An SBIR Primer for Government and Small and Large Businesses

This article provides a pragmatic perspective on how small and large businesses can use Small Business Innovation Research contracts (SBIRs)[1] to increase revenue, defray risk, and add new customers. It also explains how government agencies can leverage SBIRs to access innovative solutions and build a robust small business vendor ecosystem.

However, this is not meant to be an exhaustive discussion of the program, and this article will gloss over many exceptions and administrative niceties. The endnotes and figures will add detail, but the goal of this article is to help people understand the basics of how to integrate SBIR into their business strategies and pipelines.

The SBIR Program[2]—A Brief Overview

There are three important things to know about federal SBIR programs:

1. SBIRs fund corporate development of solutions to government needs,
2. The company that develops the solution keeps the intellectual property (IP) and ownership, and
3. Solutions developed under an SBIR can be procured from their creators without competition.

A government agency’s SBIR program allows the agency to fund the development of technologies that will help to deliver on its mission. Eleven agencies[3] currently participate and, predictably, the types of solutions they fund reflect their underlying missions and goals. (Refer to FIGURE 1.)

As a procurement vehicle, SBIRs are not new, but have recently become increasingly popular as a way to engage the start-up and innovative small business community, which might not otherwise be interested in government contracting but is hungry for growth capital.

Each agency structures its program slightly differently, but the following elements are consistent:

• A need is identified and published as an SBIR solicitation—i.e., a “SBIR topic”;
• Companies with ideas propose solutions;
• A review committee evaluates the proposals based on their technical and commercial merits and whether the proposing team will be able to execute;
• Winners build a proof of concept of their solutions under an SBIR Phase I, which typically last between four and 12 months, and typically funded between $50,000 and $200,000 (refer to FIGURE 2);
• Following Phase I, progress is reviewed, and promising companies go on to Phase II;
• During Phase II, companies mature their proofs of concept into a prototype over 12 to 24 months, with Phase II funding ranging between $500,000 and $1.5 million; and
• Following successful prototype development, the government can purchase the solution without competition under a Phase III SBIR contract.

Two Important Variants

While all the SBIR programs share the same basic goals and three-phase structure, there are two important variants—namely the National Science Foundation (NSF)’s SBIRs and “dual-purpose” SBIRs.

• The National Science Foundation

  Generally, SBIRs focus on an agency’s needs. However, the NSF’s SBIR topics focus on needs in the American economy at large. For example, the NSF saw promise in 3D printing a decade before it became popular and was issuing SBIR topics to help the technology and industry mature. As a result, NSF topics tend to be much broader than those of other agencies and they tend to fund much earlier stage technologies. 

• The Dual-Purpose SBIR[4]

  The “dual-purpose” SBIR (a.k.a., the U.S. Air Force special open-topic of the AFWERX SBIR for commercial technologies and solutions), is different from a traditional SBIR in two important ways:

  • First, there is no defined need in these SBIR solicitations—instead, companies identify a problem that the agency has as part of its proposal; and
  • Second, the proposing company must already have a commercial solution that addresses the bulk of the identified government need.

     

    An SBIR Primer for Government Contract Managers

    There are three important things to know about SBIRs for government contract managers:

    • An SBIR allows program offices to get bespoke solutions using research and development (R&D) money,
    • You can easily contract for tens of thousands of products that have already been funded through SBIR, and
    • The SBIR Phase III is a highly flexible contracting mechanism for reaching small businesses.

      (Refer to FIGURE 3.)

      Someone Else’s Money

      SBIR funding comes from an agency’s R&D budget, not a program’s operating budget; therefore, they allow for procurement of custom solutions without impacting operations. Of course, once the solution is built and you want to buy it, that would come out of your budget, but SBIR purchases can be funded with any color of money.

      The process for submitting an SBIR topic varies by agency, but by and large the following traits are shared:

      ●      A need is identified for one of your programs;

      ●      You talk to your agency R&D team and discuss whether they think it is a good candidate for SBIR; and

      ●      If it is, they can push it out as an SBIR.

      This is not a quick process and you can easily wait six to 12 months for your need to be published (and another 18 to 24 months before a solution is developed). However, in the end, you get a bespoke solution.

      Solutions Ready-Made for Government

      Each agency has its own mission and unique requirements, but there is a lot of overlap, especially within the Department of Defense (DOD). Over the decades, the government has funded tens of thousands of solutions to different problems at different agencies. So, before starting your own SBIR, search for solutions that have already been developed. As previously mentioned, it doesn’t matter who funded the original SBIR; you can still sole-source it. The process for finding previously funded solutions is effectively the same as the process for finding topics, which will be discussed in the following section.

       An SBIR Primer for Small Business Contract Managers

      There are three important things to know about SBIR for small business contract managers:

      ●      Winning an SBIR contract gives a small business a tremendously flexible vehicle for selling both products and services,

      ●      It is a fantastic way to break into a new agency,

      ●      It is an outstanding way to turn your service into a product.

