Public Venture

By Wendy Hall, Larta Staff Writer
Lynn Foster, Director of Technology Consulting
Rohit Shukla, Larta CEO

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Long considered to be one of the most successful government funding programs for science and technology, the Small Business Innovation Research (SBIR) program was reauthorized by Congress in 2000, essentially protecting it against economic and political uncertainties for almost a decade. Yet as other tech funding resources and budgets continue to face extinction amidst industry downturn, the SBIR program may be confronted with considerable pressure of its own in its goal of keeping alive and vibrant the development of the country's early technologies.

History and Process of the SBIR program

Established in 1982, SBIR was created to fund R&D from small technology businesses (those with less than 500 on staff). The current program currently mandates that an agency, such as the National Science Foundation or the U.S. Air Force, set aside 2.5 % of its overall R&D budget for the SBIR program. The program is designed to be proposal-driven and multiphase. In the first phase, a company will receive up to $100,000 to test the technical and commercial feasibility of a particular concept. All Phase 1 recipients are required to report on commercialization of the technology. If Phase 1 is successful, the company may be invited to apply for a Phase 2 award of $500,000 to $750,000 to further develop the concept, usually to the prototype stage. Following completion of Phase 2, recipients are expected to obtain funding from the private sector or other sources to develop the concept into a product for sale. The so-called "Phase 3" of the program is to provide for sales of the prototype developed under Phase 2.

A Catch-22: Commercialize or perish at your own risk

So, how do companies leverage such funding for maximum commercial advantage? The strange catch that traps many companies lies in the fact that the Federal Regulations directing an SBIR contract forbid the company from using any funds on any activities other than R & D. Because of this young companies cannot conduct other critical commercialization activities-i.e. market research, marketing, building a sales force-- that are so often needed to achieve penetration of the commercial market. The California Technology Investment Partnership (CalTIP) grant administered by Larta was created precisely to address this shortfall. It matches SBIR grants with the funds needed to fund these activities and achieve commercial sales for SBIR technologies.

Nevertheless, an important funding source

The broader purpose of the SBIR program is to fill a funding gap (which exists in any economic climate but is particularly large in strained ones), for promising technologies that would otherwise never see the light of day. By providing over $7 billion since its formation for R&D to small businesses that lack the budgets of large science and tech corporations, SBIR essentially plays a vital role in stimulating the technology economy, functioning similarly as seed venture capital would, yet without positioning the businesses to have to forgo any ownership of the company in the process. (Companies do not have to give up any equity or intellectual property rights to the technology developed in SBIR; but they must grant a "no fee license" to the Federal Government for its use.)

Tracking the success of SBIR recipients

Unlike most programs, SBIR has enjoyed consistently strong bipartisan Congressional support, and has proven itself, through the most recently available data which tends to end around 1999-2000, to be consistently successful in funding technologies with real commercial promise. The commercialization phase tends to occur in a slow, non-linear process, and subsequently the data on SBIR does not reflect its entire success. Because there has been no totally thorough analysis of commercialization activity, job creation and ROI (return on investment) of all SBIR recipient companies through a longer (i.e. five year) time frame, the track record of the program is essentially incomplete.

"We have a requirement that any company that has had the Phase Two award from us is required to submit commercialization reports on an annual basis for five years, but I now have somebody who is basically devoted to developing these metrics," says SBIR program manager Joe Hennessy, who works with The National Science Foundation. "We recently completed at least an anecdotal evaluation of awards going back, and I was pleased to see that at least 30% of those awardees actually had a positive cash flow as a result of the goods or service that came out of their Phase Two Proposal. But we're still refining that, and getting more quantitative data on it. There's a lot more emphasis being placed today than there was at the beginning of the program in really trying to track these commercialization successes."

California's budget difficulties (and CalTIP's lower profile) impact commercialization

Because of the State of California's budget difficulties impacting the number of non-federal tech programs, and with venture capital market tightening, there has been a significant decrease in alternative sources for small businesses. Hennessy says that in the past year the number of proposals his department received jumped from 800 in 2001 to 1,200 proposals in 2002, an almost 50% increase. This surge in applications obviously impacts the percentage of applicants that can be awarded, as there are inevitably more quality proposals than an agency has resources to fund. But this isn't the only plausible affect. SBIR funding must specifically go towards R&D--not marketing, sales, staffing, and other resources that programs such as CalTIP--which recently endured a 50% budget slash--provides for companies. With these other resources being diminished, it could impact the entire commercialization efforts of SBIR companies.

Ultimately, the SBIR program may allow the unseen to be found

There are other non-tangible successes involved in the SBIR program that cannot be tracked directly to empirical data. The program is acknowledged as enabling budding entrepreneurs to leave their "day jobs" such as academics and engineers within labs and large companies. SBIR also allows later stage companies to fund internal R&D efforts that they would not normally be able to fund from their own sales. SBIR allows these companies (and the younger companies) to develop prototypes needed as the technology validation required by VCs and other investors. A critical success factor of SBIR also is allowing young companies to "live to fight another day". The majority of startup companies achieve success in a market outside of the one envisioned at the creation of the company. SBIR allows for the company to continue toward success by providing funding and opportunities to develop new products for new markets.

"The SBIR program has allowed us to implement cutting-edge research discoveries into a clinical-grade device, thus, the program plays a key role in the chasm between research and device development," says Ananth Natarajan, SBIR recipient and CEO of Infinite Biomedical Technologies. "Given the current funding climate and regulatory hurdles, it is clear that many companies, including our own, would not be able to reach a sufficient financial momentum without the availability of this program."