Business Partnerships for Academic Scientists: the SBIR and STTR Programs

Who'd have thought the Small Business Administration could be a scientist's best friend?

Started in 1983, the congressionally mandated Small Business Innovation Research (SBIR) program requires that every federal agency with an external research budget exceeding $100 million set aside 1.5% of that budget to fund small businesses. Eleven agencies participate: the departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, and Transportation; the Environmental Protection Agency; NASA; and the National Science Foundation. SBIR gave out $1.5 billion in grants in 2001. The Department of Defense dominates the field; its grants make up roughly half of all SBIR disbursements.

The Small Business Technology Transfer (STTR) program, which commenced 10 years later, is similar, but it has the further stipulation that the business must be partnered with a nonprofit research institution, such as a university, making this program especially suitable for faculty members. Five agencies participate in STTR.

The SBIR and STTR programs have a similar structure. Applicants start with a phase I grant proposal, which provides up to $100,000, usually for about 6 months, and is intended to demonstrate technical feasibility. Phase II must be applied for separately and is intended as a research and development period for phase I results. Phase II awards can be for up to $750,000, for 2 years.

For an SBIR grant, the principal investigator (PI) must be primarily employed by the business (although the business need only be in existence when the grant is officially awarded, so you can theoretically wait until the check arrives before you quit your day job). The company must also be at least 51% owned by one or more individuals.

That primary employment stipulation can be worrisome to those happily entrenched in academic positions. The thought of leaving for a risky business venture can be scary. But there are ways around that, says John Davis, general manager of the SBIR Resource Center. One is to simply let someone else be the PI--even a nontechnical project manager--and stay on as a consultant or take stock in the company. That gives you a financial stake but allows you to stay in your current position.

If you do so, however, be prepared to lose control of the business and the use of your technology. If you want to maximize the business's chance for success and your stake in it, there's no help for it but to risk that academic position, says Davis. "In my mind [staying involved part-time] increases the business risk, which is already pretty high to begin with. There's almost no such thing as a part-time entrepreneur. If you're going to make a success of a business, you pretty much have to put body, soul, family, and fortune into it." Some institutions will grant "entrepreneurial leave," which allows an employee to go off and start a business, with the institutional job waiting if things don't work out. But such arrangements are not common, says Davis. Despite the risks, academics are frequently involved in SBIR grants. Davis estimates that, in his experience, about half of all grants have an academic as a key part of the team.

Applying for an SBIR is simple enough. Participating agencies identify needs--sometimes specific (such as a blue laser to be used in aircraft navigation) and sometimes more general (such as genetic testing methods). Search the agencies for an announcement that you think you can satisfy, and then begin the application process. Note that each agency administers its programs individually, making for variation in deadlines, announcement dates, and application procedures.

Research funded by the SBIR and STTR programs is expected to have true commercial potential, but until recently the emphasis was on potential. In the past, agencies participating in SBIR have funded projects that are really just small-scale basic research. "People think of it as [a way] to feed their research habit," says Davis.

In its 2000 SBIR reauthorization, however, Congress insisted that SBIR more strictly focus on commercialization. Now the key word in that phrase--commercial potential--is "commercial." "We're willing to fund high-risk tech programs, but only if there's a strong possibility that they'll be commercially viable if they're successful," says Joseph E. Hennessey, senior adviser for industrial innovation at the National Science Foundation.

That means that, these days, the basic research underlying your idea had better have already been performed. Even phase I grants are intended to demonstrate the feasibility of an application of your basic research. But when it's ready for prime time, there isn't a better source of money than SBIR/STTR, says Davis. You don't have to pay any of the money back, the government won't ask for equity in your business, and you keep full control of the intellectual property that you develop. Venture investors--if you can find any--will not be so kind. Despite these positive differences, with a yearly funding total pushing $2 billion, "it's [in effect] the largest venture capital fund on Earth, " says Davis.

