SBIR/STTR as alternative financing for new business starts and new product/technology development

1. SBIR 101:Often the best option for funding your business to bring innovative new ideas to market* SBIR/STTR as alternative financing for new business starts and new product/technology development *without losing equity or building debt Ray Friesenhahn SBIR & Technology Transition Manager June 12, 2013 TechLink is an Authorized U.S. Department of Defense Partnership Intermediary per Authority 15 U.S.C. 3715

2. Small Business Innovation Research (SBIR) $2.4 Billion (FY12) federal set-aside (since 1982) for U.S. Small Businesses Small Business Technology Transfer (STTR) $300 Million (FY12) federal set-aside (since 1992) for U.S. Small Businesses working with not-for-profit Research Institutions (e.g. universities)

3. Today’s Key Takeaways: • SBIR is just one funding option • Not always the best option • Can mix/synergize with other funding options • Know your customer (agency)! • Grant vs. contract; line vs. peer review • Do your homework – background research • Customer (agency) relationships can be important! • Plan for the long term (don’t chase short-term $) • Plan for Phase III and commercialization/transition • Build successful collaborations & partnerships • Read the instructions! Then read them again!

4. Perspective on SBIR as a business finance option

5. Convince yourself it’ll work Start to build a team! Conduct some realistic market research Work on building your team! Begin IP (Intellectual Property) protection Continue building your team! Build a prototype or test a crude demo Do you have everyone you need? Develop a business plan Working with your team! Now you need to finance this plan!

6. Options for Financing your Innovative Technology Start-up • Venture Capital (VC) • Angel or Corporate Investors • FFFF • Loans & Bootstrapping • Crowdfunding • SBIR/STTR

7. “Typical” Early-Stage Funding Levels: (Traditional) VC: Angels: FFFF: (Bank) Loans: Bootstrapping: Crowdfunding: SBIR/STTR: $4M – $50M+ (Avg. $7.2M, $27B in 2012) $25K - $2M (Med. $450K, $22B in 2011) $5K - $100K ($50B overall) $0~$250K (with good collateral) Varies(see Greg Gianforte, e.g.) To $10M? $70K - $1M +++ ($2.4B overall) (Sometimes use convertible debt, typically pre-seed) Pebble on Kickstarter (Kickstarter $435M on 37K proj.)

8. Venture Capital & Angel Investors

9. VC Funding in the U.S. PricewaterhouseCoopers MoneyTree Report # of Deals Billions

10. VC Funding in Texas PricewaterhouseCoopers Money Tree Report

11. VC Considerations: • Looking for ROI: >10X 5 years • Need Scalability, Exit Strategy • Odds of getting VC <1% (0.11% of new co’s get VC) • VCs looking for team experience • Performance-driven (ruthless) • ~50% of founders forced out in 1st year • VC need to bring value to your Board • Earlier stage = more equity to VC • “20-Minute Rule” for traditional VC

12. Angel Considerations: (From the Ewing Marion Kauffman Foundation) • Of 500K annual new business starts, typically 50K receive some angel backing • In 2011, $22B angel funding (vs. $29B VC) • Up to 90% of companies receiving outside equity capital got it from angel investors • Median angel investment: ~$450K • Investments tend to be local, within industry experience of investor (adding value to Board) • Should come after self-financing, FFFF • Typically take 20% - 40% equity

13. SBIR/STTR Overview

14. SBIR/STTR Overview • Federally mandated programs (since 1982/1992) for agency funding of small business (<500 empl.) R&D to develop new commercial products or services • FY13 Budgets: • SBIR: ~$2.4 Billion • 2.7% of extramural R/R&D for agencies >$100M (3.2% by FY17) • STTR: ~$300 Million • 0.35% of extramural R/R&D for agencies >$1B (0.45% by FY16) • Goal is commercialization of new innovations from U.S. small businesses

15. SBIR/STTR Overview 3-Phase Program: • Phase I: Feasibility Study • “Typically” 6-month, $80K - $150K ($225K) • Phase II: Proof of Principal/Prototype • “Typically” 2-year, up to $1M ($1.5M) • Phase III: Commercialization (or “Transition” to DoD) • No SBIR/STTR funding • May be government contract/procurement • No contract size limit • Possible Phase II “Enhancement” to get there

