Entrepreneurship Essentials Part II: Government Grants For Commercialization And Small Business
By Greg Villareal Ph.D, Asis Lopez B.S., Dorn Carranza Ph.D/MBA Authors’ notes: the NSF has first-use branding rights for the term I-Corps. Citations are indicated within the (italic parenthesis). (*) indicates a visual description at the end of the article.
In part I of the “Entrepreneurship Essentials” (EE) series we revealed the non-sinusoidal(*) journey of two SACNAS academic entrepreneurs and their long and hard fought campaign of getting an idea from the bench to the marketplace (1). One big misconception we deconstructed about them was that they were risk-seekers when, in fact, these entrepreneurs sought to reduce and manage their risk exposure at critical commercialization milestones; including, for example, identifying and protecting intellectual property (IP), incorporating a legal entity and assembling a strong management team.
Traditional Startup Funding Sources
In many accomplished cases, you will hear about startups raising private money from the “4Fs” (founders, friends, family, and fools), Angel Investors, and Venture Capitalists who fund early rounds and lead to massive success. But, did you know that more than 90% startups - the untold stories - fail? This could be due to many elements such as a dysfunctional team, wrong product-market, or simply running out of money.
When investors commit, they reduce their risks by performing due diligence on the technology and team, then eventually take equity (dilutive ownership) of the company. However, adroit entrepreneurs aren’t just trying to raise money from any investor, but rather someone who will add value to the company in the form of growth strategy, network affiliations, and/or follow-on capital. There is an upside to raising private money — the idea has a higher probability of reaching the market. The downside, from a founder’s financial perspective, is for every private dollar raised, equity of the company is relinquished to the investors. But that’s just the point, there’s nothing wrong with getting external, albeit dilutive, help when innovating. It is essential for a healthy startup. But imagine taking your idea to the marketplace with ‘free money’ from your “5Fs” (friends, frenemies, familia, followers, fellow Americans) without diluting shares in your company. Guess what? It’s already happening!
America’s Seed Fund
As a taxpayer, did you know you’re an investor in innovative technology? In 1982, under President Reagan, an act of Congress created one of the largest and unique public-private partnerships through the National Science Foundation (NSF) Small Business Innovation Research (SBIR) program. “America’s Seed Fund” signaled a new era in workforce development by providing early-stage capital to small innovative US-owned companies to advance their technology through government grants (2). In fact, under the Obama Administration your $42-Billion-dollar investment (FY2016 $877M) has already brought new technologies and cures to the market which improve national security and quality of life.
Ranging from nearly a quarter of a million dollars to several million, successful applicants can bring their ideas and technology to market through three phases of the SBIR which include feasibility (proof-of-concept), development (research & development) and commercialization (use of private funds). At the moment there are 23 National Institutes of Health (NIH) institutes out of 27 participating in the program.
Small Business Technology Transfer program
Ten years after the SBIR was formed, Congress approved the Small Business Technology Transfer (STTR) program to facilitate partnerships between non-profit research institutions and innovative small business. Data from a recent comprehensive report (3) by the National Academies concluded that the STTR program has strengthened company and university researcher connections; and, that three out of seven scientific teams were able to file at least one patent and publish three or more peer-reviewed research articles from the STTR awards. As a faculty researcher, the STTR allows you to commit more than 50% of your time towards the small business as a full-time employee at the university. Both programs offer undergraduates $8,000/year to participate and provide competitive diversity supplements to qualified applicants.
The SBIR and STTR programs are available from both federal agencies with respect to program structure, investigator-initiated submission, and use of grants. However, there are distinct differences with grant solicitation times, submission procedures, review systems, and other programmatic flexibilities (such as fast-track application, a Commercialization Readiness Pilot Program, and re-submission options).
Do these programs work and are they successful?
Yes. According to the report, at least two in five STTR projects reported positive sales and licensing deals and nearly a third expected future revenues. Of those surveyed, 71% respondents said that follow-on funding ranging from federal agencies, research institutions to foundations and private investors were secured from their STTR projects. Not only is the funding non-dilutive but the intellectual property rights are retained by the company.
But here comes a sobering reality check to this success story: Women and underrepresented (UR) individuals are accounting for only 8–10% of SBIR/STTR awardees. The programs also considered ‘Asian Indians’ as minorities in this context. And, out of 263 STTR survey respondents only 3 Hispanics, 3 Blacks, 1 Native American were company owners!
Furthermore, a recent study on the NSF SBIR (4), which reported Principal Investigators (PIs) who were Hispanic and Native American only made up 1.3% and 0.2% of the respondents, respectively, indicated this program also fell short meeting a legislative objective to — “foster and encourage participation by minority and disadvantaged persons in technological innovation”. Not only does this Congressional mandate have a disproportionate and negative impact on SACNAS members but also on the American and global economy.
Is applicant tracking or low UR innovators application rates a real issue?
We posed these two questions to the NIH and here is what the SBIR/STTR Program, Office of Extramural Programs had to say. “For the past several years, HHS (U.S. Department of Health and Human Services) has bolstered small business outreach efforts to reach underrepresented scientists and socially and economically disadvantaged businesses (SDB). HHS tracks the participation of these communities in the SBIR/STTR programs. To reach a more diverse group of underrepresented scientists and SDB, HHS has formed workgroups with the Small Business Administration and internally at HHS. The workgroups conduct research to better understand these communities, and discuss the broad and specific challenges these groups may face with high-growth entrepreneurship.” They outlined specific activities which included:
1. Examining HHS SBIR/STTR application trends for SDB.
2. Gathering best-practices from multiple federal agencies that participate in the SBIR program for reaching SDB.
3. Analyzing the challenges underrepresented scientists face in entrepreneurial career paths.
4. Identifying and cultivating relationships with professional organizations that serve minority entrepreneurial communities.
