Secure Non-Dilutive Funding: How to Use SBIR to Fund your Startup
$50K - $3M in Equity-Free Cash to Grow Your Business
When it comes to funding your startup or small business entrepreneurs are faced with the tough decision: maintain 100% ownership and bootstrap development or give up equity, and with it a bit of control, in exchange for capital from VCs. Those that prefer to bootstrap can still get financing in the form of non-dilutive funding. For US companies, one of the funding options is the Small Business Innovation Research (SBIR) program, designed to finance small businesses developing innovation products without taking a slice of the company. The catch? You have to navigate a confusing and convoluted government proposal process.
This post demystifies SBIR, covering what it is, what it isn't, how it works, and the steps you can take to grow your startup with OPM (other people’s money) without taking on debt or giving away equity.
If you are pursuing topics designated “STTR”, you must partner with a research institution to be eligible for a contract award. We have a separate guide for that here.
1. Understand the Program
What it is: The Small Business Innovation Research program provides funding to small businesses whose product/technology has government end users*. The funding is intended to support staged research and development (R&D) of highly innovative products or technologies with the potential for commercialization within the private sector and transition to widespread use within the government as relevant.
*does not apply to NSF and NIH SBIR grants. If you are looking for NSF or NIH resources checkout these websites for NSF here and NIH here.
Phases: The program is structured in three phases:
Phase I: Feasibility study and proof of concept development.
Phase II: Further R&D based on Phase I results, typically resulting in a tested prototype.
Phase III: Commercialization, typically funded through private sector or non-SBIR government sources.
Specific agencies have other programs or Phases (such as a “Follow on Phase II” before a Phase III) but understanding those programs comes in after your startup has won its first Phase I.
2. Identify Your Eligibility
Not all startups and businesses are eligible for this funding. Your business must meet the below criteria and there are some additional criteria if your business has venture capital already. You can review the detailed and most up to date information on SBIR.gov. At a glance, your startup is likely eligible if you:
Are legally registered in the US as a for-profit business
Have less than 500 employees
Are primarily owned by U.S. citizens or permanent residents
**Companies with 50% or more of their shares owned by investors are eligible for some SBIRs, but not all. If this applies to you, remember to check the BAA to see if you’re eligible.
3. Know the Funding Limits and Timelines
While often referred to as “America’s Seed Fund”, SBIR is not the same as rasing a VC seed round, so plan accordingly. For Phase Is under the Department of Defense topics the time from when a topic is announced to when you actually have an award signed and in your hand, is easily six months. And on the most optimistic timeline it will be another six months before you have a Phase II awarded and ready to invoice against. While a year isn’t long for the government, a startup can be born, live and die in that time.
Funding Limits. Depending on the agency, the funding limits for each Phase can vary. In general, funding caps looks something like this:
Phase 1s vary from $75-250K, with a 90 day to 6 month contract duration (typically referred to as a period of performance)
Phase IIs vary from $250K-3M, typically with a 12 to 24 month duration
Phase IIIs have no funding limitations but are not funded with SBA dollars
Timelines. The timeline from deciding to apply to your first SBIR to learning the result of that proposal is longer than most new entrants into this process expect. While it can vary slightly by agency, the timeline is typically as follows. Remember, this doesn’t apply to NSF and NIH.
Topic Open in Pre Release: 14-30 days
Topic Open for Submission: 30-60 days
Proposal Evaluation: 60-120 days (most programs will notify by 90 days, but many agencies have the option to request an additional 30 days for evaluation if necessary)
Contracting: 30-60 days from award notification
If you need cash TODAY and/or have not identified product market fit, SBIR may not be the best option for you. If the government is an ideal end customer for you, and your business allows for a lean burn, the patience required to participate in the SBIR program can pay off.
4. Secure Relevant Registrations
Unfortunately, it's not as simple as seeing a topic your business’s solution is a good fit for and submitting your proposal. We broke down all the various registrations you need for a smooth application and contracting process here. These all take some time, so if you haven’t started registration yet and you’re trying to submit a proposal in the next two weeks, it’s probably not going to happen for you this round.
5. Find a Suitable Agency
While the SBIR program is all under the Small Business Administration (SBA), each government agency has its own unique focus areas, application processes, and funding priorities. Understanding these differences can significantly enhance your chances of success.
Focus Areas. Each SBIR participating agency has specific missions and interests that guide their funding priorities. For instance, the National Institutes of Health (NIH) primarily supports health-related innovations, while the National Science Foundation (NSF) tends to focus on broad scientific advancements, including engineering and technology. The Department of Defense (DoD) has a more security-oriented agenda, funding projects that can enhance national security. Before applying, research the agency’s interests and align your proposal with their strategic goals.
Funding Mechanisms. There are two primary mechanisms through which funds are awarded for SBIR: contracts and grants. With both, agencies expect regular progress reports, forms, and adherence to milestone schedules. If your topic is designated as a grant the reporting requirements are significantly more burdensome and often require dedicated accounting software. This cuts into your budget, so make sure you check what the individual requirements are before submitting and make sure it’s something you actually want to commit to.
6. Prepare Your Proposal
Don’t skip the topic pre-release period. When a topic is in “pre-release” it means you can’t submit a proposal yet but you are able to ask the topic owner questions. Topic owners are usually listed as the “technical point of contact” (TPOC) listed on the solicitation. You can email them directly with clarification question during the pre-release period. If no email is provided you must submit questions publicly on DSIP. Make sure you review everyone else's Q&A on DSIP too.
Start a Proposal and Build Out the Volumes. When a round opens or goes into “release” you can now create a proposal and start filling out all the required information to craft the proposal package. DoD agencies use a website called DSIP to accept proposals. NASA uses a similar website called ProSAMS. Feeling daunted by the required workload? We offer guides, as-submitted winning proposals, and strategy walkthroughs to increase the efficiency of your proposal prep.
Double check, then Certify Before the Deadline. We collected the most common mistakes to check for before hitting submit on your proposal, read more here. Submission portals tend to get buggy on the final day so if you can submit and certify your submission a day or two before. You can make changes up until the deadline, just remember to “recertify” to save your edits.
7. Listen to Feedback and Take Advantage of Free Resources
If you are awarded a contract or grant based on your proposal, know that if it was a closed topic it is likely that others (your competitors) were awarded at the same time. You should treat the win less like an assurance of the customers intent to purchase your technology long term and more like an agreement for a second sales call from a prospective private investor or customer. You should request the feedback letter on your proposal and create as many opportunities as possible into your performance period to get feedback and visibility.
If you receive a rejection, request the feedback letter for your proposal and use what you learn to improve your proposal for future submissions.
