When we started our company in 2002, venture capital was tight, so we looked for alternative ways to finance the business. The Small Business Innovative Research (SBIR) program, specifically the one offered through the National Science Foundation (NSF), is a high-quality funding source. I have personally worked on proposals that have won Department of Defense (DoD) and NSF awards totaling more than $2.1 million. I am also a trade reviewer for NSF Phase II proposals. I have gone through the proposal process and the selection process.
The SBIR program
The SBIR program was created in 1982 as part of the Small Business Innovation Development Act. Under this law, eleven federal departments and agencies must set aside a portion of their research and development funds to award to small businesses each year.
To receive an award under this program, a business must be US-owned and independently operated, for-profit, with fewer than 500 employees. In addition, the principal investigator must be employed at least 51% of the time by the company. There is still some debate as to whether venture-backed companies qualify if venture capitalists own more than 50%. Please speak with the program administrator to determine your eligibility if you fall into this category. Each agency determines its own award themes and amounts (within parameters). The websites of all SBIR programs are listed on the DoD SBIR web page.
The latest NSF application
The NSF has a fairly comprehensive website covering filing guidelines. Your life will be easier if you check this site well in advance of the submission deadline. The deadline for the spring 2008 round has passed, but start thinking now about your potential submissions for the fall. The application for the spring has been posted and the proposal is due June 10 at 5:00 pm. This is a tough deadline and they won’t give you leeway if you miss it. Each company may submit up to four proposals in a round.
Topics for this round include biotechnology and chemical technologies, software and services, and electronics, components and engineering systems.
Phase I will be for no more than $100,000. Typically, you are notified four to six months after the proposal is submitted. If you win this grant, the grant period will begin in late 2008 or early 2009. You get 2/3 of the money up front and 1/3 at the end. After six months of research, if successful, you can apply for a Phase II grant of up to $500,000. Again, you can apply in January or July after completion, and if successful, you’ll receive your funds in another six months: 25% upfront, 15% at the end, and 20% three times over the course of the project. . A Phase II is usually 24 months. Keep in mind that for the first year, you are spreading out a small amount of money over a fairly long period of time. This is useful for financing part of your development with non-dilutable funds, but not particularly useful for providing working capital.
Winning your Phase I
- Understand the theme of the request – they are very serious about sticking to the themes. The topics in this round are pretty broad, but if you have an advanced material that decreases wind resistance on your plane, no matter how cool it is, you’ll have to wait until the advanced materials request. Call the program officer and find out if he is interested before doing all the work on the proposal.
- Have innovative technology. They are not interesting to finance improvements. Also, the proposal is reviewed by someone who really understands the technology. Don’t skimp on technical details because you assume the reader can’t understand it. If the program manager doesn’t understand what he’s doing, he’ll find someone who does. You will not be successful if they do not have the necessary information to understand what you are trying to do.
- Have a good marketing plan. In Phase I, they don’t expect an extensive business plan, with a complete marketing campaign defined. However, they will expect you to have a good understanding of who might buy this product, why they would want to buy it, and how much they would be willing to spend for it. They will also hope that the market is at least large enough to support their company as a business venture. And never, never say “there is no market for my product yet because it is very innovative” or “there are no competitors for my product”. When the automobile was invented, the market was everyone with a horse and cart. Competitors were all that could move a person from one place to another.
- Provide letters of support. It’s actually a requirement for this application, but even when it’s not a requirement, it’s a very good idea. Good letters of support come from representatives of companies that will be interested in buying your product. At best, they will say that they will buy it, if it is successful. Often the easiest thing to do is to write the letter yourself and have the representative copy it onto your company letterhead and sign it. If you include multiple cards, do not provide the same copy to all followers; it will make you look like an idiot.
- Call the program officer well before the due date. Ok, I’ve said this before, but it bears repeating in case you missed it. The program directors I have met are smart and dedicated people. They are very excited about these technologies and are knowledgeable in their areas of expertise. They can be very helpful in developing your proposal. That being said, don’t bother them with small details, they are also very overworked. It’s probably a good idea to call sooner rather than later.
