illustration by Phillip Ortiz

$2 Billion in SBIR Grants

April / May 2009 By: Sherry Robinson Volume 7 Number 2

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Think your kids spend too much time playing video games? What if those games were educational or, better yet, helped them improve their health?

"Escape from Diab" and "Nanoswarm: Invasion from Inner Space" are fun. That's the first requirement of a game. But Archimage Inc., a Houston design studio and game developer, uses role playing, story and graphics to teach, train and change attitudes and behaviors.

The games's ultimate goal is to prevent childhood obesity and type 2 diabetes, which is why the National Institutes of Health funded this project with a Small Business Innovation Research (SBIR) grant.

Many federal agencies need innovative new technologies—€”everything from sensors to software—€”and hope private industry will develop and commercialize them. But the path from research to commercialization is long, risky and expensive, particularly for startups and small companies.

In 1982 the U.S. Small Business Administration began the SBIR program. Each year eleven participating agencies set aside 2.5 percent of their R&D budgets for small businesses (fewer than 500 employees). Participating agencies are the departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security and Transportation, as well as the Environmental Protection Agency, NASA and the National Science Foundation.
Agencies designate R&D topics, accept proposals and award funding based on the applicant's qualifications, degree of innovation, technical merit, and future market potential. Phase I awards, up to $100,000 for about 6 months, support exploration of technical merit or feasibility. Phase II awards, up to $750,000 for 2 years, support R&D and evaluation of commercial potential. During Phase III, the company must find private funding to commercialize the product.
A parallel program, the Small Business Technology Transfer (STTR) program, provides grants to small companies with an institutional partner. It has five participating agencies: the departments of Defense, Energy and Health and Human Services; NASA; and the NSF.

Together, the two competitive programs award more than $2 billion a year to some 6,000 companies.

For its money, the government gets new technologies and solutions to problems. In fact, about a quarter of the R&D 100 awardees are the result of SBIRs.

For example, WorldWinds Inc., of Picayne, Miss., developed web-based hurricane storm surge and flood forecasting for NASA. Miox Corp., of Albuquerque, supplied two water purification systems for the Navy's warship USS New York that don't require storage of dangerous chemicals.

And when the Defense Advanced Research Projects Agency (DARPA) needed a more reliable, cost-effective way to make compound semiconductor wafers, J.A. Woollam Co. Inc., of Lincoln, Neb., produced the first high-speed ellipsometers, which use polarized light to nondestructively inspect thin films and surfaces and improve wafer production. The technology is now in use for defense and commercial production.

Companies describe the programs as a financial lifeline and an alternative to loans or venture capital.

As Archimage developed the two video games, it grew from 7 employees to 30 during full production. SBIR funding was critical.

"It literally helped launch us in a whole new market" that wasn't otherwise possible because of financial limitations, says CEO Richard Buday. "There is no better opportunity to grab hold of something new—€”a market or technology—€”and add the skills and experience of new people. When you use your own funds or an angel or venture capital, along with that comes a lot of baggage."

ADA Technologies Inc., of Littleton, Colo., used SBIR grants almost from the program's inception. "We won some of the first grants awarded," says CEO Cliff Brown. The company has won dozens of awards from multiple agencies.
"We use them as a base to operate the R&D portion of the company," Brown says.
"Part of our business model is to use friendly startup research money. It's friendly because we end up with the intellectual property rights. We've been very successful using SBIR grants."

One project, for the EPA, involved developing an arsenic removal system for drinking water systems to help communities address arsenic contamination in groundwater. The problem is acute in the West and some places in the Midwest and Northeast, and the EPA has tightened drinking water standards. ADA's technology also includes the company's Amended Silicate—„ sorbent, a material that can remove both arsenite and arsenate, the forms of arsenic that commonly are found in well water.

Subsequently ADA joint ventured with Denver-based CH2M Hill to form Amended Silicates Inc., which will produce and market a sorbent formulated for mercury; the first target is coal-fired power plants. After 24 years in business, ADA, through the joint venture, is contemplating its first use of venture capital.

DeltaNu, of Laramie, Wyo., won more than 20 grants worth $4.5 million between its start in 1997 and 2007.

"We capitalized totally on SBIR funds, so when Intevac acquired DeltaNu in 2007 every bit of money went to the shareholders," says company co-founder Keith Carron. "There were no investors, no venture capitalists. I had a stock option plan, and all the employees had stock at some level."

DeltaNu used SBIR funding to develop small Raman spectrometers for medical applications and for material identification. It also developed Surface Enhanced Raman Scattering assays that can be used with the Raman device for the rapid detection of prenatal and neonatal metabolic disorders. The grants allowed DeltaNu to hire expertise, develop its first commercial product, protect its intellectual property, and gain more than 5 percent of the Raman market.

Raman spectroscopy is a way to obtain chemical information about the structure and composition of a sample. DeltaNu reduced the device from the size of a small car and cost of $100,000 to a hand-held device selling for around $15,000. It can be used in medical diagnostics, brand security, homeland security and material identification.

For companies like DeltaNu that operate far from the nation's tech (and financial) hotspots, the program is even more important. "SBIR means a lot—€”maybe more so to rural-based companies," says Carron.

That accounts, in part, for New Mexico's rank of 17 nationally in SBIR activity. Companies in the state received 1,391 grants and $374.5 million over the years. Large in land mass but small in population, New Mexico lacked significant venture financing until recently.

"We average about 105 SBIR awards annually with $26 million in funding. It's significant," says Barbara Stoller, director of SBIR outreach programs for Technology Ventures Corp. "I'm so enthused about this for tech entrepreneurs—€”it's their lifeblood."

"We have used SBIR as it was designed to be used—€”to give small companies an opportunity to compete with the big guys," says Tony Tenorio of Applied Technology Associates, an Albuquerque firm that has leveraged the program to win 14 patents.

Nationally, as the nation focuses on economic stimulus, advocates like Stoller and entrepreneurs make the point that SBIR projects are not only shovel-ready, they inject capital into the economy in a productive way.

If anything, the SBIR-STTR programs should be expanded, says Carron, "especially in this economic environment. It's a good way to get capital down to working people."

Archimage's Buday adds, "It's one of the highest and best uses of taxpayer money."

Sherry Robinson is a freelance writer based in Albuquerque.