What You Should Know about Non-Diluting Federal SBIR, STTR Funding

By Iris Gonzalez
A row of microscopes in a lab. Photo by Ousa Chea on Unsplash

Scientists are always looking for ways to fund their research. But what if you want to translate discoveries into a viable product or service for the marketplace? Successfully tapping into the Federal Government’s “America’s seed fund” of early-stage funding can make or break commercialization efforts, especially since you don’t have to give up equity in exchange.

Researchers should familiarize themselves with the $2.5 billion annual set aside for the U.S. Small Business Innovation Research Program, also known as SBIR, and the Small Business Technology Transfer program, or STTR. These two initiatives are the largest source of federally-funded early-stage, high-risk funding for startup companies. Designed to meet specific needs for federal government research and development (R&D), SBIR and STTR solicitations call for innovators to develop specific products with commercial merit and provide the incentive to profit from its commercialization.

Both the SBIR and STTR programs are divided into three phases. Phase I awards feasibility and proof of concept of the proposed R&D, while Phase II funds research and R&D for results achieved in Phase I. Phase III awards fund commercialization in most instances (the National Institutes of Health (NIH) SBIR/STTR programs do not fund Phase III). As the R&D matures, the product should be closer to market commercialization by the time Phase II funding ends.

Each program has a different end user in mind for the solicited R&D product. There are 11 federal agencies participating in the SBIR program such as NIH. Of those 11, five agencies participate in the STTR program: the Department of Defense (DoD), Department of Energy (DOE), National Science Foundation (NSF), Department of Health and Human Services (DHHS), and the National Aeronautics and Space Administration (NASA).

The best way to see if there is a match between your proposed concept and an agency’s need is to check individual agency SBIR program websites to see if your research fills a federal need for innovation.

Benefits of SBIR, STTR Funding

This funding is well suited for startups given eligibility rules require that the small business must be American-owned, organized as a for-profit entity, and have less than 500 employees. The review process to approve grant submissions is highly competitive, so getting a grant tells investors that a panel of scientific experts has validated your innovative concept as worthy of federal funding. Most importantly, SBIR and STTR money is not a loan and is nondilutive, as no equity is required in exchange.

Downsides of SBIR, STTR Funding

Given each agency has specific priorities, it can be challenging to find the perfect match for your proposed research concept. SBIR grant proposals are quite time-consuming and difficult to prepare, and it can be a long time waiting between submission and funding. Once awarded, the founder must comply with time-consuming SBIR grant reporting regulations.

Most experts will advise not to look at SBIR grant funding as the sole source to underwrite your R&D efforts. Still, founders will find federal funding valuable for early-stage science companies. How can researchers interested in commercializing scientific advances for the market succeed in applying to and securing nondilutive federal grants? The first step is to understand which federal agency and program is best suited for your startup company.

Which Program Should I Consider — SBIR or STTR?

There are distinct differences between the SBIR and STTR programs.

Designed to support federal R&D priorities with high potential for commercialization, SBIR funding can help underwrite proof-of-concept research. SBIR grants are awarded to a small business that has the option to collaborate with research faculty to develop the proof of concept. The primary investigator (PI) must be employed by the small business, meaning the researcher cannot work full time elsewhere during the project period.

In contrast, STTR grants require the small business applying for the grant to collaborate with a nonprofit research institution. The STTR program is typically focused on the transfer of technology from the research institution to the small business for further market directed R&D and ultimately to the marketplace. The intellectual property rights are typically negotiated in a licensing agreement between the nonprofit and the small business before the award is granted. The STTR mechanism allows for the PI to be primarily employed at either the research institution or the small business for only certain federal agencies and not for others.

Bijo Mathew, director of the Technology Commercialization Center at UTSA’s Institute for Economic Development, explains that it depends on the federal agency whether their award is given as a grant or contract. The difference essentially boils down to whether the particular agency is the end user of your proposed innovation.

“Granting SBIR-STTR agencies are focused on fostering innovation across the nation, but they are not typically the end customer of your product innovation,” Mathew said. “Granting agencies tend to favor more disruptive innovations with a higher risk of failure because for agencies like DHHS, NSF, and DOE, it’s all about ‘disruptive’ scientific R&D being commercialized.”

DoD Defense Health Agency and Army SBIR/STTR deputy program manager Colleen Gibney said the “ideal SBIR topic is specific. We tell you what our problem is, but not how to solve it.”

Because contracting federal agencies are the end users for the R&D the agency defines the requirements of the product, both Mathew and Gibney emphasized. However, the applicant seeking STTR funding should not assume the federal agency will be able to buy the product once it is ready for market.

Gibney, for example, looks to fund dual-use commercialization of innovative products for combat casualty care. “While we propose topics for what we want, we may not have funding for it in the future,” Gibney said.

A savvy entrepreneurial mindset is needed to develop R&D into a product with a broader market. GaitIQ founder and CEO Rick Morris secured Phase I SBIR funding for a software application to detect early signs of dementia.

“Collaborators must remember agencies’ objectives for SBIR grantees — the viable business should be able to attract private investment after a Phase II grant,” Morris said. “Consider IP and licensing agreements carefully when thinking about how these can impact the company’s profit and fundraising over the long term.”

One final consideration is whether you even need SBIR or STTR funding.

“If you know your product innovation will work, and then you don’t need the program as there is no R&D to be performed,” Mathew said. “The research outcome should be both innovative and disruptive.”

Read more: 7 Tips on Winning SBIR, STTR grants.

Featured image is of a row of microscopes in a lab. Photo by Ousa Chea on Unsplash.

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