SBIR and STTR Grants

Advantages

The upside to an SBIR grant is significant for a small company. First, the investment is non-diluting, which means that the government does not take any share of ownership in the awardee at any time in exchange for the award. This makes a small business very attractive to future venture capital investment because the seed funding round will have already taken place without exchange of equity or dilution. Second, the award does not require board seats or decision-making authority, which means that the founders retain full autonomy over the company decisions. Third, the award comes with some advisory support. Fourth, this competitive award may act as a catalyst to spur future investment later on. Fifth, indirect overhead costs - usually 40% to 70%, as set by the principal investigator (PI) - go directly to the company instead of being absorbed by the institution.

Disadvantages

There are not any significant disadvantages to receiving an SBIR/STTR grant; however, there are some potential disadvantages to applying. Indeed, the main factors involved in making the decision to apply for an SBIR/STTR grant center often center around the time and effort required to prepare an application, which can be considerable. However, the research plan for a Phase I proposal is limited to 6 pages, while Phase II research plans are limited to 12 pages. Phase II applications also require a 12-page commercialization plan, which is a typical business plan. In total, a Phase II application may fall somewhere between 100 and 200 pages in length. The Phase I commercialization plan is typically only one paragraph in length. These limits result in relatively short applications for awards of this size. Further, the preparation to make a pitch to an angel investor or venture capital firm also requires time, and a large portion of an SBIR/STTR application can later be repurposed for a pitch or a Food and Drug Administration (FDA) marketing application. Another disadvantage of applying is the time required for a decision to be made. In some cases, the decision may be delivered in excess of one year from the submission date. This timescale may be unacceptable for the growth of a new startup company, especially in an active field that requires rapid development. On the other hand, obtaining angel investment may improve the likelihood of success of a future resubmission or an SBIR/STTR application. However, this strategy will mitigate some of the advantages mentioned in the previous section, as taking angel investments can be relatively costly (in terms of equity). Much of the advance time needed to apply for the SBIR/STTR grant is spent obtaining the proper credentials to create an application. There are at least seven credentials that must be obtained sequentially, and while they each require little effort, some can take weeks to process.

The considerable time and energy invested in preparing a small business for an SBIR/STTR application necessitates careful consideration of the benefits and costs of receiving an SBIR/STTR grant in the specific context of the applicant. Moreover, the benefits and cost considerations can differ significantly when viewed from either the academic or the company perspective (Figure 1).

Figure 1: Comparison of DBIR/STTR Pros and Cons from Academic and Company Perspectives

Given the considerable time investment and expertise required to prepare a successful SBIR/STTR application, the business entity for which this time investment represents a worthwhile endeavor will typically be smaller and have the flexibility of waiting months between their application, award notification, and actually receiving the allocated funding. Notably, NIH grants may require up to 100–200 hours of work in total to prepare. This time investment is worth considering, as the opportunity cost of preparing a strong application includes the time that could have been spent seeking other, more substantial sources of funding. Additionally, the particular restrictions placed on SBIR/STTR funding make certain businesses more suitable to one mechanism of funding compared to the other. For example, the greater flexibility in fund allocation in the SBIR program makes it more appropriate for relatively more established small businesses that can operate without an academic partner. The STTR program can be more attractive to a new company that lacks a credible principal investigator or may rely more heavily on access and close collaboration with available academic resources.

From the academic entrepreneur's perspective, SBIR/STTR grants can be worth the time and effort investment if a company partner can be identified easily, or if there is a desire to create a company de novo. The structures and timelines of SBIR/STTR grants are particularly useful for exploring the practical applications of technologies, which might be a natural extension of an academic entrepreneur's ongoing research, in addition to surveying market potential. Additionally, SBIR/STTR grants can be submitted in conjunction with other federal grants, including a mechanism-focused R21 or R01 grant, allowing academic entrepreneurs to leverage existing work that has been done in preparing such grant applications for an SBIR/STTR application.

With these costs and benefits in mind, the ideal project proposal for an SBIR/STTR funding application has some combination of the following four components, depending on whether it is a Phase I or Phase II application: a strong scientific basis (Phases I and II), team members with expertise in the area of the proposed development (Phases I and II), preliminary data (Phase II), and a working prototype of the technology (Phase II). For Phase I, although helpful, neither preliminary data or a working prototype are necessary components to a successful application; the amount of preliminary data included in an SBIR/STTR Phase I application is often much smaller than what is expected for an R01/R21 application. Ultimately, having a strong team and compelling scientific basis are the key foundation for a Phase I grant, even in the absence of robust preliminary data or a working prototype. Additionally, generating preliminary data or making a working prototype is frequently used as one of the aims of an SBIR/STTR Phase I proposal. If an academic entrepreneur is thinking of applying for an internal university pilot award, for example, this may also be a good time to apply for a Phase I SBIR/STTR grant, since neither require preliminary data. That being said, if possible, it is still helpful to have preliminary data or a basic prototype to support the Phase I application; however, if the preliminary data already answer the research question proposed in the Phase I application, or the prototype is too far developed, that will be grounds for rejecting the application. For Phase II applications, on the other hand, preliminary data and a working prototype are often necessary, in addition to a strong scientific basis and team expertise.