Stakeholder Value from SBIR? Think Assets not Revenues!

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A client recently asked me to help him with a presentation that involved a chart that depicted the value derived by “stakeholders” in an SBIR project. The chart only considered the distribution of the funds provided by the grant. That made me think about the whole issue of stakeholder value in SBIR-funded ventures.

Unfortunately, for most awardees, SBIR has little to do with market share or even market definition. It’s basically a Technology-Push facilitator. The Agencies define technology priorities or projects they’d like done. The small businesses propose a project to develop the technology to proof of concept. That’s not the same thing as a product. And most Agencies would never be the customer and buy the result of an SBIR project. They’re strictly being seed investors.

Even for DOD, who does buy things for deployment, the resulting SBIR-developed technology innovation is not usable until it’s integrated into a solution they can actually deploy. They don’t buy technology, they buy complete and fieldable systems. That frequently requires integration and collaboration with a Prime contractor. The DOD market is what the Prime serves. It’s up to the small business to figure out who to team with to enable that integration. Their market is not the final customer of the solution – it’s the Prime. Their challenge is how to make money from what gets developed as a result of the SBIR funding.

A grant revenue distribution diagram depicts how the money invested in the SBIR project by the Agency gets divided up among the project’s participants. That’s not what’s important. It’s all consumed by the project, so it isn’t an asset. What’s more, it shouldn’t be looked at as strictly working capital. Yes, it pays the bills, but only for this project.

A company that looks at its SBIR awards as invested capital, and considers its return on invested capital (ROIC) is more appropriately considering the asset value of the money received.

What’s important from an asset perspective is how the results of the project turn into a strategic advantage for capturing market share. That rarely has anything to do with the Federal Agency that provided the SBIR seed funding. It has to do with the strength of the intellectual property position, and the ability of the company to make the deals necessary to leverage that IP position into cash. Figuring out with whom to make the deals and how that deal is structured is where the value lies. In the final analysis that has virtually nothing to do with how the SBIR award revenues were distributed.

Unfortunately, the SBIR Program was never designed to even deal with this. It was strictly to be a way to give a small technology business a fair chance to get the seed funding. As SBIR was conceived by Roland Tibbetts back in the late ‘70s and implemented in the early ’80s, commercialization was NOT intended to be an Agency concern. While it did successfully open the door to small businesses, not including direct support for end-use deployment was probably short sighted, as, arguably, there’s no other good way to determine return on investment (ROI).

The current reauthorization legislation is attempting to remedy this by providing some requirements for the agencies to fund Phase III and gather data on what SBIR funded companies do with the technology that gets developed. As it currently stands, virtually no consistent or reliable data on SBIR commercialization activities exists, other than ad hoc anecdotal reports.

Marketing and market research of technologies which have some IP protection are clearly keys to figuring out how to make money from what’s been developed. Business success is most quickly (and sometimes ONLY) achieved when selling to a Market-Pull. But, the Agencies are quite specific about allowable costs in SBIR projects, and marketing, market research, and patent prosecution are explicitly NOT allowed to be included in SBIR budgets.

This is a classic Catch-22. The ROI of an SBIR project is measured on what money the company can make from selling the developed technology, but they’re not allowed to use SBIR money to figure out how to do that. What other money do they have? And the reauthorization’s inclusion of required Agency commercialization support may not be able to overcome this without significant paradigm modifications to what the government allows its money to be used for, as it’s the Federal Acquisition Regulations that define allowability of costs.

So, for “stakeholders” in an SBIR related venture, there’s nothing to be gleaned by simply looking at award revenue distribution.

Who are the “stakeholders” in a venture anyhow? I see them as everyone who has something to gain or lose by associating with the venture. This includes the venture’s founders, owners, employees, suppliers (of all goods and services including consultants), investors (who may or may not be owners), subcontractors, and customers. It may also include those who are building a “culture” (e.g., a professional association) where the venture plays a supportive role.

A “Stakeholder Value from SBIR” chart is, therefore, much more complex than a simple revenue from the grant depiction.

Sadly, there are many “SBIR companies” out there incapable of thinking strategically from a market-driven perspective. They do nothing more than win SBIR awards, proudly looking at the Phase I/II grant/contract revenue as their “bottom line” end game. These “lifestyle companies” (some call them "SBIR Mills") are, for the most part, not sustainable in the long term and doomed to eventual failure. They don’t start out that way, but find that making that transition to commercialization is not automatic.

Phase III is not an entitlement. It requires an entirely different focus and talent for execution not attainable by the founders or technically oriented staff. So, to survive, they stay in their comfort zone – winning SBIR awards. For them, ROI is moot.

Value is characterized by, among other things, ROI expectations. Who has them? How do we measure them for the companies and their stakeholders – including their investors? For the Agencies? For the Taxpayer? Lots of questions.

How we frame the answers may determine whether the SBIR program flourishes and grows as an innovation driver, languishes as an “entitlement”, or even survives. Any thoughts?
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SBIR is a strategy, not an end game.

