Background
The small business innovation research (SBIR) program is a US federal initiative to provide small business with funds to complete proof-of-concept work, leading towards commercialization. SBIR funds come from federal agencies with extramural research budgets greater than $100M. Greater than 50% of the awards go to companies with fewer than 25 people and 33% of the awards go to firms with less than 10 employees (SBIR website and more here). Funds can be awarded for projects deemed to be in Phase I (prototype phase) or Phase II (development phase). Depending on the granting organization, the amounts vary between $100K – $200K for Phase I and $300K – $750K for Phase 2, with the amounts varying from year to year. In addition to the award, the possibility exists for matching funds to be awarded, with the aim of encouraging companies to attract external investment. To participate in the program, the company has to be headquartered in the US and be 50.1% owned by US citizens.
Benefits
The SBIR program is highly desirable for small businesses as defined by the administration since it is a source of non-dilutive funds that was envisioned to be used to support expoloratory work. Often such funds are used to de-risk technical challenges and demonstrate that a technology can be a viable product. Because the funds are non-dilutive, they can be used to increase the value of a firm, allowing the entrepreneur to later raise investor dollars while maintaining a larger share and control of the company than may otherwise be possible (link to a related post). As such, small businesses have competed for the money since the early 1980s and the SBIR program is competitive as is evident through the statistics from FY 2009 (only 18.2% of the approximately 24,000 applications received an award). Changes in the latest legislation now allow venture capital backed firms to participate in the program.
Challenges
Although the SBIR program is very appealing, it’s not free money, meaning specifically the reporting and alignment of work can, and sometimes does constitute a drain on scarce resources, particularly manpower. Therefore entrepreneurs should carefully consider the implications of the funds before applying for the awards.
On work alignment specifically, these grants are designed to support the specific body of work outlined in the proposal, meaning they are less flexible to support the quick pivots that startups so often have to execute. That is not to say a SBIR is a rigid framework without any chance for deviation from it. There are ways to adjust the scope of work, but it’s not well communicated what processes could or should be used for it. In reality, it’s up tp the program manager to accept the change in scope and it’s on the grantee to communicate that clearly. This lack of flexibility makes sense from the government’s perspective, because it ensures greater accountability, allows for project management and simplifies post-work evaluation.
From a lean startup’s perspective this can be a challenge, particularly if technical or market indicators suggest you should pivot from your original proposal. Combined with the delays between initial proposal and project commencement, such inflexibility can pose a significant challenge. Consider the following, not-unusual, scenario. You write an SBIR proposal with a set of objectives (A, B and C) and submit. About four months later you get a request to clarify your proposal asking you do D and E as well remove C. You’re now left with objectives A, B, D and E, of which D and E are hopefully still be aligned with your original goal and attempt of work. You get a positive response, which bodes very well for you. You’re excited! Then another few months pass before you get the funds (we’re now in t + 7 months). Ok not too bad you think, however you don’t get all the funds at once. For Phase I a 2/3– 1/3 split is enacted, meaning you receive 66% of the funds upon the beginning of the project, and 33% upon submission of the report post completion. Depending on the status of the participating small business with regards to having received a Phase I b extension either a final report or an interim report is required at the end of Phase I. The reporting is limited to 15 pages of results and discussion. For a full breakdown of the reporting requirements check out each agencies website, e.g. for the NSF. For Phase II, the payout of funds is similar though gated by the milestones set out in the project plan and reporting is significantly broader in scope, and schedules at 6-month intervals (6, 12, and 18; 24 and 30 upon Phase II b extension).
What does that mean for a startup? It means you are required to plan work in detail and with high-fidelity 7+ months ahead of starting a project. This is very tough to do for any startup, no matter how well planned and linear you think your development is going to be. As most entrepreneurs know and have experienced, startups are most often chaotic, with business plan discovery taking more importance than business plan execution (e.g. lean startup).
Future Outlook
An interesting development has taken shape in the wake the Startup America initiative that was kicked off the great fanfare. It’s a plan by the administration to do two things: a) merge the Small Business Administration into a larger organization, and b) to lend up to $1 billion to VC funds in order to facilitate greater investment into startups. The latter part of this plan has the potential to be implemented in the spring of 2012 (Link).
Summary
The SBIR program provides useful funds for not quite-early-stage-anymore companies and projects. However, there is no such thing as free money and entrepreneurs are well advised to consider all the implications and challenges of planning and running an SBIR funded project on their own timeline and critical path.
