Government Funding Can Make or Break Small Firms.

Wild ideas conceived in basements rarely become next-generation technologies for the Defense Department. But some of these ideas materialize, with the help of government funding. The Small Business Innovation Research (SBIR) program is one way to make this happen.

Competition for SBIR awards is aggressive. Many companies often fail to win awards, because they don't know how to market themselves, experts said.

Congress established SBIR in 1982, to open the door for small businesses to federal research and development (R&D) dollars. The government also wanted to speed up the transition of these companies' technologies into useful products. Companies with up to 500 employees are eligible to participate.

"I tell these companies, whatever you are working on now, I don't care about," said Jeff Bond, SBIR program manager for the Ballistic Missile Defense Organization in Arlington, Va. "I want to know what you have in the back room, that if you had a little capital for it, you would try it out. That is the wild idea that I want to find, because it is the wild ideas that are the technologies for tomorrow."

Each federal agency with a budget in excess of $100 million has to reserve 2.5 percent of it for SBIR. Ten federal agencies allocate a total of $1.2 billion a year for the program. The Defense Department alone spends almost $600 million. The Pentagon issues SBIR solicitations twice a year, describing R&D needs and inviting proposals.

Companies first must apply for an initial six-month award--that can reach $100,000--to test the scientific, technical and commercial merit of a specific concept. If the first phase proves successful, the Defense Department may invite the company to apply for a follow-on two-year award--worth up to $750,000--to turn the concept into a prototype. The proposals are judged competitively on scientific, technical and commercial merits. After the second phase is completed, the government expects the companies to obtain private funding or non-SBIR government support to turn the concept into a product for sale, either on the commercial market or to military customers.

"We never know where these innovations are going to lead," said Bond. "We never know how these companies are going to mature, but we know they do and we know that, by taking a lot of risk and a lot of different ideas, we are going to find those few gold nuggets that just really take off."

Although competition is open for all qualified small businesses, some critics of the selection process believe that SBIR competitors often are not small businesses participating on their own, but are teamed with large companies that have the necessary resources to write successful proposals. Don Howard, executive vice president of Jardon and Howard Technologies Inc., a small technology firm in Orlando, Fla., said he suspects that this is the case in more than 50 percent of SBIR awards.

Partnering with the large firm may be the only way for a small firm to participate in SBIR, because preparing a bid is an expensive task that requires skilled and experienced proposal writers, whom many small businesses cannot afford to hire. Nine years ago, Howard's company won an SBIR contract for an online interactive training system for Navy submarines. "We were the protege of the company that knew [the technology]. ... We couldn't do it alone."

Many companies "haven't done their homework and research," said Scott Stanberry, a consultant and the author of a book tided "Federal Contracting Made Easy." It is important, he said, "for a company to do as much research as they can on the agency prior to submitting their solicitation."

Russ Farmer, president of PBC Inc., a company in Denver that provides management services to small business, said that companies sometimes fail in SBIR competitions, because they don't understand the nature of the government agencies funding the project. The Defense Department and NASA, for example, are interested in the applicability of technology that is being proposed. Other agencies, he said, are more interested in theoretical, academic research.

"In a customer environment, the more the customer knows about you as an individual the greater the hit rate," he said. In May, the Defense Department puts out a list with the potential topics, and small businesses have until July 1st to contact the author of a specific topic and have an open discussion.

"You have dialog going on, and you plant the idea in the customer's mind and when the proposal comes in, the technological reviewer will remember the discussion," Farmer said. Obviously, he added, there is a high correlation between pre-marketing the idea and the award.

"A lot of these people are techno-nerds," he said. These are people who are not comfortable talking to other people. They only write proposals. That is why it pays off to market the proposals ahead of the selection process, Farmer said. Half of those businesses that "pre-market" their ideas win awards, versus one out of seven that fail to do so. He said that the Defense Department encourages this "pre-marketing." Farmer's advice: "Learn to play the game. Use the rules to your best advantage." The government, he added, "wants the best solution for itself ... Best solutions come from discussing and playing off each other."

As someone who follows SBIR and has won a few government contracts, Charles Smith--the owner of Softwar, an encryption and software company--said that many phase-one proposals never get anywhere. "The biggest drawback comes in the phase one," he said, "because there are some people that are proposing stuff that is just so wild arid so crazy it will never come through. They get the money, they smile and they walk away, and nobody ever sees another thing."

