SBIR grants explained & impact on region analyzed

(21st Century Systems, left, is an Omaha-based SBIR recipient.) Guest post by Tom Chapman: In January, I contributed a guest post to Silicon Prairie News that discussed the reasons for measuring venture capital as a bellwether for investment and investible deals (Building an entrepreneurial ecosystem: what does success look like?). Another…

This is a guest post written by Tom Chapman, director of innovation and entrepreneurship for the Greater Omaha Chamber of Commerce. In his role, Chapman works with new ventures, innovation programs, at large companies, service providers, innovation thought-leaders and community advocates.


      

21st Century Systems (CSI), an Omaha-based SBIR recipient, developed a Geospatial Storefront where customers can purchase archived geospatial products such as electro-optical and synthetic aperture radar. Image from 21csi.com.

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In January, I contributed a guest post to Silicon Prairie News that discussed the reasons for measuring venture capital as a bellwether for investment and investible deals (Building an entrepreneurial ecosystem: what does success look like?). Another bellwether that we at the Omaha Chamber utilize is Small Business Innovation Research grants or “SBIRs”. SBIRs are excellent indicators of (1) research, development and commercialization in a state and (2) pipeline strength of future investible deals. Obviously, not every deal comes from an SBIR, but we believe that SBIRs represent an easily measured instrument that is instructive regarding current market conditions.

SBIR Explained

SBIRs are grants written by 11 federal agencies intended to help small businesses create and commercialize new innovations and technologies. The program consists of three phases of funding:

  • Phase I (Feasibility): Awards range from $75k to $150k
  • Phase II (Prototype): Awards range from about $250k to $1MM
  • Phase III (Commercialization): This is considered an outside funding from a customer or private enterprise – so some groups do not even match this type of funding.

In 2009, 6,500-plus (6,571) awards were granted to U.S. based companies – totaling more than $3 billion in awards through this program. Ultimately, the federal government has an SBIR program because it believes that it is a good way to help grow American tax-paying companies for the future.

SBIR Impact

Locally in Omaha and Lincoln, 21st Century Systems, Li-Cor Biosciences, and J.A. Woolam have received a significant number and dollar awards from the SBIR program. This has led to new business lines for each of those companies. However, generally, the region has been woefully lacking in SBIR awards against other regions and states. Again, we will use a comparison methodology to emphasize this point.

As an example, compare two comparable states to the Silicon Prairie region. In the graph below, both Utah and Kentucky have more SBIR grants than the primary states in the region.

In particular, Kentucky’s growth over the last two decades in SBIR awards has been noteworthy because the state has actively attempted to create an innovation pipeline leveraging the SBIR program. Below is a graph from that 20 year period.

Starting in 1990 through 1995, Kentucky’s SBIR program was basically smaller than any of the states within the Silicon Prairie region today. However, with smart public policy and a true push through matching grants and Phase 0 awards, the State of Kentucky has increased the amount of money flowing into early stage companies via the SBIR process. In the last five years, Kentucky has received more than doubled the amount of SBIR grants compared to Nebraska. The numbers for Kansas and Iowa are similar, although not as extreme. This is essentially from a comparable position 10 years ago.

This is a testament to the programs and emphasis placed on the SBIR program in Kentucky. From a practical point of view, it also means that Kentucky has put more than $20 million more into its local economy for innovation and commercialization than any of the states on the Prairie.

Here is some additional interesting information regarding SBIR on the Prairie. Cities without universities do not do well. Cities with universities do well. So for example, Ames, Iowa (95), Iowa City, Iowa (24), Lawrence, Kansas (57), Manhattan, Kansas (66) and Lincoln, Nebraska (60), each have more SBIRs than the commercial center nearby – even though they are quite a bit smaller. Additionally, Ames had 95 SBIR grants compared to Des Moines’ three. This is a good sign regarding the types of technologies that are getting funded through the SBIR process. Thus as a commercial (rather than academic) center, Omaha did really well with more SBIRs than any other commercial center measured.

As a comparison, Salt Lake City continues to dominate the Midwestern cities with more than 390 SBIR grants over the last decade. In fact, Salt Lake City has only 1.9 million residents, but it had more SBIRs than the entire states of Iowa, Nebraska and South Dakota combined (by a lot: 395 to 329).

Action Steps

Below, I have included some thoughts regarding how states, like Nebraska and other states on the Prairie, can ramp up their SBIR awards.

