November
9: Larta University Seminar - Winning Federal R&D
Money, Produced By: Larta & Caltech/MIT Enterprise
Forum
This forum will provide comprehensive, relevant information
on the process of obtaining federal funding to help
grow a technology company.
more
information >
Uncle
Sam: The New VC?
by
Wendy
Hall, Larta Staff Writer
A growing number of tech start ups have been turning
towards grant funding as VC investing becomes increasingly
stagnant, redefining the government's role in building
the tech economy. Yet these programs are from being
a crutch for companies trying to gain footing in a
struggling marketplace.
Simulating
Innovation
The
function of these government funding programs is somewhat
similar to that of an angel investor: to fund early
technologies that are of high risk, but also to sustain
technology and science growth within the U.S. Many
of the most groundbreaking technologies in use today,
such as the Internet and global positioning systems,
were jump-started through government funding. Without
support from the government, these technologies would
have likely developed at a far slower pace, if at
all. Many VCs also seek out companies that have been
funded in early stages through grants in order to
fund them at a later stage. Yet during the Internet
boom of the late 90s, when VC money was tossed at
a variety of dot com ideas, government funding served
as a support system for traditional technology businesses
struggling to attract capital.
"Two
to three years ago, when we had solid business prospects,
we had a hard time attracting venture capital due
to the infatuation of the venture community with Internet
companies, and we were thus viewed as a dinosaur in
that we actually sold hardware." says Jack Syage*,
CEO of Syagen
Technology, the recipient of both Small Business Innovation
Research (SBIR) and CalTIP grants. "Through SBIR,
we were able to prove the feasibility of the technology.
This quickly led to a sale of a prototype instrument
to a company, which got us positioned for commercial
business. Fortunately our foundation of government
R&D grants and contracts kept us going. Today,
the government funding is important to us for conduct
exploratory research that cannot be done out of profits
or investment funds."
Corporate
welfare is the criticism that is frequently directed
at some of these programs amidst political battles
to keep them intact. Unlike investor funding, grant
money does not have to be repaid if and when revenue
is generated. However, because the government does
not require any of the funds to be returned, this
by no means implies that this is "free"
money that has no obligations. Many of these programs
have a strict process of tracking research and development
progress as well as any revenue generated. 
"The notion of welfare (falsely) suggests giveaway,"
says Julie Schoenfeld*,
CEO of OE
Waves, another SBIR and CalTIP recipient. "While
Federal grant money does not require a repayment,
there are hard deliverables that must be met for that
funding to continue."
These
deliverables often entail proof that the technologies
serve a social purpose, particularly with funding
from such entities as the National Institute of Health.
Ananth Natarajan*, CEO,
Infinite Biomedical Technologies, says that, in order
for the taxpayer to get his money's worth, "the
research and development must be translated into real
devices and results. A small business, subjected to
critical scientific review, is the most efficient
way of accomplishing this."
The
Application Hike
As
the investor climate, now burnt from Internet and
other technology investing, has become more hesitant
to finance anything other than established businesses
with revenue streams, more and more infant companies
are now considering government support. And the application
numbers are proving it. According to The Washington
Post, from 1998 to 2001, the Advanced Technology
Program of the National Institute of Standards and
Technology (NIST), which had on average been receiving
between 400 to 500 business proposals per year, has
already received 1,075 proposals in just 2002 alone.
The Small Business Innovation Research Program (SBIR)
has also been reporting a recent application flood.
Om Sahai*, Program Manager,
National Science Foundation, says the number of Phase
I applications, which come from startup companies
who are seeking support for an early stage project
that is oftentimes too nascent for the VC market,
has seen a significant increase in the past year,
ranging from slightly over 50% in the areas of biotechnology
and electronics to almost 100% in the area of information
technology.
Although
the rise in the number of companies seeking technology
grants in the aftermath of the tech bust has been
substantial, the application rate can vary significantly
from program to program, and sector to sector (hence
the case with the SBIR program). Tech funding programs
with a more specific sector focus and priority, such
as the Department of Energy (DOE), have not seen a
shift in the application rate. "Over the past
couple of years, we have not found any increased competitiveness
in this program," says DOE program manager Robert
Berger*. "The number
of grant applications we have received has remained
about even, while the number of awards has increased
slightly. (The increase in awards reflects the small
increase in the overall DOE R&D budget, of which
the SBIR program is a fixed percentage.) Therefore,
our proposal-to-award ratio has improved slightly.
Correspondingly, there has been no increase in the
number of rejections."
Survival
of the Fittest
As
the applicant pool for tech funding will continue
to widen during the VC draught, subsequently, the
government agencies stand to benefit more so than
the competing companies. "New technologies and
new applications of technologies that might never
have been brought to attention are now being proposed,"
says Julie Holland*,
Program Manager at NASA Commercialization Center.
"The challenge is timing. This becomes an issue
when a company's technology development is complete.
The risks are a delayed market entry or investment
in an application not considered core to the long
term business strategy."
Aside
from a tough investing climate, another factor that
is likely to stiffen the competition for technology
grants is the threat of reduction, if not extinction,
of budgets for these programs. Although long-existing
federal programs with strong track records such as
SBIR receive general universal, bipartisan support,
cuts are still a looming issue as state budgets and
the federal budgets of certain programs are expected
to undergo severe slashing during the next political
cycle (California's budget alone is expected to endure
an estimated $10-20 billion cut next year). Meanwhile,
as these programs see a surge in applications, the
chosen technologies are likely to reflect the changing
agendas of the various agencies. The government will
continue to have a strong interest in technologies
that address its current needs and priorities, and
as a reflection of the current concerns, there will
be afocus on technologies that will enhance and affect
military capability and homeland security.
(*speaker
at Nov 9 Larta University workshop, Winning
Federal R&D Money)
Coming
this December from Larta :
The 2002 Federal Technology Funding Guide
Larta presents the 2002 Federal Technology
Funding Guide, the most comprehensive resource
on government grants for technology businesses, with
updated information on grant programs for research
and development, budgets, and application processes.
This years Guide also features targeted research on
funding for small businesses, comparing VC versus
SBIR funding.
