 2008, though it opted to exercise a simple extension before ultimately completing reauthorization as an amendment to the National Defense Authorization Act for Fiscal Year 2012 (FY2012 NDAA) (passed in December 2011).[25][26] Although the new authorities included within the FY2012 NDAA began to address important aspects of the program’s future, the legislation provided relatively little clarification as to the expected overall strategic balance of SBIR program objectives between research and development. For instance, the law explicitly allowed most agencies to use up to 15% of their total SBIR budgets to fund companies that were majority-owned by venture firms, reversing the 2002 rule that had excluded them completely.[27] The 2011 reauthorization also included the first concrete limits on award size, restricting agencies’ authority to provide grants greater than 1.5 times the SBA-directed baseline.[28] However, Congress also saw the potential under certain circumstances to continue to allow larger awards and created a waiver process, with legislative language stating that “[upon] the receipt of an application from a Federal agency, the [SBA] Administrator may grant a waiver from the [limitation] requirement . . . with respect to a specific topic (but not for the agency as a whole) for a fiscal year.”[29]

The seeds of the eventual STRATFI program were further sown in 2016 when a group of Air Force captains attending Squadron Officers School conceptualized the idea for an Air‑Force sponsored tech accelerator (a structured program to engage and nurture startup companies developing Air Force-relevant capabilities).[30] Through the course of winning approval for their concept, one of the officers learned of an “Open Call for Innovation” program offered through the British Defense and Security Accelerator (DASA).[31] As opposed to traditional, narrowly defined SBIR solicitations, the “open call” format gave companies the ability to propose their own research and development topics for evaluation. After adopting this concept, the Air Force Research Lab released the first open topic SBIR solicitation in 2018.[32][33] This evolution dramatically expanded the pool of companies seeking Air Force SBIR awards. In doing so, it created a pipeline of new awardees pursuing operational system development, as opposed to advancing basic research, and also gave Air Force procurement professionals valuable experience in using acquisition authorities in novel ways. It also led to the creation of a new Air Force organization called AFWERX — a group of innovators with the institutional mandate to identify mechanisms to assist this new cohort of companies in crossing the valley of death.[34]

These events of the 2000s and 2010s exposed, but did not completely address, the underlying, continuous tension within the program. Developing new operational capabilities, as opposed to simply advancing basic research, would almost always require external funding beyond the amounts stipulated for Phase I and Phase II SBIR awards. Being risk-averse, Program Executive Officers (DoD acquisitions leaders) were unlikely to make funding available for Phase III development towards projects that did not fall under congressionally appropriated programs of record. This left private investors, especially venture capital firms that invest in early-stage businesses, as the most likely source of follow-on funding. However, companies that otherwise met the SBA definition of a small business were often majority-owned by venture firms and still limited to participating in a small fraction of the overall SBIR funding pool. Similarly, it was not entirely clear to what extent the new authorities granted within the 2011 reauthorization should be deployed to advance a greater number of overall awards or to pursue final commercialization and development of operational products and services.

STRATFI: A Test Case for the Future of SBIR

Following the 2011 reauthorization, the legislative and policy foundations were substantially in place to test using the SBIR program in a larger and more flexible manner to complete the advancement of early-stage research to fully operational capabilities. As one element of a comprehensive effort to expand the defense industrial base, the Assistant Secretary of the Air Force (Acquisition, Technology, & Logistics) approached SBA with the concept of a new program whereby waivers would generally be approved for larger sequential Phase II SBIR awards when matched with a combination of non-SBIR government funding and private investment.[35] This approach would de facto elevate the sequential Phase II award into an expanded bridge between the traditional, limited, Phase II and the Phase III commercialization effort.

