SBIR – Non Dilutive Funding for Your Company

This is a reblog of an interview I did last year for IEEE-USA, the original can be found here.

What if I told you there is a funding opportunity in the US that is restricted to small companies, focuses on technology, and takes no equity (non-dilutive), debt stake (grant or contract, not a loan), or claim on Intellectual Property (IP) for what may be a seven figure investment? The SBIR – Small Business Innovation Research – program has been operating since 1982, providing funding totaling over $2 billion per year, and giving early starting capital to companies that grow from there including the likes of Symantec, Qualcomm, Intuitive Surgical, and Illumina. 

History

The SBIR program came into law in 1982, founded by Roland Tibbetts, whose goal was to fund innovation, supporting American companies and giving them the support to take ideas to a stage where other private investment can take over. It was last renewed as part of the 2017 National Defense Authorization Act and is currently authorized to September 2022.

All federal agencies with a large R&D budget are required to set aside part of that budget (3.2%) exclusively for small businesses, with 500 or fewer employees, that are majority owned by Americans and permanent residents. There are 11 agencies that administer SBIRs - the Department of Defense (DoD) and National Institutes of Health (NIH) are by far the largest and account for nearly 70% of the ~$2.5 billion of funding, then Department of Energy (DoE), National Science Foundation (NSF), and NASA provide under 10% each, and the remainder is split between the other 6 agencies. Application processes vary between agencies, but there are common factors between them.

The Small Business Technology Transfer (STTR) is a sister program to SBIR. It is similar but requires participation of an academic partner, is restricted to a smaller number of agencies, and with a smaller set-aside. Aside from these differences, the broad strokes of SBIR also apply to STTR.

SBIR Phases

Most SBIRs start with an application for a Phase I – often a proof of concept – that is expected to take between 6 and 12 months, with funding for $100,000 to $400,000 (depending upon agency and project area). Applications usually take the form of a 6 to 12 page technical proposal, a project plan, a commercialization plan, a single page budget, personnel biographies, letters of support, and other relevant information. The proposal is reviewed by a committee, and typically awardees are notified and funded within 4 to 6 months. By the end of Phase I, the company has ideally demonstrated a proof of concept, and its competency, to take the project further.

Phase II is a more substantial effort with greater budgets – up to around 3 years and $2,000,000 (again, depending on agency and topic). Usually an agency invites a company to apply for a Phase II after a successful Phase I – there are some Fast-track and “Direct to Phase II” options but are unusual. The application is usually much more detailed, and budget and timelines come under more intense scrutiny, and so is recommended for more seasoned applicants. By the end of Phase II, a successful project is usually expected to have something between a working prototype and a commercial product. 

Phase III is the commercialization phase and receives no specific SBIR funds, though some agencies do have matching and follow on funding. Agencies with very specific needs often try to ensure valuable technologies make it to market, such as the DoD connecting a small business with primes like Boeing.

With a few months between Phase I and II, it can take as much as 5 years to get from application to the end of a successful Phase II – these are not small projects or commitments!

Application Process

Companies applying for SBIRs need to follow a few administrative basics – the first is setting up a for-profit company (e.g. an LLC, C-corp etc) in the US, with >50% ownership by US citizens or permanent residents, and obtaining an Employer Identification Number (EIN) from the IRS. The company should then apply to Dun and Bradstreet for a DUNS – a unique identifying number. (They may try to sell you other services. Just keep telling them you need it for a federal grant application and you get it for free). The next step is registering with the System for Award Management (SAM) to apply for government contracts. As you can see, all this takes some time and effort, and can take a couple of weeks to complete. The SBIR.gov site has a walkthrough to help here.

Each agency has a specific application site. NSF uses Fastlane, the NIH uses eRA Commons, the DoD uses DSIP etc. Each site has its own registration requirements for the company and potentially the key investigation staff, that also may take a few days to setup. I usually tell applying companies to allow a month prior to submission to get this process completely done the first time. Subsequent applications are then much faster.

Each agency like the DoD, NIH, NSF, DoE, and NASA maintain their own SBIR websites, while there is also an overall SBIR site, where more details on submission can be found.

Every proposal has key staff and a Principal Investigator (PI) who must work at least 50% of their time at the company. Proposed budgets may cover items such as salary for key staff, consultants, equipment, and materials, justifiable travel, as well as reasonable overhead costs. The majority of the budget must be spent within the company (not outsourced), and any outsourced work should be done within the USA.

Agency Specifics

As mentioned, each agency administers the SBIR in its own way. The DoD has very targeted needs and this is reflected in its methodology. Twice a year the DoD SBIR topics are opened up, and each branch has a number of targeted topics (For example, the Navy may call for development of a more compact and higher performing SONAR buoy. The application deadline is about 2 months after the topic release, after which the topic is gone.

