Wild ideas conceived in basements rarely become next-generation
technologies for the Defense Department. But some of these ideas
materialize, with the help of government funding. The Small Business
Innovation Research (SBIR) program is one way to make this happen.
Competition for SBIR awards is aggressive. Many companies often
fail to win awards, because they don’t know how to market
themselves, experts said.
Congress established SBIR in 1982, to open the door for small businesses
to federal research and development (R&D) dollars. The government
also wanted to speed up the transition of these companies’
technologies into useful products. Companies with up to 500 employees
are eligible to participate.
“I tell these companies, whatever you are working on now,
I don’t care about,” said Jeff Bond, SBIR program manager
for the Ballistic Missile Defense Organization in Arlington, Va.
“I want to know what you have in the back room, that if you
had a little capital for it, you would try it out. That is the wild
idea that I want to find, because it is the wild ideas that are
the technologies for tomorrow.”
Each federal agency with a budget in excess of $100 million has
to reserve 2.5 percent of it for SBIR. Ten federal agencies allocate
a total of $1.2 billion a year for the program. The Defense Department
alone spends almost $600 million. The Pentagon issues SBIR solicitations
twice a year, describing R&D needs and inviting proposals.
Companies first must apply for an initial six-month award—that
can reach $100,000—to test the scientific, technical and commercial
merit of a specific concept. If the first phase proves successful,
the Defense Department may invite the company to apply for a follow-on
two-year award—worth up to $750,000—to turn the concept
into a prototype. The proposals are judged competitively on scientific,
technical and commercial merits. After the second phase is completed,
the government expects the companies to obtain private funding or
non-SBIR government support to turn the concept into a product for
sale, either on the commercial market or to military customers.
“We never know where these innovations are going to lead,”
said Bond. “We never know how these companies are going to
mature, but we know they do and we know that, by taking a lot of
risk and a lot of different ideas, we are going to find those few
gold nuggets that just really take off.”
Although competition is open for all qualified small businesses,
some critics of the selection process believe that SBIR competitors
often are not small businesses participating on their own, but are
teamed with large companies that have the necessary resources to
write successful proposals. Don Howard, executive vice president
of Jardon and Howard Technologies Inc., a small technology firm
in Orlando, Fla., said he suspects that this is the case in more
than 50 percent of SBIR awards.
Partnering with the large firm may be the only way for a small
firm to participate in SBIR, because preparing a bid is an expensive
task that requires skilled and experienced proposal writers, whom
many small businesses cannot afford to hire. Nine years ago, Howard’s
company won an SBIR contract for an online interactive training
system for Navy submarines. “We were the protégé
of the company that knew [the technology]. ... We couldn’t
do it alone.”
Many companies “haven’t done their homework and research,”
said Scott Stanberry, a consultant and the author of a book titled
“Federal Contracting Made Easy.” It is important, he
said, “for a company to do as much research as they can on
the agency prior to submitting their solicitation.”
Russ Farmer, president of PBC Inc., a company in Denver that provides
management services to small business, said that companies sometimes
fail in SBIR competitions, because they don’t understand the
nature of the government agencies funding the project. The Defense
Department and NASA, for example, are interested in the applicability
of technology that is being proposed. Other agencies, he said, are
more interested in theoretical, academic research.
“In a customer environment, the more the customer knows about
you as an individual the greater the hit rate,” he said. In
May, the Defense Department puts out a list with the potential topics,
and small businesses have until July 1st to contact the author of
a specific topic and have an open discussion.
“You have dialog going on, and you plant the idea in the
customer’s mind and when the proposal comes in, the technological
reviewer will remember the discussion,” Farmer said. Obviously,
he added, there is a high correlation between pre-marketing the
idea and the award.
“A lot of these people are techno-nerds,” he said.
These are people who are not comfortable talking to other people.
They only write proposals. That is why it pays off to market the
proposals ahead of the selection process, Farmer said. Half of those
businesses that “pre-market” their ideas win awards,
versus one out of seven that fail to do so. He said that the Defense
Department encourages this “pre-marketing.” Farmer’s
advice: “Learn to play the game. Use the rules to your best
advantage.” The government, he added, “wants the best
solution for itself ... Best solutions come from discussing and
playing off each other.”
As someone who follows SBIR and has won a few government contracts,
Charles Smith—the owner of Softwar, an encryption and software
company—said that many phase-one proposals never get anywhere.
