DoD SBIR Phase III transition probability comes down to one question: who has money to buy what you built? There are three customer signals. Signal 1 is a user who likes your product. Signal 2 is a program office willing to sponsor you. Signal 3 is a named budget owner with non-SBIR dollars. Most founders have Signal 1 and call it transition probability. That is the mistake this guide fixes.
Here is the math problem. Across DoD, only a small fraction of Phase II awards ever convert to Phase III. The most-cited estimates put the Phase II-to-III conversion in the low single digits to low teens depending on the component and how you count (source: SBA and DoD SBIR/STTR program reporting; exact rates vary by component and accounting method). The reason is almost never the technology. The reason is that a Phase II proves your technology works. It does not prove anyone has budgeted money to field it.
So when a founder tells me "we have great customer pull, three operators love it," I ask one follow-up: does any of those three control a budget line? Usually the answer is no. That is Signal 1. It feels like traction. It does not predict transition.
This guide gives you a 3-tier rubric with specific evidence requirements for each tier, so you can self-assess where you actually stand before you bet a Phase II on it.
What is DoD SBIR Phase III, and why do most Phase II awards never get there?
SBIR Phase III is work that derives from your SBIR-funded R&D but is funded by non-SBIR dollars. It has no dollar cap, and it can be awarded sole-source, meaning the government can contract with you directly without re-competing. The catch: Phase III money comes from someone else's budget, not the SBIR program.
That single fact explains the conversion problem. Phase I and Phase II are funded by a set-aside pool that exists to de-risk technology. Phase III is funded by a program office, a major command, or a procurement line that has to choose to spend its own money on you instead of something else.
A Phase II tells the government your technology is feasible. Phase III asks a much harder question: is it worth a budget owner reallocating real dollars? Feasibility is necessary. It is not sufficient. Transition is a budget question, not a technology question.
What is SBIR Phase III? SBIR Phase III is follow-on work that derives from your SBIR-funded R&D but is paid for with non-SBIR dollars. It has no dollar cap and can be awarded sole-source, so the government can contract with you directly without re-competing. It is the point where your technology transitions into a real budget.
That reframe is the whole game. Once you see transition as a budget question, the three signals fall out naturally. They are just three answers to "how close are you to a budget?"
The three customer signals (and why founders confuse them)
Here is the rubric in one table. Read it, then I will walk through each tier with the evidence that actually counts.
| Signal | What it is | Proving artifact | What it proves |
|---|---|---|---|
| Signal 1 | A user who likes your product | Letter of Support (LOS) | An operator finds the technology interesting |
| Signal 2 | A program office willing to sponsor | Signed Customer Memorandum | An organization sees a mission fit and will help |
| Signal 3 | A budget owner with non-SBIR dollars | Named O-6/GS-15+ sponsor with a budget line | There is money and someone accountable for spending it |
The confusion almost always happens between Signal 1 and Signal 3. An enthusiastic lieutenant colonel who takes your call, shows up to your demo, and emails you afterward feels like serious pull. But unless that person controls or can directly influence a budget line, that is Signal 1 wearing a uniform.
Rank is not the same as budget authority. A captain who runs an acquisition line can be a stronger signal than a colonel who just likes your gear. The question is never "how senior is your contact?" It is "how close is your contact to a dollar?"
Signal 1: the user who likes your product
Signal 1 is a government user, usually an operator or an engineer, who has seen your technology and wants it to exist. The artifact is a Letter of Support. The LOS says, in effect, "this capability would help us."
That is genuinely worth something. It means you are solving a real problem for a real user, which is more than many applicants can say. AFWERX Open Topic Phase I is largely a customer-discovery exercise, and starting from a credible Signal 1 contact is a legitimate place to begin.
What an LOS does not prove: that anyone will pay for it. A letter that says "this is exciting and we would love to see it developed" commits no organization to anything.
Here is a fully fictional example to make the tiers concrete. Imagine a startup, call it NorthVane, building a low-cost counter-drone acoustic sensor. Three squadron operators at a test event love the demo and each write a letter saying the capability would help their mission. NorthVane has three Signal 1 letters and zero program offices attached.
The trap at Signal 1 is writing a Phase II narrative that treats those three letters as a transition plan. Reviewers on the commercialization and transition side read past it immediately. They have seen a thousand "the warfighter loves it" letters.
