Capital Raising Without Venture Capital

VC to my rescue? No, I’m fine, thank you though.

Entrepreneurs – those beginning their journey following their passion – commonly don’t come from the world of finance.  They are inventors, engineers, salesmen, and creative types.  So when they go to look for financing, the thing they’ve heard about is Venture Capital”.  It is all so seductive, this… Venture Capital.  It’s capital to finance ventures, right?   It all seems so logical.

The problem is that the world of Venture Capital is broken.  And those aren’t my words.  They are the words of Jeff Sohl, Executive Director of the National Center for Venture Capital at the University of New Hampshire, uttered while we discussed the best way to help a manufacturer have access to more innovations than through its own R&D.  There’s not much to misunderstand about ‘broken’.

Rumors abound of someone with a great idea getting oodles of dough from a Venture Capitalist.  It’s a bit like hearing about Bigfoot.  We’ve all heard the stories, but do we know anyone personally that’s actually seen this thing?

For those of you out there that want something that’s real and obtainable, look into the SBIR.   Did I mention its free?

So what is this SBIR?  The Small Business Innovation Research program is a US program, coordinated by the SBA in which 2.5% of the total extramural research budgets of large (over $100 million) federal agencies are reserved for contracts or grants to small businesses.  In 2010, that represented over $2 Billion in research funds, of which $1 Billion was from the DOD alone. Over half the awards were to firms with fewer than 25 people and a third to firms of fewer than 10. A fifth were to minority or women-owned businesses. A quarter of the companies in FY10 were first-time winners.

The program has three objectives:

• to spur technological innovation in the small business sector
• to meet the research and development needs of the federal government
• to commercialize federally funded investments.

The purpose of the program, in the words of its founder, is to “to provide funding for some of the best early-stage innovation ideas — ideas that, however promising, are still too high risk for private investors, including venture capital firms.”   That is good news for many entrepreneurs.

So, with this as backdrop, here is my point in a nutshell.   If Uncle Sam isn’t going to finance you, think about your chances obtaining Venture Capital.

And for you not-so-small companies, the SBIR defines “small business” as a business with fewer than 500 employees.

The SBIR program agencies award monetary grants in phases I and II of a three-phase program:

• Phase I, the startup phase, makes awards of up to $150,000 for approximately 6 months support for exploration of the technical merit or feasibility of an idea or technology.

• Phase II awards grants of up to $1 million, for as many as 2 years, in order to facilitate expansion of Phase I results.  Research and development work is performed and the developer evaluates the potential for commercialization.  Phase II grants are awarded exclusively to Phase I award winners.

• Phase III is intended to be the time when innovation moves from the laboratory into the marketplace. No additional SBIR funds are awarded for Phase III.  At that point the business must find funding in the private sector or other non-SBIR federal agency funding.

Commercializing your product is the challenge.  After being burned a decade ago, Ven Cap tends wait on the sidelines before it invests in a company, well after its revenues come rolling in.  To get from Phase II to commercialization, you need to bootstrap your company.  Professor Sohl was one of the authors of a very good article on this subject, Mitigating the limited scalability of bootstrapping through strategic alliances to enhance new venture growth.  

Once you have revenues and approach break even, we can help you raise capital for growth.

The nice thing about the SBIR is that your company owns the intellectual property and all commercialization rights. Companies such as Symantec, Qualcomm, DaVinci and iRobot were started with R&D funding from this program.

A similar program, the Small Business Technology Transfer Program (STTR), uses a similar approach to the SBIR program to expand public/private sector partnerships between small businesses and nonprofit U.S. research institutions, and is funded at present at .3% of the relevant agencies’ extramural research budgets.  In FY10, that amounted to over $100 million, but that is a pittance compared to the SBIR’s $2 Billion (unless you are the lucky soul to get the $100 million).

To get started, look into the FAST program (“Federal and State”).  It is a program of State-based business mentoring and assistance to aid small businesses in the preparation of SBIR proposals and management of the contracts.  It is more active in some states than others.

We don’t arrange finance for startups.  We finance late stage startups, those with customers and revenues.  Look to the SBIR to get you started.  To learn more, contact us

by Charles Smith