The NSF has a different approach, with 4 deadlines a year, where a submission on any topic within its remit is encouraged. Companies can pre-submit a short description to the NSF, and receive feedback on whether an application is warranted or not.

The NIH has a mix, with three submission dates a year for most applications, which similar to the NSF can be anything within its broad remit. Applicants are usually encouraged to speak to the SBIR manager in that area to gauge general response, and as a courtesy to let the NIH staff for review. The NIH also has calls on specific topics that run for a limited period, for example one to two years, on areas of particular need. Dates on some topics may vary slightly.

How Agencies Benefit

What do the agencies get for this money? First of all, they don’t get equity in your company, they don’t get paid back, they don’t own any product or IP that is created, and provided you label everything sent to them in reports they don’t own data rights either.

They do get research and products in areas critical to them. The products may not sell, or the research may show an approach is not viable, but it’s understood that there is risk involved. You owe them the reports, milestones, and deliverables listed in the proposal. Even then if the ongoing research shows a pivot is needed, every monitor I have been involved with has been very reasonable about changing course.

In most cases the project monitors are have spent their career in these fields and care deeply about curing disease, advancing technology areas, or helping those in the military get the best equipment and tools, or whatever their area is. They aren’t in this for personal reward, and they want you to commercially succeed because it means more and better products in their key areas. In my personal experience, almost every government agency representative is an exceptional advocate for their field, and works hard to get positive outcomes for the company, agency, and the country.

The other side of this is that the funding for SBIRs comes from an overall pot, not from an individual group’s budget. Getting awards in their area effectively increases their departmental budget, and your success benefits them in multiple ways. They *want* you to be the next Qualcomm.

This is one of the few times you will have a counterparty who doesn’t care solely about the bottom line.

The Downsides

So far it seems easy – write a few pages, join some websites, and you get up to $2.4 million. These awards are competitive - there are many others applying, and your application is only one of many other worthy contenders. NIH Phase I submission success rate averages around 15 to 20%. Phase II averages around 30 to 40%, and there is no guarantee you will be in that pool. An excellent idea with a top notch team and a well written proposal will put you above that average, but you are unlikely to be there on your first application. When I work with companies writing SBIRs, I advise them to consider them for the long term, and that several attempts will be needed before they succeed. 

As with anything new, the first proposal you write will take some time. Just the administrative preparation can take a few weeks, as you work with various websites and develop the company boilerplate sections, key member bios, and learn budgeting methods.  You’ll also need to write compelling research and commercialization plans. Companies should expect to invest about 6 man weeks into writing their first SBIR proposal (apart from the administrative setup), 2 weeks into the next, and a week every one after that. As the business minded among you are calculating, it does not make sense to have one of your most important staff members spend 6 weeks for a 20% chance of $150k – but if you are in for the long haul and assume this is going to continue over years, then it quickly shifts to being worthwhile. Over time, you will learn not only how to write SBIRs but when to apply and which ones not to. Ultimately, you can get to the point where a few days' work on a well targeted application gets you a >50% chance of success.

After receiving the award, you are subject to Federal Acquisition Regulations (FAR), which require careful financial tracking and reporting and limits how you can spend your funding. It is not a pot of money that can be used any way you want, but a well-run company with good accounting should have no problems meeting FAR.

While the federal government will always pay, sometimes it takes time for federal payments to arrive, or for contracts to be renewed. This can leave periods where your company is left without income but still has employees. While agencies try to minimize this, it is a concern. If possible, try to maintain sufficient revenue or cash in your company to pay staff during these uncertain times.

The Upsides

There are several upsides beyond “up to $2.4 million of non-dilutive funding”. The agency is a customer, giving you input and feedback as you develop, and may ultimately be a source of revenue. This third party endorsement proves to others your idea and team have merit, and if you are raising money from other sources, helps validate you.

Even if not initially successful, the process of creating the research and commercialization plans often focuses a company on where they are and where they need to go I’ve often found that this is the first time a company has laid out a formal plan for their technology and business. Further, the reviews returned can be eye opening as to what other experts feel are the strengths and weaknesses of your approach, and can direct future improvements. Of course, there’s always the chance that “Reviewer 2” is simply an idiot who doesn’t appreciate your genius, but that’s been grant applications throughout history!

One often forgotten benefit of SBIRs is that because they are competitive, if you have won one in a particular field, you have now met the competitive requirement in any such federal contract, so it can be a rapid way to beat your competition to the punch.

