Navigating fed funding takes startup moxie
A $2.6 billion jackpot for early stage R&D funding from 11 federal agencies plus their related institutes seems too good to pass up, but applying for the money isn’t for the faint of heart, startup companies discovered at an educational meeting about federal grants Thursday in Portland.
“You need to submit an excellent and compelling proposal that excites reviewers, is complete and is innovative,” said Karen West, a consultant with the Maine Technology Institute on the federal government’s Small Business Innovation Research and Small Business Technology Transfer grant programs, also known as SBIR and STTR. The National Institutes of Health, or NIH, is one of the biggest grantees of federal R&D funds and just reviewed more than 1,000 applications, she said, so companies must make sure their submission stands out.
It can take about 160 hours the first time an applicant prepares a Phase I R&D application for either grant. “It’s intense,” said West. “You’re going to drink, eat and write the proposal, especially in the last 30 days.” Phase I grants are for feasibility studies, Phase II are for prototype development and Phase III are for commercialization.
Phase I grants carry up to $150,000 in funding that is not required to be paid back. The average success rate of applications is 10% to 13%, West said. Phase II grants carry up to $1 million in funding, with an average success rate of 40% to 50% among applicants, West said.
Small companies benefit
Both the SBIR and STTR programs aim to fund early stage R&D for high-risk, innovative technology that eventually leads to commercialization, which is why they are targeted for small companies. West said the definition of what constitutes “technology” can vary greatly among government agencies.
The grants differ from the direct government money research institutions get from many of the same federal institutions, in that the major party applying for an SBIR or STTR grant must be a small business that is independently owned and operated, organized for-profit, have its principal place of business in the United States, be at least 51% owned by U.S. citizens or permanent residents and have 500 or fewer employees. The investigator leading the project must be more than a 50% employee of the business at the time of the award, meaning he or she cannot have another full-time job. There also is a large commercial component to SBIR and STTR applications, sometimes requiring details in up to half of a 25-page application, for example.
Monies for the grants come from so-called extramural funding targeted at awards and grants the federal entities give to outside institutions.
So, for example, the 11 federal labs must set aside 2.9% of their extramural R&D funding for SBIR grants and 0.4% for STTR grants, West said. Applicants can apply to more than one lab, but if they win more than one grant, they can only accept one.
One primary difference between the two grant types is that companies winning STTR money must partner with a research institution that performs 30% of the work, while the business must perform 40% of the work. Additionally, the parties must allocate intellectual property rights. SBIR grant winners must perform 67% of the R&D work and may subcontract the balance, which may include university research partners or consultants, but it is not a requirement.
Maine pulls in $88M to date
To date, more than 100 small businesses in Maine have won SBIR/STTR awards in all of Maine’s 16 counties. They received $88.4 million from 1997 to 2014, according to statistics tabulated by West, who said the grants got rolling in Maine in 1997. The total number of awards was 336, including companies with multiple awards. Most of the awards in numbers came from the Department of Defense, with 93 awards from 1999 through 2012, followed by the NIH with 61. The NIH also is an anomaly in that it accepts applications from businesses partly owned by venture capitalists. The DOD and NIH issue about 80% of the total grant monies, with the NIH alone having 27 centers alone that dole out funding.
Among Maine companies that have received federal grants are Sea & Reef Aquaculture, which in 2009 got an $80,000 U.S. Department of Agriculture SBIR Phase I award and subsequently commercialized its technology; Tex-Tech Industries Inc., which won both SBIR and STTR awards, along with MTI Seed Grants and Development Awards; and Ocean Renewable Power Co., which won two STTR awards.
West said successful applicants will have an idea for a technology that is revolutionary rather than evolutionary, that is, an idea that moves the state of the science forward, and that once it is commercialized, provides jobs, benefits and taxes.
Think commercialization early
The commercialization aspects have taken on a more prominent role in recent years, with the government looking for a return-on-investment for taxpayers’ dollars.
“If you don’t have a strong commercialization strategy, it can sink the proposal,” said West. “We can always fix the technology, but not the commercial part [the market size, for example].”
The process for the federal grants is long, starting with preparing the proposal, which then undergoes a four- to six-month review process, a one- to two-month award process, and then the company has six to nine months to perform work under the Phase I grant. The Phase II proposal is then submitted. That review process takes up to four months. The companies have two years to carry out work under the Phase II grant before the idea is commercialized. The total program takes three to four years, West said.
MTI offers some money that can piggyback on the SBIR/STTR programs, said Shane Beckim, portfolio manager at MTI. That includes a Phase 0 KickStarter grant of up to $5,000 and free advice for companies to get help in preparing their proposal. There also is a TechStart Grant of up to $5,000 for the initial business groundwork, though it requires a one to one match for the funding MTI provides. The MTI Seed Grant offers up to $25,000 for early stage specific R&D. And finally the MTI Development Loan for $250,000 to $500,000, which also requires a one to one funding match from the company, which West said could come from monies from an awarded SBIR/STTR grant.
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