GOVERNMENT GRANTS

Betsy M. Ohlsson-Wilhelm, Ph.D. and Katharine A. Muirhead, Ph.D.

SciGro, Inc.

The Small Business Innovation Development Act of 1982 requires that federal agencies with R&D budgets in excess of $100 million set aside a percentage (currently 2.5%) of their extramural research budget to fund innovative research in small businesses. Though grants are available from a variety of agencies including state governments, local governments, and foundations, by far the largest amount of money to support biomedical research is available through federal programs, primarily the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, associated with the National Institutes of Health and the Department of Defense. The NIH operates one of the largest SBIR/STTR programs focusing on biotechnology and biomedical products.

Many other governmental agencies also have SBIR/STTR programs but may differ in the number of solicitations (i.e. calls for applications) per year, deadlines for receipt, guidelines for money and duration of each phase, adherence to guidelines, and the number of awards possible per company prior to commercialization of a product. The DoD maintains a commercialization index; if your company does not make good use of its SBIR funds, it will not get more. The DoD SBIR program strives to achieve an 80% commercialization rate for those products that receive support.

Grants are in theory an attractive way to obtain seed funding without having to distribute equity. Grant applications take time to prepare and there may be a lag time of 6 to 9 months from submission until receipt of funds. Once the funding comes through, the company is restricted to following an approach it may consider out-of-date (since startups change their direction frequently). A company should carefully assess whether or not to include grants as part of its fund-raising and business development strategy. The most critical goal for a small business is getting its first product to market.

Before applying for government grants, consider the following key questions:

• Is the proposed work a critical path activity? Would the company carry out the proposed work even if no grant funds were available?
• Will the proposed work shorten the time to market for the first product? Could the company solve a technical problem faster if it had more money? Keep in mind that some solutions require more time rather than more dollars.
• Will the funds arrive in time? What is the time frame in which the company needs the money to do the work? Does the company's need match the timeframe in which money would be received if the grant application were funded? Would it make more sense to seek funding for a project later in the product development plan?
• What is the chance of success? Is the company a competitive grant applicant? Most grant programs receive many outstanding applications; keep in mind that you are competing with companies that have up to 500 employees and established track records.
• Can we afford it? Can the company afford the time, resources and/or missed opportunities that writing a successful grant application and managing the interaction with the granting agency will cost? Even the simplest grant application will require ~1 person-month to prepare and administer.

Winning a grant does not substitute for getting a product to market. Business conditions and priorities change, sometimes very rapidly. It is possible that doing the project in the way you proposed when you were writing the grant is no longer in the best interests of the company by the time the grant is awarded. If this occurs, you must be prepared to grit your teeth and decline the award.

Many of the committee members who review your grant application are academicians, who may or may not recognize that good science is necessary but not sufficient for making good products. Therefore, well-reviewed grants do not substitute for the money and advice coming from real investors or corporate partners.

HYPOTHESIS VS. ENGINEERING APPROACH

Grant applications are typically either hypothesis driven or follow an engineering approach.

Hypothesis driven grant applications identify questions/unknowns critical to product development. The usual approach is to form a testable hypothesis with quantifiable outcomes. One then tests the hypothesis experimentally, using appropriate methods and controls. Results are analyzed and interpreted and any new unknowns critical to product development are identified. This process is then repeated until all critical unknowns are identified and under control. It is important to identify the minimum information needed to proceed to the next phase of product development. If the company is seeking general scientific, rather than product specific, information to extend a platform technology, it should apply for an R01 grant, the same program that supports basic research at universities and other research institutions. Companies are eligible for many programs supported through the R01 mechanism; information on R01's can be found at http://www.nih.gov/funding.

The engineering approach is commonly used with medical devices. In this case, an innovative and practical solution to an important unsolved commercial problem is presented, target performance specifications are set, and a novel prototype is developed. The prototype is then tested against the proposed target specifications and improved until the target specifications are met. Again, the company should be clear as to what the minimum performance specifications are to allow the company to proceed to the next phase of product development. Perfection can exact a tremendous opportunity cost.

Most granting agencies require that the proposed research be truly innovative, either scientifically or technically. They are not interested in funding development of "me too" products. If you are developing the n^th^ beta-blocker -- don't bother applying. Abstracts of successful awards can be found in the CRISP database located at https://www-commons.cit.nih.gov/crisp/.

UNCLE SAM AS AN INVESTOR

The government is interested in catalyzing commercial development of novel technologies and prototypes, new products and services, new knowledge, and new businesses. It accepts its return on investment in the form of taxes, both corporate and personal, rather than equity. The government, therefore, is a patient investor that adds value without diluting equity. In addition, the grant programs provide free due diligence for third party investors, as well as leverage for investor and/or partner capital. The government does retain limited intellectual property rights (so-called "walk-in" rights), to be exercised only if your company is unwilling or unable to provide the product at a rate consistent with national needs.

In fiscal year (FY) 2002, the NIH made SBIR grant and contract awards totaling $484M. Data on SBIR and STTR awards can be found at http://grants.nih.gov/grants/funding/sbir.htm\#data.