The Misconceptions

Several misconceptions discourage some scientists from applying for SBIR and STTR grants:

  • " We're too small." In many ways, SBIR/STTR is a great equalizer. Large companies can throw teams of scientists and wads of cash at a project, but they're not eligible for an SBIR. "A small business can range from a one-person entity to a 500-person corporation, " says Rick Shindell, president of Zyn Systems in Sequim, Washington, a technology and management consulting firm.

  • " SBIR grants can keep me solvent and let me explore some ideas." The SBIR/STTR programs were always meant to be vehicles for economic development, although in the past, research with poor commercial potential often slipped by reviewers. Some companies have existed for years without evidence of profitability, funded by successive SBIR awards, without working hard to commercialize. "Their business model is essentially doing SBIR-funded research. It's allowable, but it's not really what the program is intended to do," says Steven Fritz, director of technology transfer at Maryland Technology Development Corporation in Columbia, Maryland, which assists new tech companies in Maryland.

  • " You have to know someone at the agency." Baloney, says Davis. "People don't understand it, and it's being mischaracterized [as a research grant mechanism when it's really a commercialization grant]. Perhaps this myth survives because of the relatively low funding rate--about 1 in 9--which leaves some researchers frustrated. But the attrition rate isn't political; it is, rather, due to a lack of understanding of the program and a lack of expertise. Those who know how to apply do much better," Davis insists.

  • " Academic scientists can't apply." Applicants for SBIR grants must be primarily employed by a private company when the award is made, but, as already noted, there are ways around this. Furthermore, this makes the program ideal for postdocs and other scientists employed in temporary positions who are free to move into the new company as soon as it is funded. Partners--and company co-founders--can do anything they want for a living, as long as they aren't listed as PI. PIs on STTR grants can be employed full-time at an academic institution, as long as they have a small business as a partner doing at least 40% of the work.

Applying for an SBIR or STTR Grant

So, how do you apply?

First off, remember the key word: commercial. You have to convince grant reviewers that you have the technical foundation to achieve your goals, but they also have to believe a resulting product has a good chance to be a success in the market.

That means, in effect, that you're writing a business plan. It's not possible to have every twist and turn of your business laid out. Reviewers understand that, as with any technical undertaking, the R&D path is likely to be filled with dead ends and sudden course corrections. But they need to know that you've thought about it, and that you have the business expertise to see it through. If you don't have it, consider finding a business partner who does.

It's crucial to stay focused. Hennessey has seen many proposals that propose too many possibilities--"trying to put a gallon of work in a quart-sized jar," as he puts it. SBIR/STTR proposals are usually a departure from the agency's typical funding mechanisms, which generally allow the investigator to go in whatever direction the research leads. Says Michael Huerta, associate director for scientific technology research at the National Institute of Mental Health: "As part of the phase II [SBIR/STTR] application, you have to send in a report on phase I. Reviewers have to say 'Yes, this guy did demonstrate feasibility.' " That requires focus.

Marketing and business plans can give the research-minded individual a migraine. But don't panic; there are plenty of resources to help you out. Some states have SBIR/STTR specialists. An institutional tech-transfer office may have the expertise needed to apply competently for an SBIR or STTR grant. Also check out state and regional economic development programs. Courses and seminars can help you get familiar with SBIR, and consultants can help prepare a proposal or review it.

Other strategies to improve your odds include finding partners at other institutions to be sure that you have the technical and business acumen you need to convince your reviewers of the commercial potential of your idea and your plan. Reviewers know this is high-risk stuff; the more expertise you can bring to the game, the better your chances of winning. And winning the high-risk technology development game is what it's all about.

You might wonder what the government's stake is in all this. It's simple, really: economic growth and increased tax revenue. Some percentage of companies that get SBIR funding will be successful, and they'll collect revenues and pay corporate income tax. Their employees will pay personal income tax. A small portion of that money will end up funding other SBIR grants.

That's why commercialization potential is an increasing concern for participating agencies. "If a reasonable proportion of those phase II grants are not paying off in commercial success, that interferes with that cycle," says NSF's Hennessey. "I think a lot of other agencies feel that way, too."

Web Resources:

For links to participating agencies' SBIR sites:

To do a key-word search of open announcements: (Please note that these resources are unofficial and run by Zyn Systems, not the government.)

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