Take it for granted: need cash to develop your latest high-tech product? There's probably an SBIR grant for you

Entrepreneur, Jan, 2005 by David Worrell

EVERY TV POLICE DRAMA HAS ONE--A giant lab full of expensive equipment to analyze mysterious powders or fibers from a crime scene. Looks high-tech, right? Not compared to a new device developed by DeltaNu of Laramie, Wyoming. The company's new hand-held device, called Inspector Raman, sniffs out substances from cocaine to anthrax faster than you can say CSI: Miami.

How did a tiny company in Wyoming develop this breakthrough technology? Dr. Keith Carron, a chemistry professor and co-founder of DeltaNu, says the R&D funds came from the government's Small Business Innovative Research (SBIR) grants. Along the way, DeltaNu used these same grants to develop a string of other lab machines now sold to police departments, universities and other customers worldwide.

In addition to sparking nearly a million dollars in product sales, these grants have turned DeltaNu into a multimillion-dollar company. "All in all, we've received over $3.7 million [in grants] over six years," says Carron, 46.

"The SBIR is a combination of grants and contracts. It all equates to the same thing: funding for the small-business [person]," says Rick Shindell, president of Zyn Systems in Sequim, Washington, which helps both entrepreneurs and government agencies get the most out of SBIR programs.

"There are 11 agencies involved, none of which take unsolicited proposals," says Shindell. "You have to respond to a particular open solicitation." But don't let that discourage you. What Shindell calls a solicitation is really just a statement of need--a problem that the government has identified and for which it is seeking a solution.

The largest SBIR granting agency, the Department of Defense (DOD), often posts very specific needs, such as developing a laser guidance system for a fighter plane. On the other hand, the National Institutes of Health (NIH) issues grants for very general research. "They may simply be looking for a broad topic, like new ways to detect breast cancer--that's very different than the DOD," says Shindell.

Either way, SBIR programs are split into two phases. According to Shindell, Phase I is generally to study the feasibility of a new technology or idea, and the award amounts are limited to $75,000 to $100,000. Phase II grants are meant to encourage commercialization of a particular technology and can go up to $750,000. The program has grown so large since its inception in 1982 that there are now various state and federal programs providing pre-and post-award opportunities. So-called "Phase Zero" grants, for example, are offered by some state governments to pay for professional SBIR grant-writing assistance.

Planning to Succeed

To get started on the SBIR process, you should have a clear understanding of who you are and where you are going, advises Shindell. "Entrepreneurs need to know what they want their companies to be," he says. That generally means identifying the best industries and government agencies for your company's products or technologies, as well as choosing whether your primary focus will be on scientific research or commercial product development.

Impact Technologies LLC, an equipment monitoring system and engineering software development firm in State College, Pennsylvania, is dedicated almost exclusively to research. "SBIRs now account for about 80 percent of our revenue," says Impact Technologies' partner Carl S. Byington, who's also founder of the State College office. "We have over 15 Phase II programs, and at least 10 Phase I[programs] going on right now."

Such intense research has helped Impact grow rapidly since its inception in 1999. But relying too heavily on government programs--especially research grants--may not be a safe long-term strategy, says Shindell. Companies that subsist solely on SBIR grants are known as "prop mills" for the large number of SBIR proposals that they submit. "That's what I would consider the dark side," says Shindell. "And, indeed, there has been talk of making companies that are subsisting on SBIR grants ineligible [for future awards]."

To temper this risk, Impact Technologies is moving away from pure research and toward more commercialization efforts. Byington, 38, says the company is headed for a transition. "What we envision for the company is 40 percent of our revenue in product sales in the next five years at least," he says. With more than 50 employees and 2004 revenue (including grant awards) of $7.5 million, Impact Technologies will have to grow product sales quickly if it is to diminish its reliance on grants.

Fortunately, the DOD--Impact's largest SBIR source--has a good track record of extending purchase orders to companies that have completed a Phase II SBIR grant program. "Last year, we received a $25 million 'indefinite quantify, indefinite delivery' contract from the Naval Air Systems Command," says Byington. "That means that any government agency can buy our technology directly. So if we develop something for the Joint Strike Fighter, the F-18 team can come along and write us a task order directly, without going out on bid."