Startups could score multimillion-dollar contracts through the Small Business Innovation Research program.

October 19, 2005

Many technology companies miss out on the chance to secure millions of dollars in revenue through sole-source contracts with the federal government, according to an expert familiar with the government’s Small Business Innovation Research program.

“The Navy is issuing Phase III contracts worth upwards of $50 million,” said Russ Farmer, president of PBC, which provides consulting and business infrastructure for companies involved in the SBIR program, the single largest source of early-stage funding in the United States.

Such contracts “are the most underutilized opportunity in the SBIR industry,” he said. Mr. Farmer spoke at the Silver & Gold Venture Capital Conference in Reno, Nevada, on Tuesday, sponsored by the Golden Capital Network, a training and networking center for entrepreneurs.

The SBIR program funnels more than $2.2 billion every year into technology companies. It divides its disbursement of those funds into three phases, depending on how developed a technology is and how close it is to commercialization.

‘It’s an incredible gold mine of opportunity.’

-Russ Farmer,

PBC

Once companies reach Phase III, any of the 11 federal agencies that administer SBIR programs can award companies sole-source contracts, according to Mr. Farmer. The government does not set a limit on the amount agencies can spend on such contracts. “There is no ceiling, period,” he said.

Another advantage to such contracts, especially compared to earlier-stage SBIR programs, which can take six months to a year to make their funding awards, is that they’re lightning-quick by government standards, according to Mr. Farmer.

“This sole-source mechanism allows you to be under government contract in as little as two months,” he said. “That’s government warp speed.”

Big-Spender Agencies

The agencies that spend the most through SBIR programs, and have the biggest contracts to award to companies in Phase III, are the U.S. Department of Defense and the National Aeronautics and Space Administration, according to Mr. Farmer.

The Department of Defense spends about $1.2 billion a year on the small-business programs, or more than half the government total. The DoD funds technological innovations in everything from semiconductors to information technology to networking equipment.

“It’s not just bombs,” said Mr. Farmer. “It’s much more than that.”

The Department of Health and Human Services is the second-largest investor in SBIR programs, with $650 million to spend, followed by NASA with $120 million.

Other agencies that administer such programs include the National Science Foundation, the Environmental Protection Agency, and the Agriculture, Commerce, Education, Homeland Security, and Transportation departments.

The SBIR programs, which can be used by for-profit companies with fewer than 500 employees, aim to help develop and commercialize innovative technology, as well as give government agencies access to that technology.

Attractive Alternative

The program can provide early-stage startup companies with an attractive alternative to venture capital funding, which requires entrepreneurs to give up some of the equity in their companies, and often to cede some management control to venture partners.

The SBIR program, in contrast, doesn’t give the government agencies any equity stake in the companies they fund or in their intellectual property. Participating companies must agree, though, to grant the government a royalty-free lease to use their technology for its own purposes.

“It’s an incredible gold mine of opportunity,” said Mr. Farmer.