Deep-Tech Driven Internet Businesses and Equity-Free Funding

You might be building your business on innovative internet technologies. Or maybe you’ve already built a solid business and you’ve decided innovation is your key to growth. Either way, you may want to source some capital to fund further research and development. Before you decide to find investors — and give up equity — you should first consider getting government-sponsored Small Business Innovation Research (SBIR) grant funding.

Real-World Experiences with SIBR Grant Funding

I have personally used the SBIR funding mechanism several times, to the tune of nearly $2 million.

I’ve used it to fund research and development on an internet-connected hardware device and its associated biosensors. And indeed, many innovators who are familiar with this program often think of hardware development.

However, organizations like the National Science Foundation (NSF) are at the forefront of innovation. As a result, software-focused technologies have many opportunities to receive significant seed funding for their product development work.

For example, the NSF’s 2022 topics of interest include areas such as cloud computing, cybersecurity, distributed ledger technologies, and digital health, among others.

The purpose of the SBIR program is to fund innovative technologies. Most of this funding goes to small startup companies. Funding occurs in two phases. The first phase, designed to demonstrate the feasibility of your new technology, will grant you up to $250k.

Phase One: Feasibility

This first phase is very technical. You can only use your funding for research and development needs. This includes salaries and wages for all technical development work, as well as materials and supplies needed.

For example, my company has needed to use “supplies” on Amazon AWS expenses for work in the machine learning space.

Your goal during the first phase should be to confidently demonstrate your proposed technology is feasible.

This brings up an interesting point about what kinds of technologies the SBIR program likes to fund. In addition to winning several SBIR awards, I have also spent time on the other side of the table as a reviewer for the NSF on SBIR awards. What the program desires — and how we review — treads a thin line between high-risk technology and feasible technology.

You need to convince the reviewers that your proposed technology is innovative. It is worth investment and, perhaps ironically, very risky. “Ironic” because the technology needs to have a high probability of failing.

However, the reviewers need to believe you can pull it off, nonetheless. Obviously, this can be a difficult and nuanced task. You should certainly put some thought into how you introduce and describe the challenges and solutions you are proposing.

Phase Two: Getting Your Project to Market

Assuming your Phase I project is successful, you have a shot at a $1M Phase II, complete with supplement opportunities totaling over $700k.

Your Phase II funding is intended to get you to market (or otherwise no longer need government funding). This funding is still earmarked for research and development. However, as your product is moving closer to a commercial product, your effort towards “research” is steadily declining while your effort on “development” is increasing.

In addition, you can request some funding (called TABA funding) to supplement your R&D funds and use them on commercial activities such as sales, marketing, IP protection, and other commercial necessities.

Equity-Free Funding and Other Advantages

One great advantage to this type of funding is that it is completely equity-free. You don’t have to give up future profits. You can retain ownership over your business and its direction.

But this funding has other benefits. You get access to a network of other researchers and program directors with experience in commercializing technology. You also get a nice brand name attached to your backers. (You’d be amazed how much credibility you gain with an NSF or NIH logo on your website.)

Feedback is another great benefit.

Far too often, entrepreneurs ignore feedback. Yes, it is frustrating talking to investors and hearing “No.” In the same vein, it’s frustrating spending time preparing a grant proposal, waiting a long time for an answer, and hearing “No.”

However, unlike some investors, the grant process will provide you with the reviewers’ feedback. This is a great way to get valuable feedback from both technical and business experts that could help you move forward even if you decide never to apply again.

Potential Drawbacks

Although I’m clearly a big fan of this kind of R&D funding, it’s not without its drawbacks.

It takes a long time to hear back. If a quick turnaround on funding is critical, I’d recommend applying but only as a backup. Don’t rely on this funding, because you may wait for six to eight months before you hear anything back from them.

Also, you may be “locked-in” to an R&D path with this type of funding. You can certainly always choose to forfeit the funding if you don’t want to pursue it any longer. However, turning down a million dollars is no mean feat! Although there is some leeway in how you progress with your research, the general scope should remain the same.

Not Just for Academics Anymore

Typically, academic circles are more familiar with this kind of funding. College and university researchers spend a lot of time searching for grants. However, this funding opportunity is open to anyone and is specifically for small businesses, not academic institutions (that’s the “SB” in “SBIR”).

One of the hardest parts for first-time proposers is simply figuring out the proposal preparation and submission process.

Additionally, we don’t typically think of government funding operations as “user-friendly.” Openings for the NSF are constantly available, so I recommend looking into the process early if you are considering applying.

The NSF now employs a pre-screening process that is easier on the applicant, letting them submit a brief two-pager to get word back on whether it even makes sense to apply and save you the time and hassle if not.

So if you have some deep technology interests for your internet company, investigate equity-free SBIR funding and start early. I recommend diving in about a month before you want to apply. This allows you to register your company with all various government accounts necessary to apply.