“The biggest drawback comes in the phase one,” he said,
“because there are some people that are proposing stuff that
is just so wild and so crazy it will never come through. They get
the money, they smile and they walk away, and nobody ever sees another
thing.”
He said the problem should be blamed on the government. “In
essence, they have to get rid of the money, because they have the
budgeting process. They have to make sure that is allocated, so
that they make sure that next year’s budget is coming in,”
he said. “There is more emphasis on the budgeting than on
the technology and the returns from it. And that is why you see
all those phase-one [awards] that don’t go anywhere.”
Statistically, roughly half of the phase-one projects are invited
to compete for the second phase. Farmer explained that small businesses
have six months to prepare the marketing proposals for phase two.
He called the first stage “paid marketing” needed to
win in phase two. But he said many scientists are afraid of the
marketing process and often fail to promote their technologies to
their technical monitors. “The ones that win are the ones
that get their technical monitors involved,” he noted.
Farmer described phase two as the period when a company has to
find money to start a business based on the technology it has proposed.
“The first thing you need to do is to identify and make contact
with your ultimate customer,” he said. At that point, the
investor could be a research organization. “You have to get
from those end customers the specifications of the product or service
they would pay for and the price they would pay. You have to get
your arms around in the market,” Farmer explained. Secondly,
the company has to start making the product that meets the customers’
specifications.
Companies need to develop a business concept. “Techno-nerds
are very lousy business people, and if you don’t have a business
champion, you won’t succeed on the business side,” he
said. Many of the managers of these small companies are scientists
and not business-development experts.
Smith said that many innovative researchers and scientists are
bothered by the intensive paperwork associated with SBIR. “I
have all my paperwork filled out, but I don’t have a gizmo,
because we didn’t really work on that. We worked on all the
paperwork all day long,” he said. I can sit here and tell
you all about quantum physics all day long, but don’t know
how to solve half of these forms. Even the people that you ask,
who should know, don’t know sometimes.”
Farmer agreed that the bureaucracy poses a problem. He pointed
out that there is a big gap between phase-one and phase-two funding.
Companies don’t get any more money than the $100,000 for five
to six months. In the meantime, the only way to survive is to get
another phase-one award, Farmer said. “They lose the momentum
from phase one to two, because in the meantime, they are concerned
about something else,” he said. The government’s procedures
often get in the way of timely turn-around of proposals. “There
is a roller-coaster effect in the SBIR funding cycle,” Farmer
noted. Start-up companies would have no other source of revenue
than the phase-one $100,000.
When companies reach the third phase, many technologies lie dormant
on the shelves, because they have not been properly marketed, Farmer
said. In this last round, the government or the commercial customer
only pays for production of the technology, not for research. Once
the government moves on to another cutting-edge technology, the
small companies have a lot of trouble convincing venture capitalists
to take a risk in their product. Many may start over with a phase-one
competition for another project, said Farmer.
Linda Williams, chief executive officer of Microbial Insights in
Rockford, Tenn., said that her company had won a couple of SBIR
projects with phase-two funding, but they never went to phase three.
“The real challenge is to get the money for phase three and
get a commercial project,” she said. But she pointed out that
her company focused entirely on research instead of the commercial
marketing for its product. Microbial Insights performs microbial
testing and currently is executing a phase-two contract with NASA
for an indoor air project that identifies microbes within air space
and in space shuttles. Williams said that she is trying to persuade
NASA to fund a follow-on phase three.
Jeffrey Pruski, a computer scientist from Washington, D.C., said
that he was attracted to SBIR simply because it encourages people
to develop innovative ideas, “which you then get to own,”
he said. He attended a recent SBIR conference to get more details
on how he could start a business that would cater to government
needs. “If you try to do this privately you either have to
arrange your own funding and that comes at a price; you may actually
lose control of your idea. ... This program [SBIR] protects your
proprietary idea,” he said.
Maurice Swinton, the assistant administrator at the SBIR Office
of Technology, said that the challenges in SBIR are not just the
responsibility of small business, but also of the federal agencies
and their managers. “Government puts no line items in the
appropriations for any of the agencies to administer their programs,”
he said. “So the program managers are at the mercy of their
agencies to provide them with money for salaries, for staff and
travel. Sometimes you get a lot; sometimes you don’t.”
If agencies don’t receive funding, then they can’t promote
their programs adequately, or attend conferences that are valuable
vehicles for outreach. “How can Congress expect the agencies
to go out and administer their programs, when they really don’t
have any money to do so?”