16. SBIR/STTR Highly Competitive • Overall about 1 in 6 win Phase I • For “Newbies” odds ~1:10 • 40 – 60 hours to write decent proposal • Most companies lose money during Phase I • Must prove feasibility and still compete for Phase II • Overall ~40% of Phase I awardees win Phase II

17. SBIR Importance to the Nation • Nation’s most successful program in moving cutting-edge technology into the marketplace • Many other nations now copying it • Largest source of early-stage technology financing • Results meet important societal and/or government and Defense mission needs • SBIR companies produce over: • 20X # patents/$R&D as universities • 5X # patents/$R&D as large companies • SBIR-backed firms responsible for ~25% of the nation’s most crucial innovations over last decade

18. SBIR/STTR Advantages: • Not a loan – no repayment required • No loss of equity ownership • Can be high-risk (high-payoff) innovation • Preferences, including sole source contracts, for follow-on government funding or procurement • Not required, no guaranteed follow-on • Overall chances of winning ~1/6

19. SBIR/STTR Disadvantages: • Government contracts and accounting can be onerous • Slow process (3-5 years through Phase II) • Not appropriate for short windows of opportunity • Requires R&D capability and writing skills • Must propose what agencies ask for • Very specific for contracting agencies (e.g. NASA, DoD) • Much more leeway for granting agencies (e.g. NSF, NIH)

20. Companies Started with SBIR/STTR Funding

21. Started as GEMTech(1988) • 1990 NIH Phase I SBIR ($50K) for “Sonic Brush” • 1992 NIH Phase II: $500K • 1995 changed name to Optiva Corp. • 2000: Optiva (Snoqualmie, Washington) had >600 employees, $175 million in annual sales • Acquired by Phillips (2000) Sonicare Toothbrush

22. iRobot • (Bedford, MA) • 29 DoD SBIR/STTR awards (2001 – 2008) • Total award value $9.2M • 2010: • 657 employees • $400M annual sales • ~40% military • $737M market value • 2011 sales $466M • 2012 sales $436M • ~10% military Packbot(with bomb) Roomba(vacuum cleaner)

23. “With one of the grants, we developed some of the first chips we did at Qualcomm.. making chips for cellphones is about two-thirds of our revenue today.” -Irwin Jacobs • 1987-1990: 12 SBIRs (NSF & DoD), $1.4M • Today (2011 numbers): • 21,000+ employees (21% growth) • $15B annual sales (36% growth) • Holds >13,000 U.S. patents • Pays more in taxes than SBA’s annual budget!

24. Basic SBIR/STTR Eligibility Requirements

25. SBIR/STTR Eligibility Requirements • Small by SBA definitions: <500 employees – including all affiliates(see VC ownership issues) • For-profit • At least 51% owned & controlled by U.S. individuals (see VC issues) • Primary employment of the PI must be with the small business firm at the time of the award and during the conduct of the proposed effort (or with Research Institution for some STTR) • All work must be done in U.S. (except with special approval)

26. Company Size Distribution:NASA Phase I SBIR Awards NASA SBIR: About 1/3 are 1st-time awardees

27. Basic Requirements for SBIR/STTR Success

28. Requirements for SBIR Success: • Innovation • New Product or Technology • New Application of Existing Technology • Research • Research of the Feasibility of the Project • Not Market Research • Not Strictly Product Development • Commercial Applications • Societal Need and Commercial Potential and/or • Specific Agency Need and “Dual Use”

29. Additional Needs for Winning SBIR: • Proposal Writing Skills • Blending of business & technical/scientific proposal • Tip: Start with the Commercialization Plan • Hiring a proposal writer usually not a good choice • Having a reviewer and/or technical editor is very helpful • Know Your Customer! • Significant agency differences in proposal requirements, technical focus, evaluation process • Build a Team to Fill in Gaps • Use allowed subcontracts, consultants, collaborators to build research capabilities, path to commercialization

