Should My Climate Tech Company Apply for a SBIR?
by Warren Katz, Chairman of The Alliance for Commercial Technology in Government
In a startup's pursuit of funding, most go the classic route of equity investment. While well-capitalized, well-institutionalized, and easy to understand, it's important to realize that you are shifting ownership of your company to others, whose interests may not entirely align with yours. While many angels, VCs, and PE firms can be outstanding partners, some are dead weight, even predatory, and extremely difficult to get rid of. This has led many founders to attempt to retain more equity by pursuing non-dilutive funding from the government, the most popular program being the Small Business Innovation Research (SBIR) Program. A blended approach can provide the best of both worlds, and in the extreme, government financing can actually save an otherwise viable company from going out of business before the conventional investment community is convinced of its value.
What is the SBIR Program?
Established in 1982, the SBIR Program was intended to stimulate small business participation in government research, with the specific goal of commercialization. Notable successes include Qualcomm, 23andMe, and Ginko Bioworks. The program provides grants anywhere from $50K to $15M. It's effectively a seed-capital fund that takes no equity.
Over the life of the program however, companies that gained proficiency in the bidding and winning of SBIRs without ever commercializing end results started to absorb a disproportionate amount of the program's funding. The rise of these so-called "SBIR Mills" tarnished the reputation of the program in the eyes of the venture community because they historically produced poor venture returns. Legitimate commercially-oriented startup companies often found themselves unfairly lumped in with SBIR Mills and therefore devalued by investors. This resulted in a perverse backlash against participating in the program by the very companies the program was designed for and could most benefit from.
Despite the risk of being labeled a SBIR Mill and in light of recent efforts to reverse this legacy problem, now more than ever SBIRs are an excellent source of non-dilutive capital for any tech startup, including climate tech companies. The SBIR budget is 3.2% of all extramural R&D, amounting to about $4B every year. It's foolish to ignore it.
Are SBIRs suitable for climate tech companies?
There are 11 federal agencies that participate in the program. It's likely that a company's core technology will have applicability to specific problems at several agencies. Those applications may be different from the company's intended end product, but as long as the majority of the funding goes towards a common underlying tech stack it's still worth doing. The company may discover that the sponsor's application is actually a viable business unto itself, perhaps even better than the company's original intended product.
I've heard the proposal process is very difficult
This common objection has resulted in many innovative companies passing up on working with the government to both their detriment. Recently, several new mechanisms have been institutionalized which are lighter-weight than the historic proposal. Most notably, the Air Force and DIU have reduced the proposal effort to merely a 15-page pitch deck.
In addition, several agencies have implemented "Pitch Competitions" or "Challenges" which offer cash awards up to $150K the same day!
As win probabilities vary from 10-33%, you should be comfortable submitting 3-5 proposals every cycle.
I've heard I have to wait months for notification
AFWERX made their SBIR process as startup-friendly as possible, including notification in as little as 3 weeks. Most agencies announce awards in 2-4 months and execute contracts 1-2 months thereafter. Considering a classic investment round can easily take 6 months, the SBIR cycle is on par. Indeed, most of the SBIR timeline is spent waiting for notification, therefore interleaving a funding round seems fairly efficient.
I've heard proposal topics are wired for incumbent companies
This is often true, but such topics are easily detectable. If the solicitation is very niche/specific, asks for a unique skill set, and/or suggests a suspiciously specific approach to the solution, it's probably wired. If you stumble across one of these topics, it pays to call the author to introduce your company, your technology, and how it may be better than the incumbent. Companies don't realize that they can engage with the customer face-to-face before writing a proposal. Worst case scenario you get the vibe that you have little chance of winning and save yourself the trouble of writing that proposal. Best case, the customer actually likes your tech/solution better than the incumbent and you’re encouraged to submit a proposal and actually win. Don't be shy. You can learn a ton in those customer meetings.
In addition, there is a recent trend towards "Open Topics" that ask for any idea at all that could be useful to the agency. Open Topics maximize the flow of creative submissions and can't be wired.
Will VCs de-value companies that do SBIRs?
Few venture capitalists will invest in slow-growing, government labor contractors. If you already have products in-market with revenue, VCs may be comfortable with SBIRs. The risk of backsliding into a consulting business is small. You’d be doing exactly what you’re supposed to be doing, which is using SBIR money to co-fund your pre-planned technology roadmap for the benefit of your commercial product offering. If you’re pre-product, you must make the case that your entire company is oriented toward coming out with that first commercial product, and SBIR money is going to be blended with VC money to get that MVP out. Having commercial proof-of-concept customers lined up with funding, especially prepaid, helps immensely with this story.
For the sake of valuation in future funding rounds or for valuation upon exit, you must make every effort to shift the bulk of your revenue to commercial product sales (SaaS, HaaS, license sales, selling individual units, etc.). It's important to understand that investors do not recognize SBIR funds as revenue. It's free venture capital, not sales.
Do I have to keep timesheets and bill by the hour?
This situation is also improving. True commercial product companies– aka Non-Traditional Vendors – can often bid Firm Fixed Price SBIRs that have milestone delivery payments. This is more consistent with commercial proof-of-concept customers buying from startups. The government is beginning to mimic commercial purchasing mechanisms such that startups don't have to run two separate businesses inside their companies. If your customer is insisting on paying by the hour and insists you have DCAA compliant, auditable labor rates, you'll have to decide whether the contract is big enough to warrant the expense and headache of complying.
The bottom line
The SBIR program is a seed-stage venture fund that takes no equity. A company can win millions from various agencies to co-fund a technology stack/roadmap and keep the equity they would have otherwise given to investors. It also provides contracting mechanisms to sell the finished commercial products to government customers on standard commercial terms. If your climate tech products have legitimate customers within the government, the SBIR program is likely the very best entry point.
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