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Acquiring Federal (SBIR / STTR) Funding for Your Company

Paul Clark
Paul Clark
Last updated: June 4, 2024
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Guest post from Tyler Tatum, 3PhaseSC: Acquiring Federal (SBIR / STTR) Funding for Your Company

You may have heard of a pot of money available from the federal government for research and development called Small Business Innovative Research (SBIR) or Small Business Technology Transfer (STTR) funds.  However, it may be confusing to understand the 11 agencies that provide this funding and what they really want.  The goal of this post is to help you understand these funding agencies and how your business can tap into these non-dilutive funds.

Phase I versus Phase II: The program is divided into two phases.  Phase I is typically between $100K and $300K and is targeted at feasibility.  Phase I projects timelines are between 6 and 12 months.  When I talk about feasibility, I like to ask companies what key “commercialization” questions do your customers demand you answer.  These questions may be directly related to your value proposition.  For example, do customers need to know that you can provide a certain level of improvement over the state of the art (i.e. 50% strength improvement)?  Do you have to show a size reduction over the state of the art?  Do you have to prove your ability to scale while meeting certain costs targets?  These questions are good feasibility questions.  Of course, you may not be able to build the actual product during Phase I.  However, you can build enough of it to test these questions.

Phase II ranges from $600K to $2M, and becomes about creating a Minimum Viable Product (MVP).  The project timeline is typically two years.  A minimum viable product is a product with the minimum set of features required by your customer to purchase it.  In some cases, you may not fully create an MVP in Phase II (i.e. medical technologies often require a large amount of money to create and validate an MVP).

You will hear Phase III mentioned in program literature, but Phase III is someone else’s money (i.e. investors, customers, etc.) that the government will count as a successful add-on funds to show program success.  Phase III SBIR funds do not exist.

STTR versus SBIR: What is the difference between an SBIR and an STTR? First, the amount of money dedicated to STTR is much smaller (~0.75 percent of the federal R&D budget) than the pot of money available for the SBIR program (~3 percent of the federal R&D budget).  STTRs are only available from five of the agencies, where SBIRs are available from all 11 agencies.  The other key differences are that STTR require a research partner (e.g. a university) and 30% of the budget must be allocated to the research partner. The small business only has to do 40% of the work leaving the remaining 30% open to either entity or a third party; whichever best suits the performance needs. Finally, under an STTR the Principal Investigator can be 51% employed by the small business or the research partner.   If you need your research partner lead to be the PI for resume reasons or you need to outsource a significant portion of the work, this can be important.  For an SBIR, you are limited to subcontracting only 33% of the work in Phase I and 50% of the work in Phase II.  Further, the Principal Investigator must be 51% employed by the small business.  Other than these differences, funding rates for both are similar, since there are less STTR proposals submitted.  Therefore, we recommend you look at which fits your needs to guide your decision of SBIR versus STTR, and not let the smaller pot of money drive your decision. 

However, in Phase II it can be advantageous to target an SBIR versus an STTR.  Yes, you are allowed to switch between the two from Phase I to Phase II.  We have found some agencies and subagencies have more trouble funding Phase II STTRs versus Phase I STTRs.  The higher funding limits allow for more flexibility in paying a Principal Investigator out of the company and the higher subaward limits reduce stress over subcontracting large portions of work.

What is SBIR / STTR Fundable: People often ask what type of innovations are fundable through the program.  I often respond with “it depends”.  Each agency is different in their funding preferences.  However, there are some common themes regarding what is fundable and what is not.  Here are my key criteria:

  • Innovative Technology: You have to go beyond a simple iteration of currently available technology.  Further, you have to go beyond patching together available technologies to create something “new”. Agencies are looking for “innovation” in its truest concept.
  • Defendable Technology: Most SBIR / STTR technologies have some IP protection.  This is often in the form of patents.  If it is easy for a competitor to replicate your technology, it is likely not SBIR / STTR fundable.
  • Research Backed: The agencies want to fund technology that will or has required research in order to create the product.  It is often good to think of Apps in explaining this concept.  SBIR / STTR funding will be applicable to Apps where they App is implementing a concept, theory or program that has research backing it.  Apps that are simply the creation of an idea are likely not fundable.
  • Preliminary Data: You must have a basis to show that your idea could work.  In some cases, this will be extensive basic research.  In other cases, you may back up your idea with research done by others in the field.  In all cases, you need to prove that the idea is plausible in the proposal.
  • Product Market Fit: Although this varies by agency, there must be customers in need of your product.  For some groups, like Department of Defense, the SBIR/STTR funding agency may be the end customer.  Therefore, the need stated in the SBIR / STTR topic is the customer need.  In other agencies like the NSF, you must thoroughly understand and present your customer need in your proposal.
  • Technology Actually Fits Topic / Agency: The innovation must fit with the agency need.  For Department of Defense, this may be a very specific need outlined in the topic.   For National Institutes of Health, this may be a key public health need.  For National Science Foundation, they want to fund “game changing” advances in technology.
  • Credible Team: The team executing the SBIR / STTR statement of work must have engineering and scientific talent in the area you are targeting.  Further, your team, including board of advisors, sub awardees and associates, must show both a commercial expertise and engineering / scientific talent.

Use of Funds: SBIR funding is targeted specifically at research and development.  The program does not allow you to spend the money on marketing and selling your product.  Further, if all you need is money to build your proven prototype, then SBIR / STTR funding is not right for you.  SBIRs / STTRs do not fund small or initial production runs of a product.  As mentioned above the money should be used for commercialization research to prove out the questions posed by your customers as buying criteria.

How Can 3PhaseSC Help?: If you are a company in the state of South Carolina, we can help you with your SBIR / STTR proposal.  3PhaseSC is a SC Commerce program to improve both the funding rate and the number of SBIR / STTR proposals across the state.  Our team offers proposal support to include:

  • Help understanding which agency to target
  • Help understanding and creating your story (i.e. value proposition, customer targets, etc.)
  • Help in morphing your story to fit the agencies proposal format
  • Help in the creation of all the documents required to submit the proposal
  • Help in actually submitting the proposal online
  • Help registering your company with all required agencies and websites
  • Help reaching out to program managers, partners and, in some cases, potential customers
  • Post submission support regarding questions you may get from the agency about your proposal

About Tyler

Tyler currently leads SC Commerce's 3PhaseSC program dedicated to helping small businesses pursue SBIR / STTR funding. Tyler has over 20 years of experience in technology focused startup ventures, including 15 years in a management / leadership role. Tyler’s core strength is his ability to turn customer needs into marketable products by facilitating communication between business leaders, current and prospective customers and technology developers. Over the last several years, Tyler helped clients raise over $13M in SBIR/STTR funding. He has also supported four teams as a mentor for the NSF I-Corps program. Prior to Ripple Management, Tyler Tatum served as Brainlike's Chief Executive Officer, where he built revenues from zero to $1 million dollars a year with no outside investment. During his tenure at Brainlike, he was able to acquire over $3 million in defense SBIR / STTR funding. His career began as a programmer at Netuitive in 1996, where his coding efforts helped the company raise their first $1.5 million in capital. He quickly became Netuitive's product manager, where he led the company in selling and delivering their first products in two separate markets. After leaving Netuitive in 2001, Tyler ran Project Planet, a leading environmental services company targeting hotels and hospitality providers. At Project Planet, he achieved over 50% revenue growth in a depressed hotel market while dramatically reducing long-term debt and continuously maintaining positive cash flow. Tyler holds a B.S. in computer science from Cornell University.