Writing a Successful Application

Beyond having an excellent idea and a great team that meets the need of a federal agency, how do you write a good application? When writing my own, the first thing I think is that I’m not writing a report, I’m telling a story. I’m leading a reviewer on a journey so by the end they know this proposal needs to be funded. I start with a title that combines an obvious and important problem and solution, and catches the eye and makes them want to read the first paragraph. The first paragraph conveys the core of the proposal over and makes them want to read the rest of the first page. Then I have the rest of the first page to make it obvious that this is the solution that’s needed. That first page is critical. The rest is only showing that you have the background and team to make this work, and not giving them a reason to doubt you. Have people you trust outside your company read your first page, and find out what excites them and why, and build that feedback into the next draft.

Keep the proposal simple and targeted. A straightforward application that picks one clear goal is easier to explain but more importantly does not give “targets” for reviewers to pick on and make negative comments. Remember that when you are up against other good applications, one small criticism may cause the agency review panel to pick another awardee over you.

Lastly, remember these are reviewed by experts who are volunteers. They have day jobs and this is usually done at midnight after a long day working. Make it easy for them to read. Use large font, short paragraphs, lots of figures and bullet point lists so they don’t have to work to understand your genius. Remember, nobody likes opening a document to see 10 pages of nine point font!

Summary

The SBIR program is a great way of accessing millions of dollars of non dilutive funding, feedback from experts, and gaining a prospective customer. It involves a lot of upfront work and discipline, but a consistent approach can yield a significant benefit to your company.

Talking to Journalists

Something I learned in the early days of writing this blog is "how to talk to journalists", and so I thought I'd do a post on it partly to remind me in future when I forget.

First thing - you do not have to talk to them. If you are uncomfortable, then don't. For the most part, they need you more than you need them. If you don't speak to them, you are exactly where you were prior and you carry on with your day to day life - but they don't have a story (or a weaker one) and those things they need. So - again - if you don't want to, just don't talk.

Journalists are not your friend even if they are friendly. They have a job to do, and you're a source of information for them in getting that done. It doesn't mean they are hostile or out to get you, but don't speak to them like they're a friend. 

Remember that like in any profession there are good ones and bad ones. Most I've spoken to were professional, checked all pieces of information given, went to multiple sources, and tried to make sure they were writing a good story. Some clearly didn't care. Before you talk to them go look up their previous articles, the publications they work for, and see if they are well written pieces and reputable publications. If you don't like how they write, don't speak to them or do so very very carefully.

Choose your words with care, they might end up on the front page of a national paper. Pause, think, and imagine what someone you don't know will read into your words, including future employers.

Email is also a good approach to communication - you have time to think about your answers and edit, and in the end there is no question of what you did or did not say. Journalists seem to prefer voice communication though, at least in initial discussions.

Also remember that anything you say can and may be used in their story with attribution, even if you say "this is on deep background" and then tell them something. They have to agree to that before you tell them something, otherwise they are under no obligation to do so. So, if you want to do the "off the record" thing, get that clear agreement first, (possibly in an email), and also make sure you understand what the terms actually mean. Taking from Associated Press definitions:

On the record (Default): The information can be used with no caveats, quoting the source by name. 

Off the record: The information cannot be used for publication.

Background: The information can be published but only under conditions negotiated with the source. Generally, the sources do not want their names published but will agree to a description of their position. AP reporters should object vigorously when a source wants to brief a group of reporters on background and try to persuade the source to put the briefing on the record. These background briefings have become routine in many venues, especially with government officials.

Deep background: The information can be used but without attribution. The source does not want to be identified in any way, even on condition of anonymity.

In general, information obtained under any of these circumstances can be pursued with other sources to be placed on the record.

I've sometimes taken the approach of "I'll speak to you on Background, where you can describe me as 'a person familiar with the company'. If you want a quote attributed to me, I'll consider and send you it in email" because I want control on what my name is attached to. I've found most good journalists agree to this or something similar. Ones who are looking more for hits than a solid story drop you quickly - I'm not sure if that's because this makes more work for them, or because it signals they are dealing with someone who knows the game.

If you think a Non Disclosure Agreement applies to anything you are talking about, then you really, really want to talk to a lawyer first. If the lawyer says it does apply, then you do not talk unless you want to risk a lawsuit. If you still think you need to talk to them, then ask your lawyer for advice on how to do so. If in doubt, just don't. And if you can't afford a lawyer for an hour (~$500) then you can't afford a lawsuit and need to stay quiet. Similar rules apply if you are speaking regarding a person with deep pockets or access to a lot of someone else's money, even if there is no NDA, as they can still cause a lot of pain legally. 

If you've signed a government secrets act and this applies, then be prepared to go to jail for a very long time. Seriously, just don't risk this one.