SBIRs and STTRs and Bears, oh my!
Understanding Small Business Innovation and Tech Transfers
Some of the most common questions that arise about doing business with the government center around the highly-coveted SBIRs.
This seems to be particularly true for dual-use companies: those companies building something with broad commercial applications but that may also be adaptable for the government / military.
I’ve covered SBIRs a bit, before in “How to Get ‘Free Money’ as a Defense Company” but I think it’s worth covering again (and likely will return to the topic every couple of months).
SBIRs are really important to small companies. But what are they and when should a company pursue them?
What are SBIRs?
Small Business Innovation Research (SBIR) funds are a government program designed to encourage and support small businesses, including startups, in developing innovative technologies that have the potential for commercialization and meet specific agency needs. SBIR funds are available from various federal agencies, including the Department of Defense (DoD), for research and development (R&D) projects.
Some of the key features of SBIRs include:
Non-dilutive funding: SBIR funds are typically awarded as grants or contracts, which means that startups do not have to give up equity or ownership in their company in exchange for funding. This makes SBIR funds an attractive source of non-dilutive capital for early-stage startups.
Technology focus: SBIR funds are awarded for R&D projects that align with specific agency needs and priorities. It's crucial to emphasize that startups should have a clear understanding of the technology areas or topics that an agency is interested in funding, and ensure that their projects align with those priorities.
Most agencies use “closed” or “specific topics” which means that they only want submissions that answer specific questions, needs, or requirements. A few use “open topics” which are much more flexible and will consider any cool technology. For example, AFWERX, DIU, and NavalX all have some open topic awards, to varying degrees.
Phased approach: SBIR funds are typically awarded in a phased approach, with Phase I being focused on proof of concept and Phase II focused on prototype development. Some agencies also have a Phase III, which involves transitioning the technology to commercialization. It's important to explain that startups need to plan and demonstrate progress through these phases to be eligible for further funding. Having said that, there are also some direct-to-Phase-II awards.
Competitive process: SBIR funds are awarded through a competitive process, where startups need to submit proposals that are evaluated based on technical merit, commercial potential, and other criteria. The SBIR program is really competitive and proposals need to be strong and clearly demonstrate the novelty, feasibility, and potential impact of their technology. It may be worth considering hiring an advisory firm that have people that specialize in assisting with the preparation of proposals (I can make recommendations on request—and no, I’m not going to recommend myself).
Compliance requirements: SBIR funds come with compliance requirements, including reporting, intellectual property, and other regulations. It's crucial to explain that startups need to be prepared to meet these compliance requirements to receive and maintain SBIR funding.
When should a company pursue SBIRs?
In terms of when startups should pursue SBIR funds, it's recommended to highlight the following considerations:
Alignment with agency priorities: Startups should carefully review the technology areas or topics that an agency is interested in funding and ensure that their technology aligns with those priorities. This increases the chances of success in securing SBIR funds.
Stage of development: SBIR funds are typically awarded for early-stage R&D projects. Startups should consider pursuing SBIR funds when they are in the early stages of technology development and need funding for proof of concept, prototype development, or other early-stage R&D activities. As such, SBIRs are ideal for earlier stage companies, as I explained in “How to Get ‘Free Money.’” Later- / growth-stage companies need different sources of revenues; however, SBIRs may potentially still be appropriate for new products.
Financial need: SBIR funds can provide non-dilutive capital, which can be beneficial for startups that are in need of funding to advance their technology but do not want to give up equity or ownership in their company. Startups should consider pursuing SBIR funds when they have a financial need for R&D activities.
Competitive advantage: Startups should also consider whether SBIR funds can provide them with a competitive advantage. For example, if an agency is a potential customer for the startup's technology, securing SBIR funds can not only provide funding but also establish a relationship and validation with the agency.
Capacity to meet compliance requirements: Startups should also assess their ability to meet the compliance requirements associated with SBIR funds, including reporting, intellectual property, and other regulations. If a startup does not have the capacity to comply with these requirements, it may not be the right fit for pursuing SBIR funds.
What’s the difference between SBIRs and STTRs?
STTRs (Small Business Technology Transfer) are often lumped together with SBIRs. While similar, these two programs are distinct in several key ways:
Purpose: The primary difference between SBIRs and STTRs is the mechanism of technology transfer.
SBIR funds are intended to support small businesses in the development of innovative technologies that have the potential for commercialization and meet specific agency needs.
STTR funds, on the other hand, are designed to foster cooperative partnerships between small businesses and non-profit research institutions, such as universities or federal research laboratories, to transfer technology from the research institution to the small business for commercialization.
Participation: In SBIR, small businesses are the primary awardees and are required to perform a majority of the R&D work. In STTR, both small businesses and research institutions are involved in the project, with the small business serving as the primary awardee and the research institution providing significant intellectual property or research support.
Ownership and Licensing: SBIRs and STTRs also differ in terms of intellectual property (IP) ownership and licensing. Under SBIR, small businesses generally retain ownership of the IP they generate during the project, and there are no specific requirements for IP licensing. However, under STTR, the research institution and the small business are required to share the rights to the IP, and there are specific provisions for licensing the IP developed during the project.
Budget Allocation: SBIR and STTR also differ in terms of budget allocation. SBIR funds are divided into three phases, with Phase I focused on proof of concept, Phase II on prototype development, and Phase III on commercialization. STTR funds, on the other hand, do not have a separate Phase III, and the commercialization efforts are expected to be part of the small business's plan from the beginning.
Research Institution Involvement: STTRs require a formal collaboration between the small business and a research institution, such as a university or federal research laboratory. The research institution is expected to contribute significant intellectual property, research expertise, and resources to the project, and the small business and the research institution are required to have a formal agreement outlining their roles and responsibilities.
Matching Requirements: STTRs also have a matching requirement, whereby the research institution is required to receive a percentage of the funds allocated to the small business as a subcontract. This requirement is not present in SBIRs.
In other words, while both SBIRs and STTRs are government funding programs aimed at supporting small businesses in R&D projects, they differ in their purpose, participation, IP ownership and licensing, budget allocation, research institution involvement, and matching requirements. It's important for startup founders to understand these differences when deciding which program is most suitable for their technology and business model.
You said there would be bears…
Did I?
Lucky for you, I like bears too. So here’s a few bears to help round out today’s edition:
Closing thoughts
If you’re looking at SBIRs or STTRs as a source of revenue for your company, great! Take the time to understand the process, the limitations, and the benefits. Everything from regulatory compliance to the non-dilutive nature should factor into your decision to pursue an award.
Check the “Real Life ‘Q’: Defense Innovation Labs” to see who is controlling the bulk of SBIR/STTR funds in the DoD.
Reach out if you’re considering SBIRs as part of your business plan or to talk about bears.
And of course,
Keep building!
Andrew