SBIR/STTR Guide for Defense Tech Startups: Funding, Phases, and Commercialization

If you are building a defense technology company, the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs represent the single most accessible funding pathway the federal government has ever created for startups. No equity dilution. No venture capitalist board seats. No repayment obligations. The government gives you non-dilutive capital to develop technology, and you retain the intellectual property rights to what you build.

Since 1982, SBIR has funneled over $70 billion into small businesses across 11 federal agencies, with the Department of Defense accounting for roughly half of all awards. For defense tech founders, this is not a side hustle funding source. It is a primary capitalization strategy that has launched companies now worth billions, including Qualcomm, Symantec, and iRobot.

But the program is also misunderstood, underutilized by first-time applicants, and undergoing significant structural changes. The statutory authorization for SBIR/STTR expired on September 30, 2025, and as of early 2026, Congressional reauthorization remains pending. Existing awards continue to be serviced, but new solicitations are paused until Congress acts. The SBIR/STTR Reauthorization Act of 2025 (S.1573 / H.R.3169) is the primary legislative vehicle, and stakeholders widely expect reauthorization to move in the first half of 2026.

That uncertainty makes this the perfect time to prepare. When the programs reopen, the companies that have done their homework will move fast while their competitors are still reading the solicitation for the first time.

This guide covers everything a defense tech startup needs to know: the differences between SBIR and STTR, the phased funding structure, which DoD innovation organizations to target, how to protect your intellectual property, and how to transition from Phase II into production contracts. For a broader view of how SBIR fits into the full lifecycle of winning federal contracts, start with our pillar guide.

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SBIR vs. STTR: Understanding the Two Programs

The SBIR and STTR programs are closely related but structurally different in ways that matter for your application strategy. Both are funded through mandatory set-asides — federal agencies with extramural R&D budgets exceeding $100 million must allocate a percentage to SBIR, and those exceeding $1 billion must allocate to STTR. For DoD specifically, these set-asides represent billions of dollars annually.

SBIR: The Core Program

The SBIR program is designed for small businesses (fewer than 500 employees, majority U.S.-owned and independently operated) to conduct federal R&D with commercial potential. The small business must perform at least two-thirds of Phase I research and at least half of Phase II research. SBIR works best for companies with in-house technical capability — you are building the technology, not outsourcing it.

STTR: The Research Partnership Model

STTR requires a formal cooperative research agreement between the small business and a U.S. nonprofit research institution (typically a university or FFRDC). The small business must perform at least 40% of the work, the research institution at least 30%, with the remaining 30% allocated between them. If your technology originated in a university lab or you need specialized research infrastructure, STTR provides a funded mechanism to formalize that partnership.

Which One Should You Choose?

The decision comes down to two questions: Did your technology originate in a research institution? Do you need specialized research infrastructure you do not have in-house? If either answer is yes, STTR is the natural fit. If neither applies and your team can execute independently, SBIR gives you more control and fewer coordination challenges. Many companies apply to both programs simultaneously for different projects.

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The Three Phases: From Concept to Production

The phased structure of SBIR/STTR is not just a funding ladder — it is an intentional technology maturation pipeline that mirrors the Department of Defense's own acquisition lifecycle. Understanding what each phase requires, what it pays, and how it sets up the next stage is fundamental to a winning strategy.

Phase I: Feasibility and Proof of Concept

Purpose: Determine the scientific and technical feasibility of your proposed innovation. Phase I is a vetting stage — the government is asking whether your idea could work, not whether it is ready for production.

Funding: Standard SBIR Phase I awards are up to approximately $275,000, though the SBA's 2024 adjustment allows agencies to award up to $314,363 without seeking a waiver. AFWERX Open Topic Phase I awards are smaller — typically $75,000 to $110,000 — but come with a faster timeline and streamlined evaluation.

Duration: Typically 6 to 12 months, though DoD-specific programs like AFWERX Phase I run as short as 3 months.

