In the world of small business and startup funding, venture capital is the “soup du jour.” But entrepreneurs would be wise to diversify their funding sources, especially given the current liquidity tightening that we are seeing across the private equity markets.
Sean O’Brien, Managing Partner at Overline, a $40 million seed-stage venture fund based in Atlanta, Georgia, has been advising his founders to “tighten their belts, be deliberate about spending and ensure that they have sufficient runway” because the reality is we are no longer seeing that “inexhaustible access to capital anymore.”
Some businesses have found much-needed seed capital from an unexpected source – the federal government, and more specifically, the Small Business Administration’s Small Business Innovation Research and Small Business Technology Transfer (STTR) programs. These twin-programs provide US-based for-profit businesses with non-dilutive grants over fixed time periods, in amounts ranging from $50,000, to $2 million, for the development of a broad range of cutting edge technologies.
Now it’s no secret for entrepreneurs that the universe of government grants is filled with dizzying acronyms, daunting technical requirements as well as extended time delays. So I tapped one founder who has managed to break through all of these obstacles, to share her tips on how to navigate the SBIR/STTR’s $3.5 billion pool of capital to accelerate business growth.
Cardiologist and entrepreneur, Dr. Elizabeth Ofili, has raised approximately $2.2 million in SBIR grant funding from the National Institutes of Health (NIH) for her startup Health 360x, a patient centered platform for population health management and clinical trial diversity. And the funding she received, enabled her to go after large commercial contracts, as she recently inked a partnership with Amgen
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Let’s break down how Dr. Ofili secured the bag.
STEP 1: Understanding The SBIR/ STTR Programs
First, a bit of history. The SBIR program was initially established in 1982 through the Small Business Innovation Development Act, and was expanded in 1992 with the addition of the STTR program, and has been continuously renewed by Congress since that time.
Dr. Ofili explains the distinction between the two programs, which largely boils down to who controls the budget. “The SBIR is designed as a collaboration with a university or research institution, so the institution is usually the sub-contractor and the small business is the prime, while in the STTR model, the institution is the prime and the small business entity is the sub.” In Dr. Ofili’s case, she partnered with Morehouse School of Medicine, as the research institution and remained the prime on the contract.
For the remainder of this article, I use “SBIR” interchangeably with SBIR/STTR, for ease of reference.
STEP 2: Deciding Which Agency To Apply To
One of the first things you need to do is identify the agencies that are most relevant to your business. There are 11 federal agencies that participate in the SBIR programs, each with its own grant opportunities, operational priorities and funding budgets.
Department of Defense. The Department of Defense, which includes the Navy, Airforce, Army and Defense Logistics, maintains the largest budget, clocking in at approximately $2.2 billion in funding per year. However, this program issues only contracts, not grants, and is a requirement-driven process led by procurement offices. To apply for DOD contracts, visit the DOD innovation portal and review the solicitation requests – also referred to as Broad Agency Announcements.
Department of Health and Human Services. As a health-tech founder, Dr. Ofili’s agency of choice is the Department of Health and Human Services and more specifically, the NIH. This agency has a hefty $1.3 billion budget, and is in fact, the largest granting institution participating in the SBIR program. With NIH covering 90-95% of the HHS SBIR budget, you often hear people speak only about the NIH programs. The specific solicitations offered by the different agencies under the NIH (ie, National Heart Lung and Blood Institute – NHLBI, or National Cancer Institute – NCI) can be accessed on their website.
National Science Foundation. Another agency of note is the National Science Foundation, affectionately known as America’s Seed Fund. With a $200 million annual budget, the NSF funds a lot of high-growth tech companies that would ordinarily go for venture capital, including robotics, artificial intelligence/machine learning, advanced manufacturing, augmented and virtual reality, cloud computing, cybersecurity, and blockchain technology businesses. In fact, during fiscal years 2016 to 2022, NSF-funded startups saw around 300 exits and more than $20 billion in private investments. There is a rolling process to submit a pitch, with the steps outlined on the program website.
STEP 3: Moving Through The SBIR “Phases”
The SBIR program is broken down into three distinct phases – Phase I, Phase II and Phase III. In deciding which path is best for you, make sure to consult with the program officer or coordinator for your specific agency for guidance.
Phase I. It makes sense to start here if you are at the idea-stage, and still figuring out the feasibility and market potential for your business. If selected, you receive approximately $50,000 to $250,000 over a fixed period – six months to one year.
Phase II. The goal here is to continue the R&D efforts from Phase I. Funding, which ranges from approximately $750,000 to $2 million over a two to three year-period, is based on the milestones achieved in Phase I, as well as the scientific and technical merit and commercial potential of the project proposed in Phase II. Dr. Ofili elaborated, “ultimately the SBIR is designed to move you through to commercialization,” or in other words, develop a product in the market.
Phase III. This is the “spread your wings and fly” stage of the SBIR process. Companies which graduate into Phase III receive training, support and introductions to potential investors and customers, but no funding is allocated here.
Fast-Track. Very recently, the SBIR came out with what they call “Fast-Track” for more mature businesses. Dr. Ofili explained, “If your idea is well developed and you’ve already gathered some preliminary traction, you’ll be able to combine Phase I and Phase II…and so that is the path I went down, upon advice from the program officer.”
STEP 4: Submitting Your Proposal
The reality is, it can take anywhere from six months to a year to prepare and submit your SBIR proposal. So don’t hesitate to engage an external consultant to help you build everything out – for example – KeepYourEquity.co.
The Pitch. For Dr. Ofili, the first step was developing a one or two-page Specific Aims document – a concise pitch, or an executive summary. She worked with the technology transfer office at Morehouse School of Medicine, to get training and support from advisors who told her, “this is what a good SBIR looks like”. And after submitting the Specific Aims, NIH program officers scheduled a meeting to provide feedback and connect her with additional resources to prepare the full proposal. Each agency will have webinars and designated program officers available to explain the next steps in the process.
The Proposal. The meat of the proposal is what is called the commercialization plan – which is not too different from what would go in a typical investor pitch deck. You have to describe your team, product, competitive landscape, market size and go-to-market strategy. Dr. Ofili laughed, “I went to a lot of classes to learn how to write the plan. I had enough to get my MBA!”
Letters of Support. As mentioned previously, SBIR applications must be submitted in partnership with a research institution or university. And so, the institution would need to provide a letter of support outlining the different resources (facilities, technology, human resources) it will bring to the project. Other letters of support come from your collaborators, key team members and other significant contributors.
STEP 5: Awaiting A Funding Decision
After submission, the SBIR application goes through a peer review process – with experts in their fields (including scientists and business people), who assess the merits of your application.
Dr. Ofili explained, “usually you submit something in the fall. The review takes place sometime in the spring, maybe winter, because [with the NIH] it has to go to through what is called ‘study section’ for scientific peer review. And then it goes to the advisory council at NIH that is in charge of that institute to approve, so you are probably looking at a period of about nine months.”
It goes without saying, your business cannot survive if it is reliant on receiving SBIR funding to continue operating. In fact, Dr. Ofili leveraged other smaller grants to keep afloat and keep her business, Health 360x going. And the reality is, SBIR is not for everyone – especially those with short-term funding needs.
But before you “exit stage left” on this process, patience and persistence can pay off. $2.2 million in non-dilutive funding (which is what Dr. Ofili was ultimately awarded) is a game-changing amount of money for a small business. And, this could be you next!
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