SBIR Phase II : Is it worth it?
Companies awarded the Phase I SBIR grant can apply for more non-dilutive financing. With funding amounts of less than $150K, these companies have developed their innovation based on leading-edge technology. Soon after this proving process, they can consider applying for the Phase II award – a grant of up to $750K. Yet, company leaders may wonder, “Will it be worth the effort?” “Free government money? Why NOT make the attempt at winning the Phase II award?”
The Phase II process requires extensive efforts to define, plan, and prepare a professional quality document outlining the commercial potential of their technological innovation. Inherent in the development of this document is a strong momentum in building the business structure and network to make that plan succeed. Certainly, there are challenges to relying on grants to fund a startup or new business venture. Time – this is not fast-turnaround financing, it takes time. Money – amounts awarded are supplementary in nature, other sources will be necessary.
- If a company is convinced that their innovation has significant societal benefit, then why wouldn’t the government agency continue funding them?
- Someone might be tempted to say – “Who cares about the market opportunity? We can make the commercialization plan say whatever the agency wants – it’s all make believe anyway.”
- Or, “If you gave us the money, we would commercialize”
Not so fast.
The agencies with Commercialization Assistance Programs ask applicant companies to step up and do all they can to bring their innovation to market – with or without their help. Phase II grant applications are reviewed by an agency-sponsored panel on their technical capacity and go-to-market potential. This means Phase I technical milestones must be met and significant progress made. In addition, a company is required to provide evidence of support from investors, customers, and suppliers. This comes in the form of Letters of Support.
These letters showcase a company’s success in building strategic partnerships, finding industry experts to back them, and in securing financial commitment. This support proves that the company’s technology has significant market potential and gives them a vote of confidence in their ability to execute their commercialization plans. Letters of support usually come from relationships companies have already developed prior to entering a Phase II Commercialization Assistance Program.
The SBIR Phase II applicant success rate varies by agency, but an average is somewhere around 40%. Not 100%. Not 0%. Over half of the applicants will not win the award. With that attrition rate, a company leader must consider if the effort is worth it.
What if dozens of hours are invested and their Phase II application is denied?
[quote_right]The application may not win the Phase II award, but the company can be strengthened on the path to commercialization no matter what route that takes.[/quote_right]Wasted effort or stepping stone?
Larta’s Commercialization Assistance Programs provide mentoring and advisory support during the Phase II application process. Building blocks such as strategic business planning, market strategy, partner strategy, and IP strategy are worked on in a collaborative fashion. In the case of the NSF program, a 15 page commercialization plan is the result. This will be the best and most comprehensive business plan they will ever produce.
So, this is the risk. The application may not win the Phase II award, but the company can be strengthened on the path to commercialization no matter what route that takes.
When considering that risk, company leaders should take note from winners of the Phase II grant. Here are some lessons learned about successful applicants for Phase II.
- Historical SBIR data point to the fact that successful SBIR companies partner with market leaders or leading researchers in the field.
- As a company develops the groundwork for deriving potential future sales, bottoms up analysis of the market is required, not just a top down market analysis. Panels are instructed to make sure that some kind of effort has gone into identifying niche markets and insertion points (e.g. no reliance solely on grad student surveys or industry market reports).
- Applicants need to very clearly show their source of funding (government or private), return on investment, current business vision, business model, value proposition, potential partners, and target customers.
- Revenue models are critically important and scrutinized. Successful firms present best, middle, and worst case revenue scenarios whether related to projected licensing, sales or other forms of revenue.
Another consideration – funding agencies would like to tell success stories. As part of their mandate, they must show economic impact of their programs. So this is why there is maximum scrutiny on who they fund for Phase II. They fund companies they think have the best potential to grow above and beyond the funding provided.
Will your innovation have an economic impact? If so, then applying for SBIR Phase II may be worth the effort.
_____________________________________________________________________________________________Agencies must provide an annual report to Small Business Administration, Senate Committee on Small Business and Entrepreneurship, House Committee on Small Business, and the House Committee on Science, Space, and Technology on SBIR and STTR programs and the benefits of these programs to the United States. Prior to preparing the report, the agency shall develop metrics to evaluate the effectiveness and benefit to the United States of the SBIR and STTR programs. The metrics must be science-based and statistically driven, reflect the mission of the agency, and include factors relating to the economic impact of the programs. The report must describe in detail the agency's annual evaluation of the programs using these metrics. The final report must be posted online so it can be made available to the public. (From www.regulations.gov)