May 12, 2014
Raising venture capital or angel financing are the sought-after ways of enabling your startup dream. The process of raising venture capital is time consuming, and at the end of the day, you’ll give up anywhere between 30-60 percent of your company in your first round. But if you are developing advanced technologies where there’s a considerable amount of technical risk, there’s an alternative to selling off huge chunks of your company.
The SBIR/STTR programs provide support for the physical sciences (advanced materials, nanotechnology, electronics, telecom), biological sciences, health-related issues and advanced computing. You probably won’t find much in the way of federal funding for a web company or social media startup that doesn’t have a lot of technical risk, but if you’re on the leading (bleeding) edge, you should leverage your capital with government money.
The federal government has myriad programs available that fund the development of critical technologies. The government is typically interested in two kinds of technologies: 1) Those where the government has a critical need and doesn’t have a commercial source available (such as with new kinds of radar, for example); or 2) Where the government needs to stimulate R&D in areas where the private sector may not invest—such as in alternative forms of energy or renewable energy. For example, recently the Dept. of Energy through ARPA-E announced the availability of $60 million to fund the development of technologies to detect and measure methane emissions in addition to thermal management systems that cut the energy needed to heat and cool buildings. A few years ago, after the Gulf Oil Spill, the government immediately started funding the development of technologies that would accelerate the clean-up and environmental remediation of the Gulf Coast.
Most importantly, some of this money is set aside in programs targeted at small businesses, so you won’t be competing with major universities or Boeing for the funds. The SBIR (Small Business Innovation Research) program is a congressionally mandated program that obligates those federal agencies that sponsor research (Dept. of Defense, Dept. of Energy, National Science Foundation, etc.—11 agencies in all) to set aside 2-3 percent of their external R&D budgets for qualifying small businesses. If you have fewer than 500 employees and the majority of your ownership is held by individuals who are U.S. citizens, you are a qualifying small business. About $2.5 billion goes to small businesses through this and its sister program, the STTR Program (Small Business Technology Transfer)—which permits co-development with universities or federal laboratories.
You can get up to $150,000 to prove the feasibility of your work in a Phase I SBIR and then can get another slug of money for more advanced product development in a Phase II—over $1 million in total. At the end of the day, the government might even become a customer of yours. In the meantime, they’ve paid to de-risk your technology in a manner that does not require you to give up equity … and once you’re done with the work, you’ll be a much better candidate for raising venture capital or angel financing. Astute VCs will recognize the competitiveness and oversight of the SBIR program as a proxy for good technical due diligence. This is a great program if you have unproven technology and otherwise are not yet ready for equity financing
These programs are competitive, and they are not a slam-dunk. I’ve heard anecdotally that something less than 20 percent of all Phase I proposals are funded. Still, writing government proposals is a skill that must be developed, and if you get good at it, it can pay off handsomely.
At Advanced Diamond Technologies we set an informal goal when we started the company of securing as much money from government grants and contracts as we did from VCs/angels. Through the first few years of the company’s history, we had raised about $7 million in equity and the total value of our government grants/contracts was a comparable amount through approximately 15 different awards. Some people would say that we effectively had $14 million of “investment” in the company, and this capital allowed us to bring products to market that generate recurring, and growing, revenues.
More importantly, we’ve been able to use the government money to fund risky projects that our investors never would have allowed. Some of the bets have paid off—notably our electrodes for water treatment—and we killed off some others that haven’t panned out. All of the commercial products the company sells today at one time were the subject of SBIRs.
But there’s no free lunch…it can take 6-12 months to secure the money and it can take a lot of time to write the proposals—but so can trying to raise VC money. You need a team of capable people with the right backgrounds to be able to credibly execute the work, and you need access to the facilities that are required to perform the work. Through the STTR program you can leverage the facilities of universities—as well as their researchers—if your company doesn't have all the ingredients yet itself.
Each of the agencies that provides SBIR funding periodically issues bulletins that describe their focus areas and the process for applying. Your best bet is to keep an eye on www.sbir.gov or http://zyn.com/sbir/. Many resources throughout the country provide assistance to small businesses that are pursuing SBIR funding.
Take it from me. If you qualify for SBIR funding and aren't already flush with cash, you should devote the time looking into this excellent program.
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