$1 Million Dollars of Non-Dilutive Investment for Your Business

$1 Million Dollars of Non-Dilutive Investment for Your Business

by Mitch Lairmore | April 20,2018

Most small businesses would welcome funding for research and development that would lead to innovative products and services to include in a portfolio of offerings. The good news is that the United States has a program to do just that. The Small Business Innovation Research (SBIR) program provides funding for research and development activities conducted by small businesses. According to sbir.gov, in 2015 government agencies made 4,334 SBIR awards for a total of $2.25 billion.

SBIR funding is awarded in two phases. Phase I awards are meant to fund concept development. Phase I awards range from $100,000 to $225,000. Phase II awards are meant to fund prototype development and are larger amounts. Phase II awards range from $750,000 to $1 million.

SBIR is a competitive program. In 2015, the agencies that made the awards received 19,958 proposals. So, about 1 of 5 proposals were funded. The historical success rate for proposals varies by agency and whether the proposal is a Phase I or Phase II. Phase II awards tend to have higher success rates than Phase I awards.

The preparation of a SBIR proposal requires a significant amount of effort. The first proposal is particularly difficult because you must also learn the process of preparing a proposal. Some of the components of the proposal can require a lead-time of weeks or months so it is also an effort that lasts a significant amount of time. Therefore, a small business owner will need to commit scarce management time in order to pursue SBIR funding. The purpose of this article is to outline the issues a small business owner will need to consider to make this decision.

Is my company eligible?

The rules for eligibility are, for the most part, straight-forward. The business must:

  • have less than 500 employees
  • be a “for profit” organization
  • be more than 51 percent owned by U.S. citizens or permanent resident aliens

The Principal Investigator (PI) is the lead person for technical activities associated with the project. The PI must be employed by the small business for 51 percent or more of their time. You can subcontract out some of the technical work that will be done but it can only be up to 33 percent of a Phase I project and 50 percent of a Phase II project.

Can my company develop a competitive proposal?

Government agencies that participate in the SBIR program can be divided into two categories: “contract” or “grant” agencies. Some agencies provide SBIR funding to small businesses through contracts and other agencies employ grants.

The largest contract agency is the Department of Defense (DOD). Other contract agencies include the Department of Homeland Security (DHS), NASA, Department of Transportation (DOT), Environmental Protection Agency (EPA), National Oceanic and Atmosphere Administration (NOAA) and National Institute of Standards and Technology (NIST).

The grant agencies include the National Science Foundation (NSF), Department of Energy (DOE), National Institute of Health (NIH), Department of Agriculture (USDA) and Department of Education (USDE).

Contract agencies publish topics in their solicitations that call for a solution for a particular problem or need. An example is a Navy topic might specify the need for a system to detect (periscopes). The solution should be lightweight enough to be used in naval aircraft and meet a list of specific performance specifications. On the other extreme, a grant agency such as NSF will have very broad topics which call for innovative manufacturing technologies for processing of single and multi-component materials.

In order to have a competitive proposal for a contract agency topic, a proposer will need to convince the agency that the work funded by the SBIR grant will lead to a commercialized product or service that will address the specified need. The challenge sometimes faced by small companies is that they sometimes do not have the resources or capabilities to commercialize the product or service being proposed so the proposal is not credible.

In order to have a competitive proposal for a grant agency topic, the small business will need to convince the agency that the work done on the SBIR will advance the state of the art and will generate a significant amount of economic growth. This can be a challenge. If your proposed research will solve a difficult technical problem but the business potential of the product or service is small, it will not be funded. In contrast, you might have a solution with a large business potential but if the SBIR effort is comprised of an incremental product improvement, the agency will not be receptive to the proposal.

A Phase I and Phase II SBIR award is typically approximately $1 million dollars for all projects. However, that amount of money is often not enough for the commercialization of new product technologies. Therefore, it will be critical for the proposal to outline a strategy that explains how the company will fund the activities not included in the SBIR effort but necessary for commercialization.

A SBIR contract or grant can be a great source of funding for a small business. Business owners considering pursuing SBIR funding should understand the issues regarding winning a SBIR award before they invest company resources to apply.