June 14, 2013
Federal grants to start small businesses don’t exist, despite popular perception that they do. What the government does fund are research grants for small businesses developing technology innovations that benefit certain federal agencies, such as the Defense Dept. The decades-old Small Business Innovation Research program was reauthorized in December 2011 amid controversy over the level of venture capital-backed small business participation allowed.
Now, with new commercialization requirements taking effect—and less private investment capital going to startup ventures—SBIR may become more relevant than ever to entrepreneurs, says David P. Metzger, one of the original drafters of SBIR in the late 1970s, who is now a partner at the Washington (D.C.) law firm Arnold & Porter. The push toward commercializing SBIR research grants was fueled by government cost cutting and renewed focus on job creation, he says, as well as complaints about awards going to purely academic researchers who should be funded by universities and other organizations.
In the past month, officials at the Defense Dept. and the National Institutes of Health have announced that their commercialization regulations will be finalized by the end of this year, putting the impetus on small companies to move away from early-stage research and into more product-focused ventures. The law establishes commercialization benchmarks and allows for companies that have won multiple early-stage awards to be dropped from the program if they are not following through on developing products for use.
“In this time of limited venture capital, [SBIR is] the only place to go that has large amounts of money to take ideas and technology and move them down the road,” Metzger says. The commercialization aspect of the law’s reauthorization “is a game-changing aspect that makes it stronger and more likely that the government will buy [entrepreneurs' products] and put them in their systems.”
Among the roughly 15,000 beneficiaries of the program is Richard McNeight, president of 80-employee Modus Operandi. His Melbourne (Fla.) business has received $40 million in research awards over the past decade through SBIR. He says he isn’t allowed to identify the specific Defense Dept. agencies that use his company’s semantic software tools, which scan disparate databases and homogenize the information found there to help analysts develop predictions about potential terrorist activity.
The SBIR program requires the 11 federal agencies with research and development budgets that top $100 million to allocate 2.5 percent of those budgets to small businesses. Early research projects can get up to $150,000 in funding; follow-on awards max out at $1 million; and final tier (so-called Phase III) awards have no monetary limits.
Over the years since it was authorized in 1982, the SBIR program has become increasingly important in funding entrepreneurial innovations, says Jere Glover, a former SBA official under President Bill Clinton who is now executive director of the Small Business Technology Council, an arm of the National Small Business Association. “Big business, in the 1970s, was doing over 40 percent of the key innovations in America, but they checked out. They’re acquiring now, but not innovating. Universities come up with 6 percent to 10 percent of the innovations. The SBIR firms make up nearly a quarter of the total firms that win R&D awards,” he says, citing a 2008 study (pdf) from the University of California, Davis.
Jenny C. Servo is president of Dawnbreaker, a consulting firm near Rochester, N.Y., that has worked with small companies to commercialize their SBIR projects since 1990. She sees the increased push for commercialization as part of a positive long-term trend. “Each time the legislation comes up for reauthorization, a greater emphasis has been placed on commercialization, and more clarification has been provided,” she writes in an e-mail. “More and more agencies feel comfortable in providing commercialization assistance to help small businesses meet the increased emphasis on commercialization.”
M.L. Mackey, chief executive of Beacon Interactive Systems in Cambridge, Mass., is not so sure. A renewed discipline on commercialization may prove to be a good thing or a bad thing, she says. Her software company, like McNeight’s, will likely profit from the commercialization requirements because getting software products to market is far cheaper and simpler than doing projects in the material sciences that have physical components. “I applaud the intent of rewarding commercialization and focusing on that, but I am concerned that if those guidelines are not carefully applied or thought through, they will become punitive to innovation and more in line with rewarding engineering,” Mackey says.
Glover is not worried: Companies will have plenty of notice before they have to concern themselves about being kicked out of the program for lack of commercialization, he says. And if the requirements spur more practical innovations, that’s a good thing.
At Modus Operandi, McNeight has already hired an employee to develop and market the company’s semantic software for use in the health-care industry. “It’s not just because of the SBIR commercialization question, but because we see that semantic technology that was developed under SBIR is a perfect match for the big data that is coming out of electronic health records and the [Affordable Care Act],” he says.
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