For most entrepreneurs, raising money is one of the most daunting aspects of starting a company. With the seemingly countless modes of fundraising out there, it can be hard figuring out which option is best for your startup. One of the best ways to raise money is by applying for grants, but they're not without their ins and outs. In this blog post, Ron Flavin (funding consultant, and Director of the San Francisco Founder Institute) outlines what founders should consider before applying for SBIR-STTR government grant funding.
Raising capital to launch and grow their startups is a persistent challenge among founders. Bank loans are out of reach for many and the prospect of taking on growth-crippling heavy debt can be insurmountable. That’s why many founders look to outside investors to acquire the capital they need to launch or grow their startups. But taking on investors comes with a unique set of challenges such as equity splits, dilution and even control of the company.
For this reason, a growing number of founders in certain fields have looked to government grants as a source of non-diluting funding for their startups. But of the approximately $500 billion in grants the U.S. federal government awards each year, only about 5% of those are awarded to for-profit businesses. The fact of the matter is that there are very few grants available to businesses. About 95% of all the federal government grants awarded are given to states, counties, cities, universities, public safety entities, governmental agencies, nonprofit organizations, cultural institutions and other entities that support strategic national priorities (SNPs).
However, there is one federal grant that is specifically targeted to for-profit businesses—the Small Business Innovation Research (SBIR) grants program. The SBIR program was established for the purpose of strengthening the role of innovative small businesses in federally-funded research and development (R&D). The program’s goals are to:
Stimulate technological innovation.
Meet Federal research and development needs.
Foster and encourage participation in innovation and entrepreneurship by socially and economically disadvantaged persons.
Increase private-sector commercialization of innovations derived from Federal research and development funding.
SBIR grants are awarded in three phases. In Phase I, the applicant is typically awarded no more than $150,000 to essentially ‘validate’ the concept. If they are successful in achieving their Phase I goals and objectives, they can apply for funding through Phase II. Here, they can apply for up to $1,000,000 in follow-on funding. Phase III does not provide funding but may involve follow-on non-SBIR funded R&D or production contracts for products, processes or services intended for use by the U.S. Government. In the last several years, a new Fast-Track program has been introduced. SBIR grants eligible for Fast-Track allow founders to simultaneously apply for Phase I and Phase II funding.
There about 12 different federal funding agencies that offer SBIR grants. Each agency administers its own individual program and designates R&D topics in its respective SBIR solicitations.
Benefits of SBIR Grants
One of the biggest benefits of securing an SBIR grant for your startup is that it is non-diluting, meaning you don’t have to give up any equity in exchange for the capital. And as long as you adhere to the terms of the grant award, then the SBIR funds do not have to be paid back.
Drawbacks of SBIR Grants
While the prospect of securing an SBIR grant is appealing, there are several drawbacks that should be considered, including:
It can be difficult to find the right topic fit.
SBIR grant proposals are time-consuming and difficult to prepare.
There can be a long timeframe between submission and funding.
Only about 3% to 8% of all SBIR proposals submitted are awarded funding.
Maintaining reporting and regulatory compliance for an SBIR grant can be onerous.
Nonetheless, despite these drawbacks, at the very least, founders may want to consider SBIR grants as an ancillary source of funds, not the primary source.
Are You Ready for an SBIR Grant?
To help you decide whether or not an SBIR grant is right for you, review the checklist below. If you can answer ‘yes’ to the majority of these questions, then you may want to consider taking a closer look at the SBIR grant program.
1. Is my company or project aligned with any strategic national priorities (SNP)?
National security and public safety
Health care innovation, cost savings and research
Education, particularly college- and career-readiness, providing equitable education services for students with special needs or disabilities and topics relating to Science, Technology, Engineering or Mathematics (STEM)
Energy savings and renewable energy
Exceptional advances in technological innovation
Major advances in scientific research
Workforce training and education in high-growth fields and industries
Agriculture- and food-related research and projects
2. Is the product or technology you wish to develop directly aligned to the goals and objectives of the agency (e.g., Department of Energy, National Science Foundation, etc.) that is offering the SBIR solicitation?
3. Is the product or technology you wish to develop directly aligned to at least one of the Priority Areas of interest of the SBIR solicitation to which you are interested in applying?
4. Are you or do you have access to, a published (in a scholarly journal) researcher with a university affiliation and experience in your field?
5. Have you or your company ever carried out a research and development project?
6. Do you have data that demonstrates the viability of the product or technology you wish to develop with the support of SBIR funds? Data can be in the form of minimum viable product (MVP), proof of concept, beta testing, etc.
7. Have you developed or are you prepared to develop a plan to commercialize and bring to market the technology or product you wish to develop with the support of SBIR funds?
8. Have you outlined or can you outline specific, measurable objectives regarding what you would like to achieve with the support of SBIR funds?
9. Have you identified the resources you need (e.g., research facilities, equipment, etc.) to achieve those objectives?
10. Have you developed or are you prepared to develop a reasonable budget that would enable you to achieve the objectives you have identified?
If you can comfortably answer ‘yes’ to questions 1, 2 and 3, then you can explore submitting a funding proposal through the SBIR program. You can learn more about the SBIR program by visiting the SBIR website. You can find a list of current topics of interest to the SBIR program here.
A lifelong entrepreneur, Ron Flavin is passionate about helping startups develop and implement growth and funding strategies that enable them to achieve their most ambitious goals. He has launched successful startups around the globe and over the last ten years, he has helped his clients to secure well over $200 million in non-diluting funding, enabling them to launch, grow, reach new markets, increase market share, extend their brand, expand internationally and much more.