We're in the midst of a campaign to get the SBIR Program reauthorized by the Congress. Everyone agrees that the opportunity that SBIR’s early stage high-risk funding gives to emerging technology businesses is unparalleled. SBIR has been a stimulus for such small businesses since it was created in 1982. Nowhere else can a fledgling business get no-strings money for developing new and innovative technology. Much of the current debate is pretty prosaic: it’s mostly about how much money should be made available by the participating Federal agencies, how much can be awarded for the phases of a project, which companies are eligible to compete for it, and how efficient should the funding process be.

But some of the debate is correctly and appropriately centered on whether the SBIR program is being effective in producing results. Some say that should be measured by computing a comparative Return on Investment (ROI) for the Federal agencies that provide funds. Others say that it’s more a matter of how much revenue derives to a company that begins selling products developed with SBIR funding. Gathering data to compute either of these metrics has proven difficult. But, either way, what it comes down to is that SBIR isn’t going to be effective unless companies use SBIR awards as a strategy for effecting business growth, not as an end game.

Only in the past couple of years have any of the agencies focused resources on improving the likelihood that SBIR funded technology ever evolves to something suitable for end use. The recently established DOD’s CPP and the NIH’s CAP Programs, for example, are good starting points but it’s too soon to see if they’ll produce any definitive results. But fact is that these agency “commercialization” programs won’t produce results unless the companies treat their SBIR funding as a strategic infusion of capital to spur technology development and not just revenue.

The agencies won’t help them do this. Why should they? That’s not their responsibility. If the company completes the work that they proposed to do, the agency is satisfied. And, only some of the agencies ever intend to be customers of the final product that evolves from the funded development. To be blunt, since the SBIR agencies (really they’re your investors not yet your customers) have no equity stake in your future, if they’re not interested in buying the end result (and actually becoming customers), they don’t care if you survive beyond the term of your grant!

For many (some would say most) SBIR companies, the top priority is first getting money in the door to pay expenses before the credit cards are maxed out, and if that’s successful, then to continue to submit proposals and win awards to support the lifestyles of the principals until such time as development is done. SBIR is used as a tactic to produce revenue. And being “done” is some nebulous future event that, for many, means, “Now that I’ve built it, someone will buy it”. It wasn’t envisioned to be that way, but it’s what has evolved to be a pervasive SBIR paradigm. Unfortunately, it only rarely produces commercialization success.

I propose that an innovative shift in thinking must take place to change the paradigm. If you win an award, think about the SBIR funds as a grant. (Yes, I know it’s already a grant – but keep reading!) Now think of that grant not as operating revenue, but as capital that you’re investing in developing a marketable product. Only propose SBIR projects that have a chance to actually produce a marketable product to a pulling market. Yes, it means passing on topics that you might be able to win, but have a very limited market to sell to. To do this means thinking strategic. It’s the only way you’re going to maximize your Return on Invested Capital (ROIC) – a metric you can compute and track.

Unfortunately most small businesses are so strapped for cash that they don’t think they can afford to think strategic. And they’re more wrapped up in the thrill of invention than they are on what’s got to be done to move the technology along to market readiness. Indeed many haven’t even assessed whether there actually is a viable market (try and get away with that from an equity investor!). It’s hard for a struggling entrepreneur to face up to over-the-horizon realities. But it doesn’t have to be that way.

As a coach, I’ve helped many of my clients through the strategic thinking exercises that can help improve their SBIR ROIC, but it can be a hard-to-sell engagement. Frankly it takes no less than a culture shift to make the changes in thinking that are necessary. Sometimes the heels drag and the toes dig in. But persistence does pay off, and I’ve enjoyed some true successes.

I’ve been talking for some time about my view of a strategic approach to seeking funding while working informally with the Arlington Technology Incubator (managed by the Arlington Chamber of Commerce), and the University of Texas at Arlington’s Office of Technology Management. I’m proud of how forward thinking both of these entities are, as they have decided to form a unique public/private joint venture to synergistically lead ideas hatched at either venue to marketability.

We formalized our working relationship this week, and I’ve been retained as their Business Coach. See more about this in the official joint Press Release by clicking HERE. (Note that this arrangement is a contract with my Commercialization Funding Coach company, and, lest you think otherwise, The SBIR Coach will continue coaching successful navigation of the SBIR opportunity on the national scene.)

In my Business Coach role, I’ll be working with those who are served by the UT-Arlington's brand new Venture Innovation Partnership and with the client companies of the Arlington Technology Incubator to help them make the appropriate strategic (and tactical) decisions to facilitate business growth and improve the likelihood of success of their fledgling companies. Of course, going after SBIR funding will be one of the possible strategies that will be considered (would you expect the SBIR Coach to do otherwise?), but charting out the path to commercialization and guiding the maximization of the company’s ROIC will be the focus of my coaching from day one.

If all SBIR awardees took this same approach to how they applied SBIR funds, we might just build evidence that a comparative Federal Agency ROI would favorably reflect on SBIR effectiveness, and the companies would be more likely to fulfill the visions of their founders. The potential is there. Let’s reauthorize SBIR, improving it of course, and continue to provide the opportunity for small technology businesses to get their no-strings seed funding. At the same time, let’s also encourage them to always take a strategic approach to the application of SBIR funds, not just think that by winning SBIR awards they’re being “successful”.
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