Keep SBIR funding opportunties pure

There is a push to revamp the SBIR/STTR system. One aspect of the change is to allow for private investors, angels and venture capitalists, to have more leverage. Bad idea.

SBIR (as the name implies) was intended for small businesses. Large businesses, such Raytheon and Boeing, already have relationships with the government. SBIR was intended to provide a venue for small entities to interact with the government and share in opportunities.

Today (2007-2008), venture capitalists, and even angels, no longer represent small businesses. Funding has moved upstream – toward bigger opportunities, leaving a void for businesses. To give VCs any significant say in how SBIR/STTR money is distributed would be shutting down one of the few potential sources of funding (< $1M) to innovative companies.

SBIR/STTR represents a choice.

- SBIRs can be an alternative to private investment. Why eliminate a viable alternative for funding. Why shut down an alternative to angels and VCs.

- SBIR can represent a way for small companies to bootstrap. A small company can retain more value/equity while bootstrapping and developing initial technology. SBIR is free money, in terms of equity.

- SBIR offers opportunities based on different criteria than VCs. Who is to say VC-think is the only way. There are plenty of worthy projects that would not receive funding (especially with the move upstream), from VCs.

The current system works fine. It does not preclude the involvement of VCs – even when VCs own more than 50%. Keep in mind:

- SBIR money is to be used primarily for development (R&D).

- SBIR is a three phase protocol. Phase 1 is feasibility and planning, phase 2 is build out of working prototype, and phase 3 is commercialization.

- SBIR phase 2 funding generally has a maximum of $1M.

This is perfect, particularly in today’s funding market. Angels and VCs are primarily interested in less risky propositions that have very large, Google-like potential (lol). They want to see working products before investing. SBIR provides an opportunity for small companies to build working prototypes at a funding level angels and VCs have abandoned. And, there is nothing to prevent private investor involvement after phase 2.

In fact, having any angel/VC participation in SBIR/STTR programs is just bad. It will have the affect of diminishing the chances for legitimate small businesses to receive funding. VCs are have fairly sophisticated machinery in place in starting up companies. Once SBIR/STTR programs become available to them, they will simply incorporate those programs into that process, giving them an unfair advantage over the true intended recipients of the grants.

I was surprised to learn that an Angel/VC group is behind the push to elbow their way in to the SBIR/STTR program. You can see that this group is fairly opinionated. They believe they define what “promising” means when evaluating new companies and ideas. This is exactly why an alternative, like the SBIR/STTR is needed.

Personally, I would like to see angels and VCs start acting entrepreneurial. When I hear these types of investors talk, they conjure the vision of the high school student who is on the baseball team. As a baseball player, he is rather average, but has grandiose visions of being A-Rod. I have heard countless angels who have a couple hundred thousand to invest, but only in billion dollar opportunities. Pleeeeease, be real.

The SBIR/STTR program is not perfect. But allowing angels/VCs to be involved is a wrong direction. Some simple improvements would be: build awareness of the program, streamline the application process, faster turnaround on applications, and provide a division to fund more commercial opportunities (non-defense).