As an attorney who works with several technology-based companies, I frequently receive questions about how to obtain outside financing. One source that is often overlooked is government funding through the federal Small Business Innovation Research (SBIR)/Small Business Technology Transfer (STTR) programs. While I do not provide clients with assistance concerning SBIR/STTR applications, I frequently field questions pertaining to eligibility requirements, contract negotiations, and general strategy issues when dealing with the various federal agencies and institutions. Because of this tangential involvement with the SBIR/STTR programs, I thought it would make sense to attend the national conference that was held in Cleveland a couple of weeks ago.
Attending the conference confirmed many things for me, both good and bad. Starting with the bad (don’t lawyers always do that?): obtaining an SBIR/STTR award is a very competitive and confusing process, especially for companies that don’t have staff experienced in obtaining one. This was very evident by the types of questions that came from the 650+ attendees at the conference, the majority of whom were from seed or idea-stage companies.
There are currently 10 government agencies that offer some form of SBIR/STTR program. While there is significant commonality among them, each agency has its own rules and sets of regulations concerning submissions, deadlines, evaluation process, and reporting requirements. Some are set up to have grants awarded for a given line of research within a specified field, while others require a contract in which the government purchases the product developed under the original proposal.
There also are numerous requirements for eligibility, such as Principal Investigator employment obligations (for SBIRs), organizational size limitations, and ownership restrictions. For example, the applying entity must be a United States, for-profit business organization that is at least 51% owned by individuals, which precludes many venture-backed companies in which the venture capitalist(s) own a majority of the voting stock.
One burdensome obligation to note about the SBIR/STTR programs is that to receive funding under many of the solicitations, a company must have a good accounting system in place to comply with the various requirements of the given agency. In fact, it was even noted at the conference, for example, that the National Institute of Health (NIH) may require an indirect expense to be characterized and accounted for one way, while the Department of Defense (DOD) agencies require the same indirect expense to be characterized and accounted for in a different way. This can lead to many issues if an organization has SBIR grants with both the NIH and DOD. As a result, it is crucial that a company work with an accounting firm that knows how to properly characterize and account for government contracts under the various SBIR/STTR granting institutions.
On the positive side, SBIR/STTR awards are, in essence, free money! How could anyone argue with that? SBIR/STTR funding comes in two phases. Phase I awards, which are for up to $100,000 for six months, are for a feasibility study to evaluate the scientific and technical merit of an idea. Phase II awards are to further pursue the research and development of the technology analyzed under the Phase I grant (only organizations that have obtained a Phase I award are eligible for a Phase II award). Awards for Phase II research are for periods of up to two years in amounts up to $750,000.
In addition, obtaining an SBIR/STTR award gives a company a certain amount of recognition because to receive an SBIR/STTR grant, the technology (and the plan for its commercialization) is often subject to a peer-review evaluation. This can be a helpful outside validation of a company’s technology when seeking outside investors who may have some difficulty understanding and evaluating a company’s complex technology.
Finally, there are a wide variety of SBIR/STTR solicitations available out there concerning different technologies, everything from the bio-defense initiatives announced by the NIH, to the contracts awarded by the Department of the Air Force concerning aeropropulsion and power technology. A searchable database for open solicitations can be found at http://www.sbirworld.com/. The site, sponsored by the National Science Foundation, is also a wonderful source of information about the SBIR/STTR programs.
The NIH SBIR/STTR Program Coordinator said at the conference that funding for the SBIR/STTR program is expected to exceed $2 billion this fiscal year: that’s almost double the funding level of FY 2000. Despite the complexity and bureaucracy one has to deal with when obtaining SBIR/STTR financing, every eligible early-stage, technology-based company should seriously consider the expanding SBIR/STTR programs as part of an overall fundraising strategy.