How SBIR Grants can Help (or Hurt) your Small Business

Government funding is a great way to help advance your small business's technology. One of the most popular government funding avenues is the Small Business Innovative Research or SBIR program.

Our company, Mide Technology, has a long history of proposing to and winning SBIR research grants to develop and commercialize innovative technology. We've seen the benefits of securing funding through this program... but we've also experienced the challenges.

In this blog I'll provide information about the SBIR program, to those who may be unfamiliar, and some insights into what we've learned over the years. These lessons will help you in your quest to carry out your innovative research that aligns best with your small business company goals.

What is the SBIR program?

The SBIR program was launched in 1982 under President Reagan. The program tries to help domestic small businesses grow while also stimulating technological innovation that benefits the US economy, government, and military.

To quote the SBIR program website, their mission is:

To support scientific excellence and technological innovation through the investment of Federal research funds in critical American priorities to build a strong national economy… one small business at a time.

Where does the funding come from, and how much?

It's all well and good that the government wants to help small businesses; but how much are they ponying up? Federal agency's with research and development (R&D) budgets in excess of $100M are required to allocate 3.2% of their R&D budget to the SBIR program. There are 11 agency's as of 2017 that currently participate; but the total program funding is dominated by the following 5 agency's.

• Department of Defense (DoD)
• Department of Health and Human Services (HHS)
• Department of Energy (DoE)
• National Aeronautics and Space Administration (NASA)
• National Science Foundation (NSF)

Almost 50% of the funding in the SBIR program is from the Department of Defense, and these awards are broken down by agency below.  The DoD is where Mide typically is submitting proposals.  The amount that each agency will dedicate to the SBIR program aligns with their specific R&D expenditures.  Those expenditures will vary based on what that agency's current R&D needs are.  If the Navy is gearing up for a big new submarine program you can bet that more R&D money will be coming out of the Navy in the next few years.  So the relative SBIR funding levels will vary between agency depending on their R&D needs. 

What's the SBIR Solicitation, Proposal, and Award Process?

The SBIR program is structured with three gated phases.  A Phase I award is typically 6 to 9 months and around $150,000 depending on the agency.  Securing a Phase I award is pretty competitive, below is some data from the DoD proposals in 2012.  The government provides this data going all the way back to 1990.  

• 575 Topics
• 9,167 Proposals (16 proposal submitted per topic)
• 1,720 Phase I Awards (3 awards per topic, 18.7% of proposals funded)
• 879 Phase II Awards (1.5 awards per topic, 51.1% of Phase I's convert to Phase II)

The Phase I is mostly a research component, maybe some prototyping to prove feasibility of your initial proposal. At the conclusion of the Phase I, the small business may be asked to submit a Phase II proposal; you'll notice that you have about a 50% chance of going on to Phase II when you win a Phase I award.  Phase II is the component that can really give life to your business, and more importantly, your technology.  These awards are typically for about 2 years and $1M in total funding.

Phase III is the component when the small business successfully commercializes the technology.  This is ultimately the goal for the government and it should be the goal for the small business too.  Securing a Phase III "award" indicates that the government made a successful investment in a growing small business which is now helping grow the US economy.  Phase III's are not funded with SBIR dollars, the funding is provided by "programs of record" that are procuring your technology, product or service.  You don't apply for a Phase III, any revenue you generate from the technology, including commercial revenue, is Phase III revenue.

Who qualifies?

Small businesses are quantified as those with fewer than 500 employees.  All work must be done in the U.S. (outside of small consultants/sub-contractors) and the company needs to be majority-owned by US citizens.  Companies with a minority venture capital (VC), hedge fund or private equity owner can participate in the SBIR program.  Three agency's, NIH, CDC and ARPA, allow for majority owned VC, hedge fund or private equity firms to bid on SBIRs.

Is there any catch?

On the surface, no.  The small business still retains all intellectual property (the government does get royalty free access), and there are  SBIR data rights that help protect any data/information developed as part of an SBIR for at least 4 years.  There are not too many external funding options for your company, besides SBIR, that let you keep your intellectual property, are non-dilutive to your equity and don't require you to take on debt.

But there are a few subtle "catches" with going after SBIR awards that our company has fallen victim to in the past.  The challenges that we have seen are a lack of focus, loss of time and challenges with commercialization.

Losing Focus of where YOU want your company to go

The SBIR program can be very attractive: they pay, you own.  You have a built in customer if you can successfully execute the SBIR.  It feels like a can't lose scenario.  However, if you reach to far or to often, proposing on topics that are not fully aligned with your company's strategic initiatives and goals, the SBIR program can cause you to be unfocused as a business. This can slow you down and starve your key technology and product development efforts of their life blood.....time!