30. Planning Ahead for SBIR Success: • Phase I is Required Step, Not Objective • Most companies actually lose money in Phase I • Phase I required before Phase II • Phase II Much More $$ - Still Just a Step • Strong Commercialization Plan is one key to winning • Need to show intent and ability to develop the product or service and get it to the customer (market). • Commercialization is Goal • Commercial or other sales • Follow-on gov’t contracts for DoD, NASA, others Phase III

31. SBIR/STTR Summary Info:

32. Agency Participation in SBIR/STTR And Key Differences

33. SBIR/STTR Agency Participation • 11 different agencies participate in SBIR • 5 of these also have STTR programs • Each agency manages its own programs • Each (of 12) DoD Components manages its own programs, with some coordination by OSD • SBA sets general rules (SBIR & STTR Program Policy Directives) • per law set by Congress (SBIR/STTR Reauthorization Act of 2011, in NDAA of FY2012, Public Law 112-81) • Agencies report as required to SBA

34. Participating Agencies Agency Programs Budget Award Type Review DoD SBIR/STTR $1.2 B / $154 M Contracts Line HHS/NIH SBIR/STTR $617 M / $80 M Grants +Contracts Peer DOE SBIR/STTR $166 M / $22 M Grants L/P NASA SBIR/STTR $145 M / $19 M Contracts L/P NSF SBIR/STTR $133 M / $18 M Grants Peer USDA SBIR $19.3 M Grants Peer ED SBIR $13.7 M IES: Contracts Line (IES & NIDRR) NIDRR: Grants Peer DHS SBIR/ - $12.6 M / - Contracts L/P DOT SBIR $8.6 M Contracts Line EPA SBIR $4.8 M Contracts L/P DOC SBIR $4.7 M Contracts Line (NOAA & NIST)

35. Grants vs. Contracts: • Granting Agencies • Less-specific topics • Investigator initiates approach • Assistance mechanism • More flexibility • More open communication • Usually peer-reviewed Contracting Agencies • Highly focused topics • Agency establishes plans, protocols, requirements • More fiscal requirements • Subject to FARs, DFARs • Restricted communications • Agency may be buyer – procurement mechanism for DoD, NASA • Usually line-reviewed

36. Line vs. Peer Review: • Peer Review • Markets and approach defined by submitter, meeting societal need of interest to agency • Technical reviews by outside experts, usually university faculty • Some use separate business review panel • Agency PM makes final decision Line Review • Contracting agencies (DoD, NASA, DHS) use SBIR to develop new technologies they need, want to eventually buy • “Dual-use” is important • Program Manager and knowledgeable cohorts review proposals • Personal knowledge, “insider” terminology useful

37. Critical Need for SBIR: • Know Your Customer! • Significant agency differences in proposal requirements, technical focus, evaluation processes • For “peer review” agencies (e.g. NSF, NIH), reviewers are typically subject matter experts at universities – consider what they might want to see • For “line review” agencies (e.g. DoD, NASA), personal knowledge, interaction, & relationships are much more important • Talk to TPOC before solicitation opens, if at all possible • Do in-depth background research before talking to TPOC, to leave a good impression

38. Plan Ahead: Registration Reqs

39. Agency Perspectives: DoD General DoD Descriptions • Primary focus is on the warfighter • Additional Service requirements also • Topics may cover nearly any technology area • Many medical topics in Army solicitation • DARPA seeks most advanced technologies • Moving back to longer-range insertion • Applicants should show strong connections to Service users • DARPA PMs may serve just 4 years, often “adopt” other Phase II proposals • SOCOM wants quick deployment of practical technology • Other Services in-between in level of technology • Navy has had most successful Phase III program • Other Services modifying programs to improve transition

40. Agency Perspectives: DoD 12 participating DoD Components • Each with its own culture, needs, requirements, and SBIR solicitation (6 with STTR) • Organizations within Services may vary as well