      (Refer to FIGURE 4.)

      SBIRs as a Contract Vehicle

      One of biggest advantages that established government contractors have is the variety of contracting mechanisms they can offer to a customer. The customer wants to use a General Services Administration Multiple Award Schedule? Great! The customer wants to use a Governmentwide Acquisition Contract (GWAC)? Sounds good! But getting on a Schedule is expensive and you generally need a track record before you can get onto a GWAC or an indefinite delivery/indefinite quantity (IDIQ) contract.

      Here’s some good news: When you win an SBIR, you get an incredibly flexible contracting vehicle. For example, imagine you are a cybersecurity services company. You win an SBIR to develop a product that addresses a government cyber need. Then, two years later, the government wants to buy cyber services from you, but you don’t have a contract vehicle or other sole-source mechanism for them to use. Well, it turns out you do. Any government agency can give you a sole-source contract for the product you built under an SBIR, along with associated services.

      One thing to be aware of is that the SBIR sole source (known as a Phase III) is not well understood by most contracting offices, but it is Federal Acquisition Regulation–approved and has been used across agencies. You might have to invest some time in training your customer on how to use it, but if you need it it’s there.

      SBIRs as a Way In

      The SBIR program can also help you break into a new agency. Again, this is easiest to illustrate through an example. For example, let’s say your company does cybersecurity work for the Navy, but you see lots of opportunities at the Air Force. The typical way to break in is to build relationships and bid on Air Force cyber services contracts, but if the incumbent ecosystem is entrenched, it can be difficult for a small outsider to win.

      Another way in is to respond to an Air Force cyber SBIR. SBIRs don’t have past performance requirements and the SBIR review committees often are not connected to program offices. As a result, SBIR reviewers are less worried about Air Force–specific knowledge and instead evaluate more on the merit of the technology proposed.

      If you win the SBIR, you can then co-develop a solution with the office that originated the need, and then sell the solution to them, creating excellent customer intimacy. Additionally, once you have a product a customer wants, every prime contractor already serving that customer will be eager to meet with you to explore ways to collaborate.

      SBIR Your Service into a Product

      Services are fantastic because they allow you to start a company with very little money and they create amazing customer intimacy. However, they tend to have low profit margins and are difficult to differentiate and scale. To address this, many services companies reinvest some of their profits to develop products that integrate with their services. This is a highly successful strategy, but if you don’t have the money to reinvest, consider applying for an SBIR related to your services and using that to develop your first product. By adding a product, you can:

      ●      Increase your credibility—As a services company, you are fundamentally selling the promise that your people can deliver, but only after the contract has been signed. If you have a product, your customer gets to see what it can do for them before they buy.

      ●      Differentiate—Every cyber services company is selling people, but your people are super-charged thanks to the exclusive products they have access to.

      ●      Get higher margins—Once product development costs are paid back, products tend to have much higher margins.

      ●      Expand in the commercial market—If your product addresses a government need, there is a pretty good chance that it meets a commercial need in commercial markets, too.

      Winning an SBIR

      There are three important things to know about winning an SBIR:

      ●      You need to be extremely patient, as you may have to wait months for a relevant topic;

      ●      Don’t chase SBIR topics that are outside your core service lines; and

      ●      Only pursue an SBIR if you can turn it into an ongoing revenue stream.

       

      Is the Juice Worth the Squeeze?

      There are no set roles at most small businesses, so days are busy and fragmented. With that in mind, the following is a low-effort approach to tracking SBIRs and making go/no-go decisions about applying for them:

      1. Let someone else do the tracking for you—Go to your favorite government market research platform and create an SBIR keyword search. At the moment, SBIR.gov doesn’t have an alerts feature, so you’ll have to look for one.^[5]
      2. Decide whether the juice is worth the squeeze—When an SBIR comes out that matches your capabilities, evaluate whether it is worth spending 100 hours on a proposal. After helping dozens of companies with SBIRs and writing them, this author has learned that 100 hours is a good planning estimate for a first SBIR proposal. The risk-weighted dollar value of proposing varies by agency, both in terms of funding and chances of winning, but $100,000 for DOD agencies and $70,000 for civilian agencies are reasonable estimates.
      3. Decide whether this is the beginning of a recurring revenue stream—SBIR funding is great, but product development is expensive, so the profit margin on SBIRs tends to be low. Proposing on an SBIR only makes real sense if you can turn it into a larger, preferably recurring, revenue stream. So, ask yourself whether the product developed under the SBIR will:
         • a) Help you sell more services;
         • b) Lead to revenue in direct product sales; or
         • c) Allow you to access a new customer.

           If the answer to a, b, and c is “no,” then it probably isn’t worth pursuing. 

