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Take It for Granted

Need cash to develop your latest high-tech product? There's probably an SBIR grant for you.
January 1, 2005
URL: http://www.entrepreneur.com/article/74854

Every TV police drama has one-a lab full of expensive equipment to analyze mysterious powders or fibers from a crime scene. Looks high-tech, right? Not compared to a new device developed by DeltaNu of Laramie, Wyoming. The company's new hand-held device, called Inspector Raman, sniffs out substances from cocaine to anthrax faster than you can say CSI: Miami.

How did a tiny company in Wyoming develop this breakthrough technology? Dr. Keith Carron, a chemistry professor and co-founder of DeltaNu, says the R&D funds came from the government's Small Business Innovative Research (SBIR) grants. Along the way, DeltaNu used these same grants to develop a string of other lab machines now sold to police departments, universities and other customers worldwide.

In addition to sparking nearly a million dollars in product sales, these grants have turned DeltaNu into a multimillion-dollar company. "All in all, we've received over $3.7 million [in grants] over six years," says Carron, 46.

"The SBIR is a combination of grants and contracts. It all equates to the same thing: funding for the small-business [person]," says Rick Shindell, president of Zyn Systems in Sequim, Washington, which helps both entrepreneurs and government agencies get the most out of SBIR programs.

"There are 11 agencies involved, none of which take unsolicited proposals," says Shindell. "You have to respond to a particular open solicitation." But don't let that discourage you. What Shindell calls a solicitation is really just a statement of need-a problem that the government has identified and for which it is seeking a solution.

The largest SBIR granting agency, the Department of Defense (DOD), often posts very specific needs, such as developing a laser guidance system for a fighter plane. On the other hand, the National Institutes of Health (NIH) issues grants for very general research. "They may simply be looking for a broad topic, like new ways to detect breast cancer-that's very different than the DOD," says Shindell.

Either way, SBIR programs are split into two phases. According to Shindell, Phase I is generally to study the feasibility of a new technology or idea, and the award amounts are limited to $75,000 to $100,000. Phase II grants are meant to encourage commercialization of a particular technology and can go up to $750,000. The program has grown so large since its inception in 1982 that there are now various state and federal programs providing pre- and post-award opportunities. So-called "Phase Zero" grants, for example, are offered by some state governments to pay for professional SBIR grant-writing assistance.

Planning to Succeed

To get started on the SBIR process, you should have a clear understanding of who you are and where you are going, advises Shindell. "Entrepreneurs need to know what they want their companies to be," he says. That generally means identifying the best industries and government agencies for your company's products or technologies, as well as choosing whether your primary focus will be on scientific research or commercial product development.

Impact Technologies LLC, an equipment monitoring system and engineering software development firm in State College, Pennsylvania, is dedicated almost exclusively to research. "SBIRs now account for about 80 percent of our revenue," says Impact Technologies' partner Carl S. Byington, who's also founder of the State College office. "We have over 15 Phase II programs, and at least 10 Phase I [programs] going on right now."

Such intense research has helped Impact grow rapidly since its inception in 1999. But relying too heavily on government programs-especially research grants-may not be a safe long-term strategy, says Shindell. Companies that subsist solely on SBIR grants are known as "prop mills" for the large number of SBIR proposals that they submit. "That's what I would consider the dark side," says Shindell. "And, indeed, there has been talk of making companies that are subsisting on SBIR grants ineligible [for future awards]."

To temper this risk, Impact Technologies is moving away from pure research and toward more commercialization efforts. Byington, 38, says the company is headed for a transition. "What we envision for the company is 40 percent of our revenue in product sales in the next five years at least," he says. With more than 50 employees and 2004 revenue (including grant awards) of $7.5 million, Impact Technologies will have to grow product sales quickly if it is to diminish its reliance on grants.

Fortunately, the DOD-Impact's largest SBIR source-has a good track record of extending purchase orders to companies that have completed a Phase II SBIR grant program. "Last year, we received a $25 million 'indefinite quantify, indefinite delivery' contract from the Naval Air Systems Command," says Byington. "That means that any government agency can buy our technology directly. So if we develop something for the Joint Strike Fighter, the F-18 team can come along and write us a task order directly, without going out on bid."

A Passion for Products

Carron at DeltaNu has taken a radically different course through the SBIR process. Although he, too, relied heavily on the grants for early financing, the R&D work the grants paid for was always product-oriented.

DeltaNu's Inspector Raman product was developed with a Phase II SBIR grant from the NIH. The grant paid for research on the broad topic of how to detect illicit drugs. "In the process, we realized that even our bench-top model was too big," says Carron. "We needed something to be carried by police in the field."

The end result, a wireless, battery-operated system, has uses far beyond what the NIH ever imagined. The device has applications in law enforcement, hazardous materials management and homeland security, to name just a few. "It can be used to look for explosives, hazardous materials, weapons of mass destruction, or even to analyze artwork," says Carron. "It's nondestructive, so you could analyze a rare piece of art and never even have to take it off the wall."

With such broad applications, Carron estimates that Inspector Raman will generate revenue of $2 million or more per year for the company. Combined with other product sales, that's a nice return on the company's SBIR awards.

Street Cred

Whether you end up developing a blockbuster product or not, completing an SBIR grant means more than just money. Says Shindell, "Once you have become an SBIR award winner, you've gained an incredible amount of credibility for your company."


is an investment banker and author of the e-book Finding Funding.