Here's how the process works. Each year the 11 agencies involved send out solicitations in a wide variety of areas. The topics are broad enough that most research-oriented companies can find a suitable category, whether it's software for dyslexic children or new lasers for surgeons. These solicitations are for Phase I grants -- feasibility research -- which run for six months, for up to a maximum of $50,000. If the feasibility study looks promising, companies can then apply for Phase II grants or contracts, getting up to $500,000 over two years. After that, a company must rely on private-sector funding or a regular government contract for commercialization.
Like any program, SBIR has its glitches. One frequent complaint concerns the six-month gap between the end of Phase I and the award of Phase II funds. That hiatus can have a murderous effect on the cash flow of very small companies. Another potential problem: adjusting to government accounting requirements. Triangle's Colvin, for one, remembers spending about half of his time during Phase I installing an accounting system satisfactory to the Department of Defense.
But by far the most daunting feature of SBIR is the odds. Less than 15% of the program's applicants win Phase I awards, and only about 40% of those go on to win in Phase II. Many of the rejected proposals are high in quality -- and cost several thousand dollars to prepare. "We're getting about twice as many proposals recommended for awards as we have funding," laments Roland Tibbetts, SBIR program manager for the National Science Foundation. The problem, he says, will only get worse: SBIR funding is growing slowly, while the number of proposals most agencies receive is increasing at a 20% annual clip.
Such statistics have some small-business advocates arguing that the program should be expanded from 1.25% to 3% of federal external-research budgets. Until that unlikely event happens, prospective first-time applicants can take comfort in the fact that about 45% of Phase I awards go to companies that have never won before, with more than half going to companies with fewer than 30 employees. One reason: as companies get larger and more prosperous, they have more financing options, many less chancy than SBIR. "It is not an attractive investment for a company that has a lot of choices," acknowledges Milt Stewart, president of the Small Business High Technology Institute, in Phoenix.
A company can also improve its odds through simple strategies. If you don't have credentials in a given field, for example, hook up with someone who does -- particularly if you're applying to a highly academic agency such as NSF. That's the method Armando Cuervo, president of Sweet Dreems Inc., in Worthington, Ohio, used to get SBIR funding for his anticolic device. An international oil trader, Cuervo had no expertise in pediatrics. But as the father of a colicky baby who would fall asleep only in the car, he figured he could sell a medical device that attaches to a crib and simulates a moving car's sound and vibrations. So Cuervo interested some medical-school professors from Ohio State University in his idea; they joined the venture in exchange for consulting work once he was awarded the grant. Later Cuervo won a Phase II grant -- and now reports sales of more than 10,000 SleepTight Infant Soothers at $69.95 each.
Sometimes participants go away satisfied even when they don't win that Phase II grant. Ed Pillar, CEO of HiTech Inc., a $2-million manufacturer of fans and blowers in Zion, Ill., had that experience. HiTech won a Phase I grant from Defense in 1988 to study improved blower efficiency, but the project never got Phase II funding. Pillar still thinks it was one of the best things that ever happened to his 14-year-old company.
Why? Doing the SBIR project forced Pillar to take time out from the day-to-day operation of his 20-employee business to think long term. What he learned in his research was that German manufacturers were working on an efficiency breakthrough that could wipe out HiTech and its U.S. competitors. "It's given us the opportunity to do some in-depth market research from an engineering point of view," he says. "We've found that if someone in the States doesn't move forward in the next five years, our fan and blower industry will move to Germany just as our VCR industry moved to Japan." That discovery substantially changed Pillar's strategy: he now plans to invest as much as he can in R&D, hoping to outmaneuver his overseas competition.
No one would recommend that companies apply for SBIR grants to do market research. But Pillar's story suggests there's more going on in SBIR than even the statistics show. From the program's point of view, Ed Pillar's project is a dead end. But if this story is a failure -- if this is the "money down the sewer" -- no wonder SBIR is a success.
FINANCING GROWTH: LOW-COST LOANS
In Ohio and elsewhere the state pays the difference
There may not be many things an entrepreneur, a banker, and a politician will agree on, but Ohio's linked-deposit program is one. Just look at R. Samantha Grubb, Karen Drake, and Mary Ellen Withrow.
Grubb, the entrepreneur, is owner of Gayhart & Associates Inc., an executive-search firm in Cleveland. When she wanted to expand by buying and renovating a building in a trendy section of the city, her banker suggested a linked-deposit loan. Under the program, the state makes a two-year, loan-sized deposit at an interest rate three percentage points below market yields, and the bank passes the reduction along to the small-company borrower. The savings for Grubb: $12,000 in interest costs over two years.