Demonstration Fund

A demonstration fund is a state-based fund of an annual dollar amount that is given to private companies that are doing innovative research. For example, the State of Iowa has a demonstration fund with roughly $4 million allotted annually. The fund is distributed in small allotments – such as $100k increments – to small, innovative companies. It is complementary to SBIR because companies can receive money for the same project for both funds, but usually a demonstration fund targets less innovative and more commercializable research that may not qualify for an SBIR grant. Iowa has used their fund to effectively start and grow companies in bioscience, information technology and advanced materials. Functionally, Nebraska could set up a smaller fund ($2-3 million) with an annual cap and still have a significant impact.

Supporting Existing Local Organization

Nebraska is lucky to have two good institutional organizations that actively support SBIR awardees in the state – the Innovation Accelerator (which also supports SBIR companies in other parts of the country) and the Nebraska Business Development Center. The State of Nebraska should increase state funding for the Nebraska Business Development Center’s SBIR/STTR office to include money for two full-time staff to work on SBIR/STTR and other commercialization awards, one in Omaha and one in Lincoln. This money should also include dollars set aside to run regular workshops by companies like Dawnbreaker or Development Capital Networks to provide guidance and expertise about the grant process and writing of grants. Additional money for a grant writer, that would cover more than simply SBIR/STTR, for example the demonstration fund mentioned earlier, would also be valuable.

Phase 0 Fund

Phase 0 funds provide an incentive for companies to apply for SBIR/STTR funds. The Phase 0 fund provides a small award for writing a qualified application – usually between $2,000 and $7,500. It could also be utilized to include an award for following up on successful Phase I awards with a Phase II application. Again this program could have a cap and a qualification process that keeps the annual price tag to a reasonable amount.

SBIR/STTR Matching Fund

Some states, such as Kentucky, match federal awards with state awards. There is no screening process that replicates the federal process, instead if a company within their borders receives a federal award, then the state matches that award based on the dollars in the award. So, some states match fifty cents for every dollar and others match one dollar for one dollar. I’d recommend that the State of Nebraska start slowly by matching fifty cents on the dollar.

Collaboration Fund

Some states have funds dedicated to collaboration. There are multiple ways of collaboration that are encouraged and incentivized. For example, Maryland provides grants to private enterprises in the state working with universities in the state. Other states provide money to collaborations between big and small companies for certain types of market testing or prototyping work. So, if a large manufacturing company wants to work with an SBIR company and will pay them $50k for that relationship, then the State of Nebraska will match the $50k. This will help build commercialization and technology transfer practices in the state. In some fields, caps may be necessary and in others (such as bioscience) they may actually be inappropriate, so there needs to be some nuances in this program. However, the goal should be to improve the amount of collaboration occurring between large enterprises, small enterprises and the universities in the state for technology research, development and commercialization.

Recruitment Fund

Recruitment funds are state dollars set aside for the universities to utilize to attract top flight faculty. The most famous of these programs is the Georgia program, but other states including Utah and Kentucky have utilized state recruitment funds to grow targeted industries and academic expertise. The goal of these funds is to utilize them to build cohorts of successful entrepreneurs and researchers/innovators that have shown success at building SBIR technologies. Rather than simply recruiting top flight researchers, recruiting those with track records that have produced commercializable and SBIR-worthy technology should be a state priority. The State of Nebraska should do this with a fund of $5 million annually in targeted development areas. For example, the University of Nebraska–Lincoln has prioritized food, water and fuel on the new Nebraska Innovation Campus. Each of these categories should develop, world class sub-industry specialties that commercialize new technologies and create companies. This fund would be a strong attraction tool for the university and a strong economic development driver.

In total, the initial cost of this program is approximately $10-12 million dollars annually depending on caps, and with long-term growth, it probably eventually grows to be approximately $25 million of state expenditures. It lays the framework for local community matches and it creates transparency and awareness around innovation and commercialization. In short, it’s the beginning of a long-term innovation strategy for the state. The State of Nebraska cannot get something for nothing – and it is time that the State strategically decides to invest in innovation and its future. The above program integrates an SBIR/STTR strategy that is sustainable and growth oriented – shifting away from a purely attraction- and retention-based economic development strategy.


Tom Chapman can be reached at tchapman@selectgreateromaha.com, and you can find him on Twitter at twitter.com/tchap623.

 

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