Mass High Tech , June 16-22, 2003, pages 14 & 20
By Robert A. Adelson
Are you an entrepreneur, academic or inventor trying to commercialize your new product or technology? Are you trying to launch having a hard time finding finding? If so, you are not alone. First time entrepreneurs face huge hurdles seeking venture or angel funding for unproven inventions or technologies. You must get by with personal savings, friends and family until a strategic partner, investor, first sales or licensing revenue arises. Yet, for the startup technical venture, there is another source of funding often overlooked: federal government funding under Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs.
Government money for startups
Federal agencies reserve 2.5 % of their research and development funding (over $1 billion per year) for SBIR and STTR Programs grants to small technical companies with under 500 employees.
For the STTR program the small company must also collaborate with non-profit research institutions. Recipients must also be independently owned and operated, have their principal business location in U.S., be over 50% owned by US citizens or permanent resident aliens, and employ the principal researcher.
In Phase I of the awards, up to $100,000 becomes available over six months for an SBIR grant, or over one year for an STTR grant. As long as your grant proposal supports the Federal agency mission, monies are paid to support research to establish technical merit, concept feasibility and development efforts leading to prototype fabrication and testing.
After Phase I, the recipient company can apply for a Phase II grant – to continue R&D efforts and evaluate commercial potential – generally up to $750,000 paid over two years (but on occasion, up to $3-$4 million) or up to $500,000 over two years for STTR Phase II grants.
Funding terms: No strings attached
Grants to Startup companies mean R&D funding on best conceivable terms:
- No debt/repayment obligations
- No equity, options or securities granted
- No downstream royalties owed
- Retained rights to intellectual property
The government only wants the research done on specific tasks needed or other tasks it approves that meet the agency’s mission.
Grants are no panacea to startup companies. The process is time consuming and involves long waits for evaluation and money and government red tape and paperwork. Yet, hundreds of large successful public companies got their start with these government grants.
Peer validation & Industry partnering
Before grants are made, people appointed by the agencies as experts in the field review and grade the proposals submitted. Thus, achieving a grant is a valuable validation of your company’s technology. It can set your company apart and leapfrog your efforts to gain a strategic partner, angel or venture funding.
The SBIR program seeks commercialization. Partnering begins even in Phase I grant proposals. Then, with validation and possibility still more money in Phase II, which is geared toward creation of a working prototype, the awardee is positioned to approach key stakeholders – users, suppliers and potential customers.
Peer review and access to agency knowledge is likewise valuable as a source of collegial interaction and collaboration. In preparing your proposal, agencies may be approached and, after review, those proposals which are scored receive extensive written comment.
Up to two revisions are allowed. So, if your proposal is scored, you should get a thorough debriefing and prepare at least one revision – responding to each comment point by point, carrying out changes asked or answering comments forthrightly in the opening of your revised proposal.
How to win grants
To seek an SBIR/STTR grant, you need to respond to a Federal agency solicitation for proposals. The National Institutes of Health and Department of Defense publish three solicitations per year. NASA, National Science Foundation, Environmental Protection Agency and all other agencies publish 1 to 3 general or special focus solicitations.
Your response must follow the directions set out. The agencies will only fund what meets their objectives and needs – so the closer your proposal is to current needs the better. Your principal investigator and listed collaborators must have academic or experience credentials to lend credibility.
Yet, securing government support does not necessarily mean detouring from your business objectives. Most solicitations include a catchall for any proposal that meets the agency’s mission, and Investigator-driven proposals succeed that –
- Define a problem fitting agency mission.
- Define a concept that the reviewer can visualize. Stress novelty
- Show utility and meet agency’s requirements
- Define success – parameters where proof of concept achieved.
The grants program offers potential for technical collaboration, seed funding, product validation, investor credibility that can be well worth the effort.
Robert A. Adelson is a corporate, tax and contracts attorney and partner at Engel & Schultz LLP.
The attorney and author of this article represents inventors, entrepreneurs and startup companies. He can be reached at (617) 951-9980 or email@example.com