At the time, the 2019 SBA Policy Directive stated the Phase II award limit without waiver was $1,500,000 (including the maximum 50% increase).[36]  An analysis of historical SBIR awards for the years 2014-2018 indicates an annual average of approximately $50,000,000 in total awards requiring waivers for the Department of the Air Force for those above the $1,500,000 threshold, with an average award of approximately $2,700,000 over the same period.[37]  As such, SBA officials determined that a reasonable limit for such an upsized program would be $15,000,000 per award, with total annual department program expenditures on the order of $100,000,000.[38] Compared to the prior five-year period, the upsized program amounted to roughly a 5x increase on the size of individual awards and roughly a 2x increase on the annual total program expenditures for larger awards.[39]

Ultimately, this evolution proved prescient, with more than 65 STRATFIs awarded in the 2019-2024 timeframe, spanning a broad range of air force and space force applications.[40] These awards have averaged approximately $10,000,000 in SBIR funding each, with more than 58% of awards going to venture capital-backed companies.[41] The awards themselves have supported a broad variety of applications, from orbiting spacecraft to advanced artificial intelligence imagery analysis.[42]

Fifty Years of SBIR & Beyond

The current SBIR program authorization expires in September 2025, once again giving Congress the opportunity to clarify its intent on the purpose and usage of this important program.[43] As in each preceding cycle, this process is bringing about new ideas. Perhaps the most potentially impactful proposal to date has been the recently proposed concept of a Strategic Breakthrough Funding program.[44] This would essentially codify and expand the STRATFI program across the entire DoD, allowing for up to $30,000,000 SBIR Phase II sequential awards, when matched by other funding, without the requirement for obtaining a waiver from SBA.

This proposal also demonstrates the utility of the SBIR program’s original sunset clause, which provides natural checkpoints for Congress to re-examine how the current capabilities of small businesses best align with the current needs of the Federal government. As the Pentagon continues to strive to equip United States warfighters with capabilities derived from the frontier of advanced technology, the SBIR and STRATFI programs, along with their likely successors, should continue to serve as important bridges across the valley of death.

* Dan Berkenstock is a Distinguished Research Fellow at the Hoover Institution Technology Policy Accelerator, where he provides scholarship related to defense tech and emerging space policy. He previously completed a PhD in the Stanford Department of Aeronautics & Astronautics and served as the founding CEO of Skybox Imaging, which was acquired by Google in 2014. Dan is also an independent director on the board of Astranis, Inc, which received a STRATFI award in 2024.

[1] “STRATFI/TACFI,” AFWERX, accessed August 20, 2025, https://afwerx.com/divisions/ventures/stratfi%20tacfi/.

[2] AFWERX, AFVentures Program Overview, accessed August 20, 2025, https://afwerx.com/wp-content/uploads/202307_AFWERX_AFVenturesProgramOverview.pdf.

[3] INNOVATE Act, S. 853, 119th Congress (2025).

[4] Small Business Innovation Development Act of 1982, Pub. L. No. 97-219 (1982).

[5] Jon Chung & Dan Berkenstock, “The $35 Billion Question: Is SBIR Funding Delivering for America’s Warfighters?”, Breaking Defense, April 24, 2025, https://breakingdefense.com/2025/04/the-35-billion-question-is-sbir-funding-delivering-for-americas-warfighters/.

[6] Marcy E. Gallo, Congressional Research Service, IF12874, Small Business Research Programs: Overview and Issues for Reauthorization in the 119th Congress, 2 (2025).

[7] Small Business Administration, 2022 SBIR and STTR Annual Report (2022), 9, https://www.sbir.gov/sites/default/files/SBA_FY22_SBIR_STTR_Annual_Report.pdf.

[8] Gabrielle Athanasia, “RAI Explainer: The Small Business Innovation Research Program,” Center for Strategic and International Studies (CSIS) Perspectives on Innovation Blog, 8 July 2022, https://www.csis.org/blogs/perspectives-innovation/rai-explainer-small-business-innovation-research-program.

[9] Small Business Innovation Development Act of 1986, Pub. L. No. 90-443 (1986).

[10] Small Business Research and Development Enhancement Act of 1992, Pub. L. No. 102-564 (1992).

[11] Consolidated Appropriations Act, 2001, Pub. L. No. 106-554 (2000).

[12] National Defense Authorization Act for Fiscal Year 2012, Pub. L. No. 112-81 (2011).

[13] National Defense Authorization Act for Fiscal Year 2017, Pub. L. No. 114-328 (2016).

[14] SBIR and STTR Extension Act of 2022, Pub. L. No. 117-183 (2022).

[15] Gallo, supra note 6.

[16] Small Business Innovation Development Act of 1982, supra note 4.