• Caveats for NSF

  Evaluating whether to pursue an NSF SBIR is a bit different from the process previously described. As such, ask yourself the following two questions:

  ●      Do you have a truly revolutionary idea for a technology that will push the state of the art in an important industry/technology domain?

  ●      Do you have one or more PhDs who did their dissertations on that tech?

  If the answer to either is “no,” then don’t apply. If the answer to both is “yes,” start reaching out to the NSF SBIR program office. They are great and shockingly accessible. Then, follow the process previously described.

   

• Caveats for the Dual-Purpose SBIR

As with NSF, there are a million exceptions that apply to dual-purpose SBIRs, but here are two questions to ask yourself:

●      Do you have a commercially successful product?

●      Does DOD have the same need as your commercial customers?

If the answer to either is “no,” then the dual-purpose SBIR probably isn’t right for you, but if the answer to both is “yes”—

1. Identify groups within the Air Force that have the same need as your commercial customers.
2. Begin reaching out to the groups and do some customer discovery to learn:
   1. Is this a big or a small problem for them?
   2. How does their use align or differ from your commercial customers’ use?
   3. What is their reaction to your solution?[6]
3. If there is good overlap in the needs and interest in your solution, then apply for a dual-purpose SBIR.

An SBIR Primer for Large Business Contract Managers

There are three important things that large business contract managers should know about SBIRs:

●      “Small business” means that you have fewer than 500 employees,[7] so you might still qualify;

●      SBIR can be a leadership development tool for you; and

●      You can get most of the benefits of SBIRs through partnerships with small business winners.

Large Can Launch Small

Large companies face challenges in delivering entrepreneurial practices, products, and services to government clients. Doing so involves overcoming some fundamental hurdles, including:

●      How do you develop entrepreneurial thinking in a large organization?

●      How do you retain future leaders who have lots of options?

●      What do you do with employees who are between contracts?

●      How do you credibly bring innovation to government when you’re the incumbent?

●      How do you identify small businesses that understand your culture and meet your standards?

At the risk of overpromising, the SBIR program can underwrite and become the basis for an entrepreneurship track for up-and-coming leaders in your company. Here’s how:

1. Identify high-potential people in your organization with an interest in entrepreneurship and product development.
2. Help them incorporate a limited liability company (LLC) and register in the necessary systems.
3. When SBIRs come out, help them identify topics that align with their interests and capabilities—which, given that they work for you, likely align with your service areas.
4. (Optional) License technology to them that your company developed that can be part of their solutions.
5. Help them write their SBIR proposals.
6. Give the winner a six-month to 12-month leave of absence to execute his or her Phase I SBIR.
   1. (Optional) You can subcontract with the winner to help with product development and compliance.
7. When the winner completes his or her Phase I SBIR, bring him or her back into your company for four to 12 months—the typical time between Phase I ending and Phase II starting.
8. If they win a Phase II, then they can quit and you can subcontract/collaborate with them on the Phase II.
9. When the Phase II SBIR is complete—
   1. You are uniquely positioned to help sell in Phase III,
   2. You have a new small-business subcontractor that “grew up” in your culture,
   3. You have access to a product built for a government customer,
   4. You are perfectly positioned to provide services that wrap around the product, and
   5. The program and the products give your firm excellent “innovation” credibility.
10. If he or she does not win a Phase II, you get a young manager who has had an extraordinary entrepreneurial experience to bring back into your company.

Traditional SBIR Partnerships

More traditionally, large companies leverage SBIRs by partnering with a small business that has won one.

Once a company has won an SBIR, the government can issue a sole-source contract to that company for the resulting product and services. However, most new product companies are not well versed in systems integration, training, and maintenance, and most do not have existing customer relationships. Helping fill these deficits creates an excellent partnership opportunity for large companies.

With these things in mind, there are three things for large business contract managers to do:

• Keep track of SBIR-funded products that are relevant to you (which is easy if you set up automated alerts)[8];
• Track SBIR solicitations to see if any are worth pursuing through an internal leadership development program or through a partnership; and
• Because tens of thousands of products have already been funded and most of them have never been sold to the government, consider reaching out to the winners to see if they are interested in collaborating with you to complete a sale.

Conclusion

SBIR has existed for decades, yet historically it has played second fiddle to high-dollar research grants and contracting. Thanks to innovative thinkers inside the government and industry, however, the SBIR program is finding a new life at the center of the government’s efforts to attract a new generation of small businesses and acquire the best and most innovative solutions.

Whether you are looking for a solution to your program’s perennial problem, want to build a product, or hope to expand your business, SBIR can provide the funds and customer access you need. CM

Geoff Orazem

• CSO, Eastern Foundry.
• CEO, Agency Capital.

     www.agency-capital.com

    [email protected]

 

Endnotes