If you are at Signal 1, your problem is customer discovery, not writing. No narrative rescues a missing budget owner. The fix is more engagement: turn one of those enthusiastic operators into a path to the program office that owns their mission.
What is a Letter of Support in SBIR? A Letter of Support is a document from a potential government user stating that your technology would help their mission. It signals interest, not commitment. It does not name a funding source or obligate any organization, so it counts as the weakest customer signal (Signal 1).
Signal 2: the program office willing to sponsor
Signal 2 is the jump from an individual who likes you to an organization that will sponsor you. The artifact in the Air Force world is a signed Customer Memorandum.
For AFWERX Direct-to-Phase-II (D2P2), the Customer Memorandum is the centerpiece of the transition case. It is short, roughly a 2,000-character statement, but it has to name a specific Air Force organization, a point of contact with a role, and an explicit intended use and transition path. Other components have their own versions; the Army and Navy use comparable memoranda and transition documents.
The evidence that makes it real:
- A named organization that owns a mission, not just an individual who likes you.
- A named point of contact with a role and an office, not "a contact at the base."
- An explicit statement of intended use and a transition path, not "we are interested in learning more."
The test that separates a real Customer Memorandum from a dressed-up Letter of Support: does it name an organization that owns a mission and commits to a next step, or does it just name a person who is enthusiastic? If you can swap the signatory for any other friendly operator and the letter still reads the same, it is Signal 1 on program-office letterhead.
Back to NorthVane. Suppose one of those three operators introduces the company to the program office that manages base air defense, and that office signs a memorandum committing to evaluate the sensor in an upcoming exercise. Now NorthVane has Signal 2. An organization, not just three individuals, has put its name on a transition intent.
At Signal 2, you have a fundable story. The Phase II narrative should focus on one thing: converting that program office's interest into a budget commitment. That is the bridge to Signal 3.
What is a Customer Memorandum in DoD SBIR? A Customer Memorandum is a signed statement from a government program office naming a specific organization, point of contact, and intended transition path for your technology. In AFWERX Direct-to-Phase-II, it anchors the transition case in roughly 2,000 characters. It proves organizational sponsorship (Signal 2), one tier above a Letter of Support.
Signal 3: the budget owner with non-SBIR dollars
Signal 3 is the strongest signal and the one that actually predicts Phase III transition. It is a named budget owner, typically O-6 or GS-15 and above, with an identified, specific funding source.
"Identified and specific" is the whole point. Signal 3 evidence looks like:
- A named sponsor with a rank or role that carries budget authority.
- A specific budget line: a Program Element (PE) number, a POM cycle commitment, or a documented matching-funds commitment.
- A timeline for when those dollars become available.
"We hope to find transition funding after Phase II" is not Signal 3. "Colonel [Name], who owns PE [number], has committed to match Phase III funding in the FY28 POM" is Signal 3. The difference is whether a specific person has tied a specific dollar to your specific technology.
The cleanest formal mechanism for forcing Signal 3 is the AFWERX STRATFI and TACFI program. STRATFI (Strategic Funding Increase) provides $3M to $15M in government funding through a three-party structure: AFWERX SBIR funds, a non-SBIR government match from a sponsoring program office, and private investment from the company or external investors. That government-match requirement is the forcing function. You cannot assemble a STRATFI package without a real government budget owner agreeing to put real money in. TACFI (Tactical Funding Increase) is a smaller step, generally requiring a strong Signal 2 moving toward Signal 3.
For NorthVane, Signal 3 looks like this: the base air defense program office identifies a Program Element line, names the colonel who owns it, and commits matching funds for a STRATFI submission. Now there is money and a person accountable for spending it. That is transition probability you can underwrite.
What is a named program-of-record sponsor in SBIR? A named program-of-record sponsor is a government budget owner, usually O-6/GS-15 or above, who has tied a specific funding source to your technology, such as a Program Element number or a STRATFI matching commitment. It is the strongest customer signal (Signal 3) because it proves money exists and someone is accountable for spending it.
The self-assessment: where do you actually stand?
Run your strongest government relationship through this checklist. Be honest, because reviewers will be.
- Signal 1 if: you have a Letter of Support or a verbal "we love it," but no named organization commits to a next step and no funding source is identified.
- Signal 2 if: a program office (named organization, named point of contact, stated transition path) has signed a Customer Memorandum, but no specific budget line is attached.
