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.
