Should Entrepreneurial Finance Calculations Include Non-Monetary Impact?

During psychiatry residency a friend said, “You should consider pursuing SBIR funding.” You may be wondering what SBIR is. This blog hopes to succinctly answer that question and, more importantly, to explain why Small Business Innovation Research (SBIR) is an excellent way for someone interested in the life sciences to fund an entrepreneurial interest. Once a life scientist establishes a small for-profit business, SBIR funds can support the creation of a technological solution to an unmet need in the life sciences.

What is SBIR?
SBIR is a component of all the primary funding initiatives of the US federal government. The SBIR funding solution is not the same as a loan from the Small Business Administration. You do not owe the government anything for its granting of money to you. There is no obligation to pay it back. Still, keep in mind that this is a government-run grant program. You must spend the funds wisely and carefully, follow government standards, and in some cases complete an audit following government standards.

NIH and other branches of government are obligated to dedicate a percentage of their R&D funds to SBIR efforts. SBIR funds are only available to a commercial enterprise, in other words, a for-profit company. This funding mechanism is not designed to complete basic science research or produce a product with no apparent applicability. Funds must yield a viable commercial product sold in the marketplace.

SBIR at NIH
This blog focuses exclusively on the NIH’s SBIR program and specifically Phase I of SBIR funding, which is the most rudimentary and simplest way to achieve funding. There are similar mechanisms such as STTR, as well as more complicated means of obtaining additional SBIR/STTR funds. However, those are less likely to be the optimal choice and are not the focus of this post.

The NIH SBIR program is particularly well-suited to the life scientist-entrepreneur. NIH provides investigator-driven research through its more academic grants, as well as SBIR. That means that the NIH program is unique in that it will consider your idea versus telling investigators what ideas they will fund. SBIR programs in other branches of the government will often specify a need and goal of the research. Your project must fit within that specified need. To sum, the NIH SBIR program can be an excellent solution for an entrepreneur interested in creating a product that will add value in the life sciences. But you must assess if the limitations and conditions are acceptable to your goals.

SBIR Limitations and Focus
Phase I focuses only on demonstrating feasibility. You are not expected to complete the entire product, nor fully assess it in all logical ways. Your goal is to use Phase I to demonstrate that the idea is sound, the team is capable, and with further funding it is likely that you will produce something of value. Some ideas cannot be easily demonstrated in a short time frame and with a limited budget. To fit within SBIR Phase I, you must then roll back your plan and goal to a feasible project. Reviewers will reject a project that over promises as quickly as one that under delivers.

Budget and timeframe for an SBIR Phase I are constrained. SBIR recommends completion of Phase I in six months. With justification, you can request a one-year period for funding. A Phase I SBIR budget is typically limited to $150,000, including any overhead or indirect costs, as well as a fee that the government allows, which is maximum of 7% of the other expenses. This budget request can be raised to $225,000 if the author can justify the higher amount due to the complexity of the project. If your needs fit within time and dollar SBIR limitations, it can be an excellent source of capital to start your company while retaining full ownership of the enterprise and limiting debt.

More funds are available to support your project. If you obtain Phase I funds and complete the project successfully, you can apply for Phase II, which is two years in length and up to $1 million in funding. Phase II has a greater chance of success if you have had a productive Phase I that demonstrated the feasibility of the project to create a valuable product.

Preparing a Phase I SBIR Application to the NIH
Obtaining SBIR funding is complicated and challenging. As with any funding request, you must have a novel idea with potential and definite value. Alongside that idea, you need a team and an organization with the skills to convert that idea into a product that provides health-related value to a potential customer. You must carefully outline the strategy to create the product and describe the underlying theoretical basis that will guide the development.

It’s helpful to consider an SBIR application as a standard pitch to a business audience, except you are pitching using paper to an academic audience that demands that the process and assertions are backed up with quality references.

The decision-makers regarding funding are not business investors looking for a return on investment over time. In fact, those decision-makers are a collection of individuals ranging from university-based academics to practicing clinicians to small business personnel who likely have submitted SBIR applications and/or received awards in the past. Due to the likely academic orientation of reviewers, the emphasis will be more on the scientific basis of concept and rigor of the theoretical underpinnings. It is not just a question of “Is this idea good?”, but “Is this idea based on sound theory?”

All SBIR efforts include research and development to determine the effectiveness of the product. Rigor also applies to the assessment strategy and process as well. The application must provide detail regarding how value will be measured by various metrics and using established methods. For an individual with experience in research, this is relatively straightforward. For an SBIR applicant with no science or research background, the academic component will require guidance from someone with assessment research expertise.

As mentioned earlier, a Phase I application only focuses on demonstrating the feasibility of the concept. In Phase I, you are expected to show that it is feasible to produce the product and that it potentially has value. The typical commercial emphasis on commercial viability is not an essential component of this phase of the application although the potential business value should be relatively clear. In other words, there’s no need for complicated calculations of cash flow, anticipated pricing, or ongoing production costs. The author of an SBIR application focuses more on the customer need, the basis for that need, as well as a discussion of why the intended product will successfully address that need.

NIH provides complete information online, through conferences, and by other means to assist the individual interested in preparing an SBIR application. Contacts in the government can answer questions about the NIH SBIR program in general or the SBIR program for a particular Institute of the NIH can answer questions as well. A local Small Business Technology Center likely has the expertise to assist with a pre-review of the application as well as general guidance. The NIH will not help you write your application or tell you if it’s good or not. That feedback will come from the review committee after you apply.

Applications are submitted approximately every four months on the following deadlines: January 5, April 5, and September 5. Feedback from the review committee comes roughly three months after you submit and will include the overall committee’s consensus about the application as well as individual observations from three reviewers. These comments are an excellent guide to the problems which may have interfered with obtaining a score worthy of funding by the government. You can respond to the comments and resubmit the application at the next available deadline.

Is SBIR For You?
If you are new to SBIR, consider the first few applications to be attempts to understand the process and opportunities to learn how to sculpt a quality application that fits the structure and limitations of the SBIR program and reviewers’ expectations. That is, achieving success the first few submissions is unlikely. As with most other pursuits, success requires diligence as well as perseverance. If you intend to submit one application for SBIR funding and not to resubmit, then in all likelihood you are wasting your time.

Hopefully this blog overview helped get you started in your investigation of the potential of the SBIR program to fund your life science company. Good luck!

Photo Credits: MaxPixel and: US Dept of Homeland Security