He said the problem should be blamed on the government. In essence, they have to get rid of the money, because they have the budgeting process. They have to make sure that is allocated, so that they make sure that next year's budget is coming in," he said. "There is more emphasis on the budgeting than on the technology and the returns from it. And that is why you see all those phase-one [awards] that don't go anywhere."

Statistically, roughly half of the phase-one projects are invited to compete for the second phase. Farmer explained that small businesses have six months to prepare the marketing proposals for phase two. He called the first stage "paid marketing" needed to win in phase two. But he said many scientists are afraid of the marketing process and often fail to promote their technologies to their technical monitors. "The ones that win are the ones that get their technical monitors involved," he noted.

Farmer described phase two as the period when a company has to find money to start a business based on the technology it has proposed. "The first thing you need to do is to identify and make contact with your ultimate customer," he said. At that point, the investor could be a research organization. "You have to get from those end customers the specifications of the product or service they would pay for and the price they would pay. You have to get your arms around in the market," Farmer explained. Secondly, the company has to start making the product that meets the customers' specifications.

Companies need to develop a business concept. "Techno-nerds are very lousy business people, and if you don't have a business champion, you won't succeed on the business side," he said. Many of the managers of these small companies are scientists and not business-development experts.

Smith said that many innovative researchers and scientists are bothered by the intensive paperwork associated with SBIR. "I have all my paperwork filled out, but I don't have a gizmo, because we didn't really work on that. We worked on all the paperwork all day long," he said. I can sir here and tell you all about quantum physics all day long, but don't know how to solve half of these forms. Even the people that you ask, who should know, don't know sometimes."

Farmer agreed that the bureaucracy poses a problem. He pointed our that there is a big gap between phase-one and phase-two funding. Companies don't get any more money than the $100,000 for five to six months. In the meantime, the only way to survive is to get another phase-one award, Farmer said. "They lose the momentum from phase one to two, because in the meantime, they are concerned about something else," he said. The government's procedures often get in the way of timely turn-around of proposals. "There is a roller-coaster effect in the SBIR funding cycle," Farmer noted. Start-up companies would have no other source of revenue than the phase-one $100,000.

When companies reach the third phase, many technologies lie dormant on the shelves, because they have not been properly marketed, Farmer said. In this last round, the government or the commercial customer only pays for production of the technology, not for research. Once the government moves on to another cutting-edge technology, the small companies have a lot of trouble convincing venture capitalists to take a risk in their product. Many may start over with a phase-one competition for another project, said Farmer.

Linda Williams, chief executive officer of Microbial Insights in Rockford, Tenn., said that her company had won a couple of SBIR projects with phase-two funding, but they never went to phase three. "The real challenge is to get the money for phase three and get a commercial project," she said. But she pointed out that her company focused entirely on research instead of the commercial marketing for its product. Microbial Insights performs microbial testing and currently is executing a phase-two contract with NASA for an indoor air project that identifies microbes within air space and in space shuttles. Williams said that she is trying to persuade NASA to fund a follow-on phase three.

Jeffrey Pruski, a computer scientist from Washington, D.C., said that he was attracted to SBIR simply because it encourages people to develop innovative ideas, "which you then get to own," he said. He attended a recent SBIR conference to get more details on how he could start a business that would cater to government needs. "If you try to do this privately you either have to arrange your own funding and that comes at a price; you may actually lose control of your idea. ... This program [SBIR] protects your proprietary idea," he said.

Maurice Swinton, the assistant administrator at the SBIR Office of Technology, said that the challenges in SBIR are not just the responsibility of small business, but also of the federal agencies and their managers. "Government puts no line items in the appropriations for any of the agencies to administer their programs," he said. "So the program managers are at the mercy of their agencies to provide them with money for salaries, for staff and travel. Sometimes you get a lot; sometimes you don't." If agencies don't receive funding, then they can't promote their programs adequately, or attend conferences that are valuable vehicles for outreach. "How can Congress expect the agencies to go out and administer their programs, when they really don't have any money to do so?"

Defense Department Small Business Innovation Research Program

Number of Proposals in Fiscal '00: 77,120

Phase I Awards in Fiscal '00: 1,155

Phase II Awards in Fiscal '00: 570

Funds for Fiscal '01: $550 million

Solicitations for Fiscal '01

Released October 1, 2000 and closed January 10, 2001

Released May 1, 2001 and closes August, 16, 2001

Web Site: www.acq.osd.mil/sadbu/sbir

Technology Areas of interest to the Defense Department: computers, software, sensors, communications networking, electronic devices, environmental effects, materials and processes energy storage, propulsion and energy conversion, design automation, human systems interface.