- Signal 3 if: a named budget owner with budget authority has identified a specific funding source (PE number, POM commitment, or matching funds) and a timeline.
What to do at each tier:
- At Signal 1: do not bet a Phase II on transition. Invest the next 90 days in customer discovery to reach Signal 2. The fix is engagement, not a better narrative.
- At Signal 2: you have a fundable story. Write the Phase II to convert the program office's interest into a budget commitment, and start the STRATFI/TACFI conversation early.
- At Signal 3: you are genuinely transition-ready. STRATFI/TACFI or a Phase III sole-source award is realistic. Now the writing has to do the relationship justice.
Different DoD programs effectively require different signal tiers. Here is a rough mapping.
| Program / mechanism | Signal tier it effectively requires |
|---|---|
| AFWERX Open Topic Phase I | Signal 1 acceptable to start (it is a discovery vehicle) |
| AFWERX Direct-to-Phase-II (D2P2) | Signal 2 (Customer Memorandum required) |
| TACFI (Tactical Funding Increase) | Signal 2 moving to Signal 3 |
| STRATFI (Strategic Funding Increase) | Signal 3 (matching funds force a budget owner) |
| Phase III sole-source | Signal 3 (non-SBIR dollars by definition) |
AFWERX Open Topic Phase I runs on a recurring solicitation cycle rather than a permanently open door, so check AFWERX for the current open window before you plan around it.
If you have Signal 1 and you are eyeing STRATFI, the map tells you to start with AFWERX Open Topic Phase I and build toward the budget owner, not to force a package you cannot back.
How this maps to ARPA-H and other agencies
The rubric is not Air Force specific. It is a general test of "who will actually pay."
For ARPA-H, transition means deployment at scale, and the equivalent of a budget owner is a delivery-and-payment partner. A clinician who likes your device is Signal 1. A health system that commits to a deployment site is Signal 2. A payer or integrated health system with a budget to adopt at scale is Signal 3. ARPA-H program managers weight deployment-at-scale heavily, so naming who delivers and who pays is the same exercise in different clothes.
For civilian SBIR at NIH and NSF, transition is commercial revenue rather than a government budget line. The rubric adapts: Signal 1 is a customer who likes the product, Signal 2 is a customer who signs a pilot or LOI, and Signal 3 is a customer with a purchase commitment or contract. The labels change. The core question, who has money to buy this, does not.
Frequently asked questions
How is Phase III different from Phase II? Phase II proves feasibility and is funded by the SBIR set-aside, with a dollar cap. Phase III has no dollar cap, is funded by non-SBIR dollars, and can be awarded sole-source. Phase III is the transition into a real budget.
Is a Letter of Support enough for a Customer Memorandum? No. An LOS signals interest from an individual. A Customer Memorandum names an organization, a point of contact, and a transition path, and commits the office to a next step. If your letter could be signed by any friendly operator without changing, it is still Signal 1.
What signal tier does STRATFI require? Effectively Signal 3. The matching-funds requirement means a government budget owner has to commit real dollars, which only happens when a named sponsor with budget authority is behind you.
Can you reach Signal 3 during Phase I? It is rare but possible. Most companies reach Signal 3 during or after Phase II, once a program office has had time to evaluate and find a budget line. If you can credibly show Signal 3 during Phase I, a Direct-to-Phase-II path becomes much stronger.
Does ARPA-H use the same rubric? Yes, adapted. Replace "program office with a budget line" with "delivery-and-payment partner that can adopt at scale." A health system or payer with a budget to deploy is the ARPA-H equivalent of Signal 3.
Where to go from here
The fastest way to waste 80 hours is to write a competitive Phase II narrative on top of a Signal 1 relationship. The narrative cannot manufacture a budget owner who is not there.
So start with the honest self-assessment. If you are at Signal 2 or 3, you have a fundable story, and the job is to write it competitively. That is exactly what Cada's AFWERX and ARPA-H grant writers do: turn a real customer signal into a proposal that survives the transition reviewer.
If you are at Signal 1, writing is not your bottleneck. Customer discovery is. We do a customer-signal self-assessment that tells you, in plain terms, which tier you are actually at and what the next move is to climb a tier. No pitch, no obligation, just a straight answer on whether your government relationship is real transition probability or enthusiasm you have mistaken for it.