Time is a precious asset

As mentioned previously the SBIR program is a gated three phase program.  In our company's experience the time to get to a successful Phase III can take up to 8 years.  You read that correctly, 8 years. The government does not move quickly, especially when integrating a new technology. From proposal to the end of Phase II the typical amount of time is 3.5 to 4 years. There is often some downtime between the Phase I and Phase II, we have had instances where that downtime can be over a year.  But the real time killer can be after the Phase II where you are working with the government to try and commercialize the technology. "Crossing the Chasm" or bridging the "Valley of Death" is challenging for any technology and especially in the SBIR world.   

Commercializing technology with a massive bureaucratic organization

To be fair to the US government I've seen this challenge hold true working with large corporate organizations as well. Commercializing and selling technology and products to the government is hard. This is often compounded with the fact that the small business's often do not have the experience or skills needed to make commercialization happen. You need to know the key stakeholder's and decision maker's. After you figure out who they are you need to find a way to get in front of them, build a relationship and eventually sell them on your technology. To do this you need to make sure you fully understand the procurement process for your specific technology/product. This can be a challenging endeavor for a small business with limited resources.

Again, to be fair to the government, they have pushed hard to help small businesses successfully commercialize SBIR technology.  Many agency's will offer programs such as the Navy FST (formerly Navy TAP) and the DoD Velociter program.  These programs are designed to train and mentor small businesses in the techniques and processes needed to commercialize their technology.  Mide successfully used the Navy TAP program to commercialize its bulkhead shaft seal technology which is now a major driver of our growth and profit.

Our Experience at Mide... Learn from us!

In our company's past SBIR was the primary driver of our revenue.  We were writing upwards of 100 proposals a year, winning over 10, and then getting a few Phase II awards a year.  This helped our company keep young innovative minds employed developing new and exciting technology.  But we were challenged when it came to commercializing the technology we were developing through SBIR.  There is only a 6% fee you can earn on an SBIR contract which isn't enough cash to enable the business to reinvest into commercialization efforts.  To stay alive and grow you need more and more SBIR's which leads you down a path of reaching for SBIR's which are not as aligned with your strategic goals as they should be.  This can be the SBIR trap, and we were in it for a number of years.

The tide started to turn for Mide with our hydrogel embedded foam technology and the application to a highly visible and critical need for the Navy.  Many things came together to make this SBIR a commercialization success.  First, the SBIR was squarely within Mide's strategic direction.  It was applying one of our previously developed smart material technologies to solve a clear Navy need.  Second, Mide committed additional resources (time and money) to get the technology past the proverbial "valley of death."  Third, the Navy's need for the technology was obvious and shared at the highest levels of the organization.  We had champions that would not let the development die and pulled it into the fleet.  And finally, Mide participated in one of the government commercialization programs (Navy TAP in this case) to assist in the commercialization effort. After this success we started manufacturing product not just innovating; and we started reinvesting into our company and our technologies.  

SBIR now represents about 20% of our revenue and I believe we use the program as it was intended: to grow our company by funding strategically focused innovative research and then commercializing those technologies.  We are much more focused on what SBIR opportunities we go after and we push hard to commercialize as many of them as we can.  All of our product lines were birthed from the SBIR program and now we look to the future with finding new exciting technologies to help Mide grow and help our customer and economy succeed. Mide's Slam Stick data logger developing is another great example of SBIR success.  It can take a long time to pay off but when it does it can really help you grow your busienss.

SBIR Program Best Practices

Not to harp on it too much, but we recommend only pursuing SBIRs that align with your company's long term strategic goals.  Focus on topics where you can see the commercialization benefit and would be willing to invest in that opportunity after the SBIR investment helped advance the technology.  We used to employ what we called the "shotgun approach" when it came to writing SBIR proposals; we'd propose to anything (hey, you had to keep the lights on!).  Now we are much more selective, we try to find areas we believe that we can add value for our customer and where we see the long term benefit.  

Having good partners is also important.  A good partner on a SBIR (or any development) provides the highest chance for not only the successful advancement of the technology, but also the highest chance for commercialization.  This can include a prime contractor who would be integrating your technology into their systems, an expert in the field you are trying to apply your technology to, a university doing research in your area or even a technician with years of experience working on the system you are designing into.  

Writing a great proposal is key.  This means having an innovative approach that solves the customers need.  Make sure you REALLY understand the customers need by talking to the technical point of contact (TPOC) prior to the deadline to do so, read all of the reference material and researching the topic as much as possible.  Next, make sure you fully read the proposal instructions, they can change from year to year so even if you have written SBIR proposals in the past you'll want to review.  Finally, write a solid peer reviewed proposal and hopefully you are on your way to being funded.

If you'd like to hear more lessons on SBIR and other small business government grants that our company has learned, subscribe to our engineering blog.  We've planned a blog series around sharing best practices, and additional resources.  

Please don't hesitate to reach out if you have any questions on the submission process and would like to explore a partnership with Mide. Hopefully we get to work together on an exciting new technology soon, one with a large commercialization opportunity that we're both excited about!