- Let someone else read your proposal before submitting it. Someone who has a very strong command of the English language and can tell you if the proposal reads well, presents ideas clearly, and has perfect spelling and grammar. Also, don’t be clever in your presentation of the document. Times New Roman, 12 point, is the font of choice for newspapers, books, and magazines for a reason: it’s easy on the eyes. Don’t make your proofreader’s job more difficult than necessary.
Some Technical Notes
- You must submit your proposal via FastLane. Sign up for FastLane and start using it right away. It’s pretty easy once you get used to it, but there are occasionally glitches and they will happen to you if you wait until the last minute.
- Get a DUNS number right away if you don’t have one. Call Dun and Bradstreet at (800) 333-0505 or find them online at http://www.dnb.com/us/. You will need a DUNS number to register with FastLane.
Winning your Phase II
There is no official application for a Phase II. If you have completed your Phase I NSF SBIR, you are eligible to apply for a Phase II grant. You can apply for either of the following two cycles, which means if you completed your Phase I in December, you can apply before January 31 or July 31. The website has general instructions for the Phase II proposal.
Should I apply?
When we are reviewing proposals, they can be rejected for many reasons. Most proposals are rejected because they do not meet the technical or business hurdles required for a Phase II grant. That being said, we periodically find a proposal being rejected for other reasons that could have saved the company and the grant committee a lot of time.
If you did not get any positive results from Phase I, please do not bother submitting a Phase II proposal. Every once in a while we see companies that basically say, “My idea for Phase I didn’t work, but I have another idea on how to make this work, so I’m running to get support for that idea.” That’s another Phase I proposal. It’s immediately tagged as such and put in the reject pile. Don’t bother presenting that as a Phase II proposal.
If you are unsure of your results, check with your program administrator. They should be willing to suggest areas that need to be strengthened and should also let you know if they don’t think a Phase II proposal will be funded.
Writing Your Phase II Proposal
The number one reason proposals are rejected is technical. The technical review team is composed of scientists and engineers in the field of study of the tender. Program administrators have selected a panel that has in-depth knowledge in their area of research. They expect the technical part of the proposal to look like any other grant, which means they expect all the technical information needed to make a technology decision, supported by references. I’ve heard many times on panel, “Well, this sounds interesting, but I don’t have enough information to determine if it’s feasible.”
If you’ve never been a university scientist before, you may want to find one in your area of expertise and ask them to review your technical proposal before submitting it. Technical reviewers are extremely brutal and are not willing to compromise their review standards.
The second reason, and much lower on the weighting scale, is the commercial aspect. I’ve seen a technology where the technical reviewers rave about its innovation and brilliance, but the business reviewers can’t see a market at all, and the project gets funded. I have never seen a great business plan, with mediocre technology, get funded.
However, the business plan is important. If your proposal is placed next to another with a similar quality of technology, the marketing section can succeed.
Your plan should clearly define the steps your company will take to move from R&D to revenue. If you need to create a beta tool after the prototype has been completed, you need to have a clear definition of how you will finance it. Just so you know, everyone says, “we’ll raise venture capital.” Raising venture capital is easier said than done. If you’re going to say that, make sure you have some VCs review your technology and write letters of support. Also, have backup plans in case VCs don’t leave money in your lap.
Plus, many proposals say things like, “We’ll partner with Honeywell to build our first project. Five years later, we’ll have $50 million in revenue.” It seems like people think a lot about completing the first product and are good at imagining what will happen in five years, but they seem to skip the whole process in between, which by the way is the hard part.
Another marketing problem is the lack of business experience in the management team. If you can’t afford to hire someone, find some business advisors (and listen to them). You can start with your local SCORE office.
Finally, ask someone to read your proposal. It must be written clearly, without grammatical or spelling errors. If you can’t find entrepreneurs or someone to read your proposal, why would anyone want to give you (yes, advise) $600,000?
Click here to visit the NSF SBIR website. Good luck.