What evaluators look for:

• Technical merit of the proposed approach
• Qualifications of the principal investigator and key personnel
• Commercial potential and market analysis
• Feasibility of the work plan within the proposed budget and timeline

Strategic notes: Phase I is where most first-time applicants enter the program, and it is also where the majority of proposals are rejected. Award rates vary by agency and topic, but DoD Phase I rates typically range from 15% to 25%. The most common mistakes are proposing too much work for the budget (evaluators know what things cost), failing to articulate the commercial market beyond DoD, and submitting a solution without clearly demonstrating that you understand the problem.

Phase II: Prototype Development

Purpose: Develop a working prototype based on your Phase I results. Phase II is where your technology moves from feasibility study to functional demonstration. The government expects to see hardware, software, or a system that can be tested and evaluated.

Funding: Standard Phase II awards go up to approximately $1.8 million to $2 million. The SBA ceiling (as of October 2024) allows awards up to $2,095,748 without a waiver. Some agencies, particularly within DoD, regularly issue Phase II enhancements and sequential Phase IIs that can push total Phase II funding well above $3 million for high-priority technologies.

Duration: Typically 24 months, though extensions are common for complex development efforts.

Eligibility: You must have completed a Phase I in the relevant topic area. However, DoD programs increasingly offer Direct to Phase II (D2P2) pathways — discussed in detail below — that let you skip Phase I if you can demonstrate equivalent feasibility work.

What evaluators look for:

• Phase I results and lessons learned
• Technical approach for the prototype, including specific milestones and deliverables
• Commercialization plan — Phase II proposals must include a substantive commercialization strategy
• Team and facilities capable of executing development work
• Strength of the customer relationship (particularly for AFWERX, where a Customer Memorandum from an Air Force end-user is required)

Strategic notes: Phase II is where the commercialization conversation becomes real. Companies that treat Phase II as "more R&D money" without a clear transition strategy often find themselves stuck with a prototype and no customer.

Phase III: Commercialization and Production

Purpose: Transition SBIR/STTR-developed technology into production, whether through DoD procurement, commercial sales, or both. Phase III is where the return on investment is realized.

Funding: Phase III has no statutory SBIR/STTR funding limit. The critical distinction is that Phase III is funded by the acquiring agency, a prime contractor, or commercial revenue — not by the SBIR program itself. The SBIR program gets you to the door; Phase III is where you walk through it.

How it works: Phase III contracts can be awarded as sole-source contracts to the SBIR firm without further competition, provided the work is an extension of the SBIR-developed technology. This is codified in SBA's SBIR/STTR Policy Directive and is one of the most powerful (and underused) aspects of the program. The government does not need to conduct a new competition to buy your Phase III product — they just need a contracting officer willing to execute the sole-source justification.

Strategic notes: Phase III is where most defense tech startups encounter the "Valley of Death." Translating a working prototype into a production contract requires navigating acquisition bureaucracy, identifying the right Program of Record, securing funding in the PPBE cycle, and often partnering with a prime contractor who has production infrastructure.

The companies that successfully cross the Valley of Death almost always do one of the following:

• Map to a Program of Record early. If your technology addresses a capability gap in a specific program (F-35 sustainment, Army network modernization, Navy unmanned systems), engage with the program office during Phase II, not after.
• Partner with a prime during Phase II. Establishing a teaming arrangement with a Tier 1 or Tier 2 defense contractor gives you production capacity, supply chain access, and a pathway onto existing contract vehicles.
• Leverage STRATFI/TACFI. AFWERX's Strategic Funding Increase (STRATFI) and Tactical Funding Increase (TACFI) programs provide Phase III bridge funding up to $15 million (STRATFI) or $3 million (TACFI) to help companies transition from prototype to production.
• Pursue Phase III sole-source directly. If your end-user champion has requirements authority and funding, a sole-source Phase III contract is the fastest path to production. Do not assume your contracting officer knows this is an option — many do not. Bring the regulatory citations.

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DoD Innovation Organizations: Where to Apply

The Department of Defense does not run a single, monolithic SBIR program. Instead, each military service and several defense agencies operate their own SBIR/STTR programs, each with distinct focus areas, evaluation processes, and cultures. Knowing which organization aligns with your technology is critical.