[17] Small Business Administration, 47 Federal Register 52966 (November 24, 1982) (to be codified at 13 C.F.R. Chapter I), https://archives.federalregister.gov/issue_slice/1982/11/24/52961-52976.pdf.

[18] Id. at 52972.

[19] Small Business Administration, 48 Federal Register 38794, 38802 (August 26, 1983) (to be codified at 13 C.F.R. Chapter I), https://archives.federalregister.gov/issue_slice/1983/8/26/38793-38808.pdf.

[20] Tom Nicholas, VC: An American History (Harvard University Press, 2019).

[21] Small Business Innovation Research Program Policy Directive, 67 Federal Register 60072, 60073 (September 24, 2002).

[22] Charles W. Wessner, ed., An Assessment of the Small Business Innovation Research Program at the Department of Defense, (National Academy of Sciences, 2009), 47, https://www.ncbi.nlm.nih.gov/books/NBK32835/pdf/Bookshelf_NBK32835.pdf.

[23] Id. at 49.

[24] Id. at 50.

[25] S. Rep. No. 110-447 (2008).

[26] U.S. House Committee on Science, Space, and Technology, “Deal Reached on Long‑Term SBIR Reauthorization,” Press release, December 13, 2011, U.S. House Committee on Science, Space, and Technology, https://science.house.gov/2011/12/deal-reached-long-term-sbir-reauthorization.

[27] National Defense Authorization Act for Fiscal Year 2012, Pub. L. No. 112-81, § 5107(a)(dd)(1), 125 Stat. 1298, 1827 (2011).

[28] Id., § 5103(d)(aa)(1), at 1825.

[29] Id., § 5103(d)(aa)(4), at 1825.

[30] Rob Slaughter, host, AFWERX Open Topic and Accelerator Origin Stories with Chris Benson, podcast, episode 9, Defense Unicorns, September 6, 2022, https://podcasts.apple.com/us/podcast/afwerx-open-topic-and-accelerator-origin-stories/id1612914663?i=1000578505099.

[31] Defence and Security Accelerator, Competition Document: Open Call for Innovation (April 29, 2025), https://www.gov.uk/government/publications/defence-and-security-accelerator-dasa-open-call-for-innovation/open-call-competition-document.

[32] Jason Rathje (cofounder and Managing Partner of AFVentures, a component of AFWERX), in discussion with the author, August 7, 2025.

[33] U.S. Department of Defense, AF182-005: Open Call for Innovative Defense-Related Dual-Purpose Technologies/Solutions, SBIR/STTR Topic Document, May 22, 2018, available at https://www.dodsbirsttr.mil/topics-app/ (search “AF182-005”).

[34] “About AFWERX,” AFWERX, accessed August 20, 2025, https://afwerx.com/about-us/

[35] John Williams (Former Director of Innovation and Technology, Office of Investment and Innovation, U.S. Small Business Administration), in discussion with the author, June 2, 2025.

[36]Small Business Innovation Research Program and Small Business Technology Transfer Program Policy Directive, § 7(i), 84 Federal Register 12794, 12816 (2019).

[37] Author’s analysis of data from Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR), Portfolio – Award Data, accessed August 20, 2025, https://www.sbir.gov/awards.

[38] John Williams (retired Director of Innovation and Technology for the Office of Investment and Innovation, U.S. Small Business Administration), in discussion with the author, July 16, 2025.

[39] Author’s analysis of data from Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR), Portfolio – Award Data, accessed August 20, 2025, https://www.sbir.gov/awards.

[40] Dan Berkenstock and Jon Chung, The Warfighter’s Pipeline: A Blueprint for Aligning Defense Acquisition with Venture Capital (Hoover Institution, April 11, 2025), 15, https://www.hoover.org/research/warfighters-pipeline.

[41] Id.

[42] AFWERX, AFWERX SpaceWERX FY 2024 Annual Report, June 13, 2024), 29, https://afwerx.com/wp-content/uploads/2024_AFWERXSPACEWERX_AnnualReport_Cleared_AFRL-2025-2954.pdf.

[43] National Defense Industrial Association, “NDIA Urges Reauthorization of SBIR/STTR Programs to Sustain Defense Innovation,” Press release, June 26, 2025, https://www.ndia.org/about/press/press-releases/2025/6/26/sbir-white-paper.

[44] INNOVATE Act, supra note 3.