Sounds good. You can count on SACNAS to help, HHS.
Intervention to Increase Commercialization Participation and Success
There is much collective work (and opportunity) to be had. That’s why in 2015 the Obama administration revealed an ambitious commitment to advance inclusiveness in entrepreneurship. For example, through the Small Business Administration’s Growth Accelerator Fund (5) the government is investing millions to advance innovation accelerators that also have a direct impact on women and minority entrepreneurs, with some funds specific to Native American communities (we’ll cover this in EE part III). But perhaps more scalable and effective is the government’s resolute commitment to a unique and innovative program where the core philosophy is to teach and apply the ‘Scientific Method’ to starting a business and identify ‘Product-Market’ fit.
The NSF I-Corps Program
Started in 2011, this program was specifically designed to help academic scientists, engineers, and affiliate institutions explore whether or not their applied research could be commercialized and turned into a successful company. The NSF I-Corps program introduces “design thinking” and incorporates an “entrepreneurial mindset” to the innovator’s experiments which may help NSF realize a return on investment from academic grants. In addition, program instructors encourage the innovator and team to conduct 100 interviews on ‘end users’ (potential customers) who will use the technology. Participants continuously point out that this invaluable exercise may save three years of work. This reinforces and helps them understand how and who will really be using the technology, and if it can really benefit society.
Now here comes another reality check: four out of five applications for Phase I SBIR funding get rejected! But fortunately the I-Corps program is specifically designed from the “Lean Launchpad” method (6) to help teams develop, refine and prepare their idea and product for the market place, and in many cases competitively apply for the SBIR/STTR. This is where NSF I-Corps Program Director, Lydia McClure, PhD., pointed out, “there is no shortage of funding mechanisms for entrepreneurs, especially on academic campuses”.
However, she echoed the discourse heard that “science and engineering graduate students and postdocs are falling through the cracks of entrepreneurial support. And that’s really where I-Corps found its sweet spot.” Dr. McClure added that the program has really evolved to “empower graduate students and postdocs to take on risk and be aware of what that risk is”. She emphasized that I-Corps is NOT a mini-MBA program nor do they dole out business advice but rather coach teams to ask the right questions to find the answers for their ideas.
More Uncomfortable Questions
We asked if UR scientists were equally represented in the NSF I-Corps program, which in turn, helps entrepreneurs become more competitive for the SBIR/STTR grants. Currently the NSF employs two methods for tracking participant ethnicity through the NSF I-Corps program:
• Automated process: PI of the 3-person team (PI, entrepreneur lead, mentor from potential industry) submits a proposal (after ad hoc review) via NSF form indicating racial and ethnic minority, disability, 3rd gender.
• Systematic process: started in 2015 through VentureWell, which collaborates with the NSF to deliver the comprehensive training curriculum as part of its NSF I-Corps initiative.
The data is still being collected but the predicted answer may be painfully (and historically) expected. That’s why SACNAS Linton-Poodry Leadership Institute (7) Alumna Chinonye “Chi-Chi” Nnawke, PhD is working tirelessly to help change that disparity through her AAAS Science & Technology policy fellowship appointment serving the NSF I-Corps program. Her primary objectives are to broaden UR groups’ (veterans, ethnic and racial minorities, 1st generation background, low income, LGBTQ, immigrants) participation at the team, institutional (nodes and sites), and course instructor level.
Building a Bridge of Awareness and Action
During the interview (8), Dr. McClure said she encourages students and innovators to work with partners and not to go at it alone because “100% of 0 will always be 0. But if they want to work with other people they can get at least 80–30% of ‘a lot’ going forward.” This also holds true, especially within social innovation organizations, like SACNAS.
SACNISTAs often face challenges (like startups) but we find opportunities to achieve common goals through collective strength. Recently a working group within SACNAS (including the authors, Chi-Chi and other leaders) was formed to help broaden awareness and preparedness of the SACNAS community to participate in the innovation economy. If you are interested in lending your voice to entrepreneurship program ideas we encourage you to connect with us via social media or email (URinnovator[at]gmail.com).
In closing, one of the goals for the Entrepreneurship Essentials article series is to create awareness of opportunities. Whether this is from professional development sessions (*) at the SACNAS conference (9), information dissemination, or developing a startup ecosystem of under-utilized talent to improve the US economy, which is already ‘great’, we each have a civic duty to utilize our individual strengths to work together as one community.
Up next in the EE article series: “Raising Private Funding through the Startup Ecosystem”.
CITATIONS
- https://medium.com/stem-and-culture-chronicle/the-academic-entrepreneur-4a07826e4b74#.r9o96lg3j
- https://www.sbir.gov/node/828355
- http://www.nap.edu/21826
- http://www.nap.edu/18944
- https://www.sba.gov/offices/headquarters/ooi/resources/1428931
- https://venturewell.org/lean-launchpad/
- https://sacnas.org/events/leadership#LPSLI
- https://medium.com/@GVPhD/keeping-an-eye-on-american-innovation-the-i-corps-program-22c07b9796c#.ir2lase3n
- https://medium.com/@GVPhD/entrepreneurship-essentials-session-at-sacnas-1b98f1537a4d#.e9aexrcu6
About the Authors
Greg Villareal, PhD is a contributor to the start up ecosystem and a proud #GoSpursGo and #LFC fan; Asis Lopez, B.S. is a BioMedEngineer Graduate Student at Tulane University, SACNAS Board Member, and not cutting his hair anytime soon. Dorn Carranza Ph.D/MBA is Senior Program Officer for Venture Development and Entrepreneurship at VentureWell, he does a mean Peruvian cumbia.