AFWERX (Air Force)

AFWERX is the Air Force's innovation arm and has become the most active SBIR issuer in the Department of Defense. AFWERX operates two main SBIR tracks:

Open Topic: AFWERX's signature program allows companies to propose any technology relevant to Air Force or Space Force needs, without being constrained to a specific topic. Phase I awards are $75,000 to $110,000 for 3 months. Phase II awards go up to $1.25 million to $1.8 million. Direct to Phase II (D2P2) proposals are accepted for up to $1.25 million.

Specific Topic: Traditional SBIR topics defined by Air Force requirements offices that address specific capability gaps.

AFWERX also manages the STRATFI and TACFI programs for Phase III transition funding, making it one of the most complete innovation pipelines in the federal government.

What makes AFWERX different: AFWERX emphasizes the customer relationship more heavily than any other DoD SBIR program. Open Topic proposals require a Customer Memorandum from an Air Force or Joint end-user, meaning you need to have already identified and engaged with your customer before you apply. This is not a cold application process — it is a relationship-driven program.

NavalX (Navy/Marine Corps)

NavalX manages the Department of the Navy's SBIR/STTR programs. The Navy typically issues three Broad Agency Announcements (BAAs) per year with specific topics defined by Navy and Marine Corps requirements offices.

Focus areas: Naval aviation, undersea warfare, autonomous systems, directed energy, electronic warfare, cybersecurity, and shipboard systems.

What makes NavalX different: The Navy's SBIR program tends to be more topic-specific than AFWERX's Open Topic model. You are responding to defined capability gaps rather than proposing open-ended solutions. This means your proposal needs to map precisely to the topic description, and the evaluation is more narrowly focused on technical responsiveness.

Army xTech and FUZE

The Army's xTech program runs prize competitions that serve as on-ramps to Army SBIR. Winners of xTech competitions earn prize money and the opportunity to submit Direct to Phase II SBIR proposals. In September 2025, the Army launched FUZE, a $750 million annual initiative that unifies xTech, SBIR/STTR, the Technology Maturation Initiative, and Manufacturing Technology programs under a single venture-capital-style investment framework.

Focus areas: Ground vehicle modernization, soldier lethality, network modernization, air and missile defense, and sustainment logistics.

What makes Army programs different: The Army's approach increasingly resembles venture capital investing. FUZE evaluates companies on market potential and scalability alongside technical merit. If your technology has dual-use potential across defense and commercial markets, the Army's current posture is more receptive to that narrative than traditional SBIR evaluators have been historically.

Defense Innovation Unit (DIU)

DIU operates differently from the service-specific SBIR programs. Rather than issuing SBIR solicitations, DIU uses Other Transaction Authority (OTA) agreements to prototype commercial technologies for defense applications. However, DIU projects frequently transition to SBIR Phase III contracts, and DIU's commercial solutions opening (CSO) process is an important adjacent pathway for SBIR companies seeking production contracts.

Focus areas: Artificial intelligence, autonomy, cyber, energy, human systems, and space.

What makes DIU different: DIU specifically targets commercially developed technologies that can be adapted for defense use. If your product already works in the commercial market and you want to sell it to DoD, DIU is often a better starting point than a Phase I SBIR. The OTA pathway also avoids many of the regulatory constraints of the FAR-based SBIR process.

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Direct to Phase II and Open Topics

Two recent innovations have made the SBIR program significantly more accessible for defense tech startups with existing technology: Direct to Phase II (D2P2) and Open Topics.

Direct to Phase II (D2P2)

D2P2 allows companies to bypass Phase I entirely and apply directly for Phase II prototype funding. To qualify, you must demonstrate equivalent feasibility work — technical documentation, prototype testing data, or simulation results that prove your concept works. For AFWERX Open Topic D2P2, you also need a Customer Memorandum from an Air Force or Joint end-user.

D2P2 makes strategic sense when your technology is already at TRL 3 or higher, you have an identified DoD customer, and speed matters. D2P2 awards are equivalent to standard Phase II — up to $1.25 million for AFWERX Open Topic, up to $2 million for other DoD components. The pathway saves 6 to 12 months compared to the sequential Phase I-then-Phase II approach.

Do not apply for D2P2 if your concept is genuinely at the feasibility stage. Proposing D2P2 without substantive prior work will result in rejection and may damage your credibility with evaluators.

