Is more certification always a good thing?

Vegetables grown in space? Adhesives that mimic gecko feet? A clean energy future through solar powered road panels? They may sound farfetched, but so did most of the world’s biggest technological innovations before their time. Ever heard of Qualcomm? What about iRobot? Not only are they some of the tech world’s biggest companies, they also have something very important in common with these future innovations: They all got their start thanks to the Small Business Innovation Research (SBIR) program.

Begun by the National Institute of Health (NIH) in 1982, the SBIR is one of the biggest sources of early-stage funding available to US technology start-ups to help them bring their idea from development to commercialization. Not only that, but SBIR certification has become a kind of seal of approval, a mark of worth for tech entrepreneurs.

But is this certification always a good thing? Or can SBIR approval sometimes hold a company back? As department of Engineering and Public Policy Professor Daniel Armanios has found, the answer is less intuitive than one might think.

While follow-on certification from a different institution may bolster the firm’s value potential, more certifications from the same institution may actually harm it.

Daniel Armanios, Professor, Engineering and Public Policy, Carnegie Mellon University

Along with University of Oregon Lundquist School of Management Assistant Professor Lauren Lanahan, Armanios looked at a representative six-state region of the country and studied each SBIR funding recipient from 2001 to 2010, and their outcomes. Their research has been published in Organization Science.

“The prevailing view is that certifications are indeed beneficial,” says Armanios. “We counter-intuitively find, however, that while follow-on certification from a different institution may bolster external perception of the firm’s value potential, more certifications from the same institution may actually harm it.”

While receiving Phase I funding from the SBIR does prove beneficial in most cases, Phase II funding from the SBIR can actually harm a venture’s chances of receiving private funding in the future. The study also found that additional funding is beneficial when it comes from different levels of government. Though the funding allocation is less, the study found that ventures that secure a state government match to their SBIR Phase I award, for instance, are actually more likely to receive private funding than those with just the Phase I award. When they do, these companies tend to receive more money overall.

“Rather than allocating Phase I and II awards sequentially,” Armanios says, “the program may want to consider offering one larger grant, especially in more capital-intensive scientific sectors such as the life sciences.”

Additionally, the researchers argue that more attention should be given to providing complementary public programs to make up a larger policy mix. For the SBIR program, the study found evidence that state government SBIR efforts enhance the federal program, outweighing the subsequent phase-based structure of the federal program as measured by private financing outcomes.

“This also has a key implication to entrepreneurs,” says Armanios. “Know not just your federal, but also your local sources of government support. The combination can be a powerful signal to private financiers.”