41. Agency Perspectives: NIH • Largest part of HHS (NIH, CDC, FDA, ACF) • 24 Institutes & Centers (23 + Director’s Office w/ funding) • “Parent” SBIR & STTR FOAs released January • Standard due dates Apr. 5th, Aug. 5th, Dec. 5th • AIDS-related due May 7th, Sep. 7th, Jan. 7th • SBIR Contract Solicitation (NIH, CDC) rel. In Aug. • Closes Nov. 13th • Additional FOAs (PAs, RFAs) released periodically • Budgets (2012) • NIH SBIR: $632M NIH STTR: $85M • CDC SBIR: $8.3M FDA SBIR: $1M • ACF SBIR: $350K

42. Agency Perspectives: NIH NIH Institutes & Centers relative SBIR/STTR budget allocations

43. Agency Perspectives: DOE • “Granting agency that acts like a contracting agency” • Program undergoing major changes • Now two solicitations per year (S&T Program Topics, Applied Program Topics) • Now providing Technical Points of Contact for pre-solicitation period • Requires Letter of Intent • Note that DOE Program focus may not be what you’d expect: • Includes Defense nuclear nonproliferation, fossil fuels, nuclear clean-up, as well as renewable energy and energy conservation

44. DOE Program Offices Participating in SBIR/STTR New for FY12: ARPA-E SBIR/STTR Programs Defense Nuclear Nonproliferation Advanced Scientific Computing Research Energy Efficiency & Renewable Energy Basic Energy Sciences Electricity Delivery & Energy Reliability Environmental Management Biological & Environmental Research Nuclear Energy Fusion Energy Sciences Fossil Energy High Energy Physics Nuclear Physics Goal 1: Clean Energy Technologies Goal 2: Science and Engineering Leadership Goal 3: Nuclear Security DOE SBIR/STTR Programs Office

45. SBIR: Small business is required to perform the majority of the R&D Phase I: >67% Phase II: >50% DOE SBIR vs. STTR • DOE uses the same topics for SBIR & STTR • Applicants can apply to either or both programs with a single application. If you apply to both programs, you must meet the requirements for both. • STTR: Small business collaborates with a non-profit research institution • For both Phase I & II • Small business: >40% • Research Institution: >30%

46. Agency Perspectives: NSF • National Science Foundation wants to see transformational, game-changing technology based upon good science, real innovation, real risk • Peer reviews typically by university faculty in relevant fields • Your team should have recognized experts, published scientists in relevant fields of science or technology, doing real research • NSF values strong industry/university collaborations • Likes to see commercialization of prior NSF-funded research • Especially values university spin-outs • NSF has very strong focus on commercialization • Need to show significant market opportunity, ability to address it (e.g. partner/customer support, incl. relevant letters of support) • NSF has led other agencies in support for, emphasis on commercialization planning and broader impacts

47. Strategies for SBIR/STTR Success

48. Keys to Long-Term Success: • Focus Strategically • Don’t chase money opportunities “just ‘cause we can” • Focus on opportunities that take you towards goals • Work with customers (agencies) to create new opportunities • Network, Collaborate, Partner! • Work with university researchers wherever possible • Biggest single factor in winning Phase I SBIR • Partner with fed. labs, esp. if agency is target customer • Cooperative R&D Agreements (CRADAs), Test Service Agreements may be paid for with SBIR/STTR funds • Work with Prime Contractors where relevant • Can be subcontractor on SBIR/STTR • Other partners for design, mfg., dist., service, etc.

49. Consider a First Strategic Partnership: • The single greatest factor for SBIR (Phase I) success is partnering with a research institution (esp. a university). • - Observation noted by top SBIR experts and Program Managers • Recognized scientific expertise adds credibility • University labs are significant sources of innovation • University laboratory research facilities may be needed • University scientists have lots of technical proposal experience • Don’t let them take lead in writing full proposal!!

50. Partnering with Federal Labs: • Advantages of a CRADA (Cooperative R&D Agreement): • Tie into significant R&D capability at little or no cost • Utilize specific R&D capability available nowhere else • Increase your perceived credibility based on partnership • Become familiar with Agency (customer) needs, culture • Agency personnel become familiar with your capabilities for potential advantages • Often opens doors for other funding opportunities • SBIR/STTR plus the OTHER 96% - tremendous long-term value! • Note: federal law prohibits payment to company under a CRADA, while companies may pay lab for services, which may now be allowed as an SBIR/STTR subcontract.