Open Topics

Traditional SBIR solicitations require you to respond to specific topics defined by military requirements offices. Open Topic programs — pioneered by AFWERX and now adopted by other DoD components — let you propose any technology relevant to the service's mission. You define the problem and the solution. The evaluation focuses on relevance, feasibility, and commercial viability rather than precise alignment to a narrow topic description.

The tradeoff is that Open Topics require demonstrated customer engagement. You need to have already identified and engaged your military end-user before applying. Building those relationships takes time, but several pathways accelerate the process: defense innovation events (AFWERX Engage, DIU events, industry days), SBIR advocates at contracting offices you can find through your SAM.gov registration, SBA's FAST program, and congressional delegation introductions.

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Award Amounts and Budget Strategy

Understanding the financial parameters of SBIR/STTR is essential for both proposal budgeting and company financial planning. Here is a practical breakdown of what to expect.

Standard Award Ceilings (Pre-Expiration)

Budget Strategy for Proposals

Your budget is an evaluation criterion, even when it is not explicitly scored. Evaluators assess whether your proposed costs are realistic and reasonable for the scope of work. Common budget mistakes include:

Underbudgeting labor: The most frequent error. Evaluators know what qualified engineers and scientists cost. If your budget implies you are paying cleared software engineers $45,000 a year, your cost realism score will suffer.

Ignoring indirect rates: If you do not yet have established indirect rates (overhead, G&A, fringe), you need to develop provisional rates. DCAA will eventually audit these if you receive awards. Building a proper rate structure now — using approaches outlined in our wrap rate guide — prevents painful adjustments later.

Forgetting TABA: Technical and Business Assistance (TABA) funding is available to SBIR awardees for activities like business plan development, IP protection, market research, and financial management. TABA can fund up to $6,500 in Phase I and $50,000 in Phase II.

Over-scoping: Trying to deliver too much for the budget is a red flag. Evaluators prefer a focused, achievable work plan over an ambitious one that clearly cannot be completed within the proposed timeline and budget.

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IP Rights and Data Rights Under DFARS

Intellectual property protection is one of the most valuable — and most misunderstood — aspects of the SBIR/STTR programs. The data rights protections afforded to SBIR awardees are substantially stronger than those available under standard government contracts, and the December 2024 DFARS final rule made them even more favorable for small businesses.

The 20-Year Protection Period

Under the SBA's current SBIR/STTR Policy Directive and the updated DFARS 252.227-7018, technical data and computer software developed under SBIR/STTR funding agreements are protected by "SBIR Data Rights" for a period of 20 years from the date of award. During this protection period:

• The government receives a limited nonexclusive license to use the data for government purposes only.
• The government cannot disclose SBIR data outside of the government to third parties, including other contractors.
• Contracting officers are prohibited from requiring offerors to relinquish SBIR data rights as a condition of award.
• Contracting officers cannot reject proposals solely because the offeror asserts SBIR data rights.

After the Protection Period Expires

The December 2024 DFARS amendment made a significant change here. Previously, the government obtained Unlimited Rights after the protection period expired, meaning it could use and disclose the data without restriction. Under the new rule, the government now receives Government Purpose Rights after the 20-year period — a meaningful improvement that prevents the government from sharing your data with commercial competitors even after the protection period ends.

Protecting Your IP in Practice

The legal framework is strong, but only if you take active steps: assert data rights in every proposal with a data rights assertion table, mark all deliverables with the SBIR Data Rights legend prescribed in DFARS 252.227-7018 (unmarked data may be treated as unrestricted), maintain clear records separating SBIR-funded development from privately funded work, and watch for non-standard contract clauses that attempt to override your rights — these are now explicitly prohibited under updated DFARS but still appear occasionally.

If your SBIR-developed technical data qualifies as CUI, you will also need to protect it under NIST SP 800-171 and CMMC Level 2 requirements. Data rights protect you from government disclosure; CMMC protects the data from adversary exploitation.

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CMMC Implications for SBIR Awardees

If you are pursuing DoD SBIR/STTR awards in 2026 and beyond, you need to understand how the Cybersecurity Maturity Model Certification program affects your eligibility and operations. This is a new requirement that did not exist when many of today's SBIR guides were written, and it catches small businesses off guard.

What CMMC Level Do You Need?

Beginning November 10, 2025, new DoD contracts — including SBIR and STTR awards — require contractors to demonstrate cybersecurity compliance through CMMC:

• CMMC Level 1 (Self-Assessment): Required for all DoD contractors handling Federal Contract Information (FCI). This covers virtually every SBIR awardee, since FCI includes basic contract data like statements of work, delivery schedules, and performance reports.
• CMMC Level 2 (Self-Assessment or Third-Party Assessment): Required for contractors handling Controlled Unclassified Information (CUI). If your SBIR work involves technical data, design specifications, test results, or other information marked as CUI, you need Level 2.
• CMMC Level 3 (Government-Led Assessment): Required for contractors working with the most sensitive CUI categories. Less common for SBIR awardees, but possible for programs involving classified-adjacent technical data.

Practical Steps for SBIR Companies

Start with a gap assessment to determine your required CMMC level — our CMMC assessment preparation guide walks through this process. Post a self-assessment score to SPRS (required before award; even an imperfect score with a POA&M is better than nothing). Budget for compliance — these costs are allowable on SBIR contracts and may qualify for TABA funding. And use compliant tools from the start: choose email, file storage, and CRM platforms that support NIST SP 800-171 controls rather than retrofitting consumer-grade tools later. Our guide on private AI for small defense contractors covers how to adopt AI tools without compromising your CUI environment.

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The Application Process: A Practical Walkthrough

Winning an SBIR award starts long before you write the first word of your proposal. The most successful companies treat the application as the culmination of months of preparation.

Step 1: Identify the Right Solicitation

Monitor active solicitations through the DoD SBIR/STTR Innovation Portal (DSIP) and SBIR.gov. Research which programs funded similar technologies in previous years by searching the SBIR award database — this reveals which topics recur and which evaluators are receptive to your technology area.

Step 2: Engage with End Users

A technically excellent proposal without evidence of customer engagement will lose to a good proposal with strong military relationships every time. Before writing, identify the unit or program office with the capability gap your technology addresses, request meetings through SBIR advocates or innovation offices, and document the specific operational needs. For AFWERX Open Topic, secure a Customer Memorandum.

Step 3: Write and Submit the Proposal

Most DoD SBIR proposals include a Technical Volume (20-25 pages covering your approach, work plan, and team qualifications), a Cost Volume (detailed budget by cost element), a Commercialization Plan (Phase II), and Company Information (past performance, facilities). Submit through DSIP and ensure your SAM.gov registration is current — an expired registration disqualifies your proposal regardless of technical merit.

Step 4: Post-Award Execution

Winning the award is the beginning, not the end. Successful execution requires a DCAA-compliant accounting system, timely reporting, building past performance through CPARS ratings, maintaining CMMC compliance throughout performance, and developing your commercialization plan into an actionable transition strategy.

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Commercialization Strategy: Crossing the Valley of Death

Most Phase II projects never transition to production. The companies that successfully cross the Valley of Death share four common strategies:

Map your technology to Programs of Record. Every dollar DoD spends on production comes from a specific line item in a specific Program of Record (POR). Use DoD budget justification documents ("P-1" and "R-1" exhibits) to identify programs that align with your technology, then engage the Program Executive Office during Phase II — not after it ends.

Build a dual-use revenue model. Technologies with both defense and commercial applications — autonomous systems, cybersecurity, communications — generate diversified revenue that de-risks the business and makes it more attractive to both investors and government buyers.

Leverage contract vehicles for scale. Phase III sole-source contracts are powerful but limited. For sustained production revenue, access the contract vehicles through which agencies do most buying — OASIS+, agency-specific IDIQs, and GSA Schedule contracts.

Partner with established primes. Primes bring production capacity, supply chain infrastructure, clearances, and customer relationships. A teaming arrangement where you provide technology and the prime provides production capability can accelerate transition from prototype to fielded system by years.

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Common Mistakes to Avoid

Five patterns consistently derail first-time SBIR applicants:

1. Writing a science paper instead of a proposal. Evaluators want a clear problem, a practical solution, a credible work plan, and a viable commercial market — not a literature review.
2. Ignoring the commercialization plan. In Phase II, the commercialization plan is an evaluation criterion. Evaluators expect specific customers, quantified market size, competitive analysis, and a realistic timeline to revenue.
3. Failing to build customer relationships before applying. For AFWERX Open Topics and D2P2, customer engagement is a prerequisite. Start building end-user relationships 6 to 12 months before you plan to submit.
4. Underestimating compliance requirements. DCAA-compliant accounting, CMMC cybersecurity, export controls (ITAR/EAR), and reporting obligations are real costs. Budget and staff for them before you receive the award, not after.
5. Treating Phase III as someone else's problem. Phase III planning should begin during Phase I. The Valley of Death is not a mystery — it is a planning failure.

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Frequently Asked Questions

Can a foreign-owned company apply for SBIR/STTR?

No. SBIR/STTR eligibility requires that the small business be majority-owned (more than 50%) by U.S. citizens or permanent resident aliens. Additionally, the business must be independently operated and not dominant in its field. If your company has foreign venture capital investors who collectively hold a majority stake, you are not eligible. Restructure your cap table before applying.

What happens to existing SBIR awards during the program lapse?

Existing awards continue to be serviced. The government will continue to make payments on active Phase I and Phase II contracts, and Phase III contracts are unaffected since they are funded by the acquiring agency, not the SBIR program. What is paused is the issuance of new solicitations and new awards. Companies with active awards should continue executing as normal while monitoring reauthorization progress.

How long does it take from proposal submission to award?

Timelines vary significantly by agency and program. AFWERX Open Topic can move from submission to Phase I award in 3 to 6 months. Traditional DoD SBIR topics typically take 6 to 12 months from solicitation close to Phase I award. Phase II awards following successful Phase I completion typically take 3 to 6 additional months. Plan your cash flow accordingly — many startups underestimate the gap between submission and first payment.

Can I apply to multiple SBIR topics simultaneously?

Yes, and most experienced SBIR companies do. There is no limit on the number of proposals you can submit across different agencies and topics. However, you cannot submit essentially the same proposal to multiple topics — each proposal must be tailored to its specific topic or program. Submitting identical or substantially similar proposals is grounds for disqualification and can damage your reputation with evaluators.

Do SBIR awards create past performance I can use for other contracts?

Absolutely. SBIR contracts generate Contractor Performance Assessment Reporting System (CPARS) evaluations just like any other government contract. A string of successful SBIR Phase I and Phase II awards creates a documented past performance record that strengthens your proposals for follow-on work, IDIQ competitions, and task order bids. This is one of the most underappreciated strategic benefits of the SBIR program — it is not just funding, it is past performance building that compounds over time.

What is the difference between SBIR data rights and standard government data rights?

Under standard government contracts (non-SBIR), the government typically obtains Unlimited Rights in technical data developed exclusively with government funding, meaning it can use and disclose the data without restriction. Under SBIR, the government receives only a limited license for 20 years, during which it cannot disclose your data to third parties — even other government contractors. After 20 years, the government receives Government Purpose Rights (under the December 2024 DFARS update) rather than Unlimited Rights, providing continued protection against commercial disclosure. This makes SBIR one of the strongest IP protection frameworks in federal contracting.

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Moving from SBIR to Sustained Defense Revenue

The SBIR/STTR programs are not the destination — they are the launchpad. The most successful defense tech companies use SBIR to prove their technology, build government relationships, establish past performance, and develop the compliance infrastructure needed to compete for larger opportunities. The funding is valuable, but the market access, credibility, and IP protections are worth even more.

As the program awaits Congressional reauthorization in 2026, the fundamental value proposition remains unchanged: the U.S. government needs innovative technology from small businesses, and it is willing to pay for the R&D that produces it. The companies that use this period to prepare — identifying their target programs, building customer relationships, establishing CMMC compliance, and refining their commercialization strategies — will be best positioned when new solicitations resume.

Need help scaling from SBIR to production? Whether you are preparing your first Phase I proposal or navigating the Valley of Death between Phase II and a production contract, Cabrillo Club's AI-powered tools and GovCon expertise can help you build the operational infrastructure — from CMMC-compliant systems to capture management pipelines — that turns SBIR success into sustained defense revenue. Contact Cabrillo Club to learn how we help defense tech startups scale.