SBIR funding can be a great source of non-dilutive funding to support research and development to commercialize high-tech innovations. However, it’s not the best fit for every startup. Today, I’m going to cover the top 9 reasons why science and tech startups may not want to pursue SBIR funding.
So, if you're a science or tech startup founder trying to decide if SBIR funding is right for you, keep reading to save yourself valuable time and energy.
I’m Stacy Chin from KeepYourEquity.co where we help start-ups like yours secure non-dilutive federal grants to bring innovative ideas to the commercial market. We specialize in helping science and tech start-ups secure non-dilutive grant funding from federal programs called SBIR or Small Business Innovation Research programs.
As a science or tech startup founder, it's important to understand whether or not SBIR funding is the right fit for your business. Pursuing these non-dilutive funding opportunities can be a time-consuming and resource-intensive process, so it's vital to know whether it aligns with your startup's goals, funding needs, and current progress.
By understanding the potential benefits and drawbacks of SBIR funding, you can make an informed decision about whether or not to pursue it. As a start-up founder, ensure you take the time to consider all your funding options and choose the one that's best for your startup's growth and success upfront to prevent wasting your time and resources in the long run.
So with that piece of advice, here are the top 9 reasons why you should NOT go with SBIR grant funding.
1. You Need Short-Term Revenue Generation
SBIR funding may not be a good fit if your startup is focused on short-term, revenue-generating projects instead of long-term research and development efforts.
Examples of these start-ups may include some e-commerce platforms, consulting services, commercial-ready products, and mobile apps. Start-ups that are offering research or consulting services, as well as those with developed products that have already been launched in the market also fall under this umbrella.
This is because the US federal government wants to use SBIR funding to invest in research and development projects with commercial potential that can result in long-term, high-impact outcomes, and growth. So while revenue-generating projects are important for startups, they don’t always fit within the scope of SBIR funding priorities especially if the start-up isn’t focused on pursuing R&D efforts.
2. You Are Short On Time & Resources
SBIR funding can be a time-consuming and resource-intensive process. Applying for SBIR grants can take months and require a significant amount of time and effort to prepare a strong application.
Additionally, the competition for SBIR funding is fierce so there are no guarantees that you will get SBIR funding even after your first submission. So if your startup is already stretched thin, pursuing SBIR funding may not be feasible. This is especially true if you're a small startup without many employees or resources to fully dedicate to the application process.
So instead of spending all that time and resources applying for SBIR funding, it may be more productive to focus on other funding sources that better align with your startup's available resources.
3. SBIR Grants Will Not Provide Enough Funding
The third reason SBIR grants may not be a great option for your start-up is that they may not provide enough funding. If you are looking to raise more than $2 or 3M, then pursuing SBIR grant funding is likely not the best fit for you.
SBIR grants are typically limited to a couple hundred of thousand dollars in Phase I or about $1 or $2 M for Phase II, depending on the federal agency. You can learn more about the NSF or NIH SBIR budget funding limits for 2023 here.
4. IP Strategy Discrepancies
SBIR grant funding may not align with your startup's intellectual property strategy. SBIR funding requires startups to disclose their intellectual property, which may not align with your startup's goals or IP strategy.
I’ve worked with many founders who expressed concerns about disclosing their proprietary IP in an SBIR application. While these are valid concerns, if you cannot provide enough details about your innovation in your SBIR application, it makes it incredibly challenging for reviewers to fully evaluate the competitive advantage and broader impacts of your proposed technology. And for these reasons, this will impact your score.
So, if your startup has a proprietary technology or trade secret that you don't want to disclose to the government or the public, SBIR funding is not the best option for you. In this case, you may want to consider other funding sources that don't require IP disclosure or work with a lawyer to figure out a strategy that works better for you and your start-up.
5. You Need Large Equipment
SBIR funding may not provide sufficient funding support to purchase large equipment. Although some equipment can be purchased with these funds, if your start-up is looking for funding to purchase lots of big equipment that costs over $5,000 each, then SBIR funding isn’t compatible with your needs.
The US federal government has strict limitations on the purchase of large equipment and this is because SBIR funding is intended to support the development of innovative technologies and products, rather than the acquisition of equipment or facilities. By restricting the use of funds for R&D activities, the program aims to promote innovation and encourage small businesses to develop new technologies that have the potential for commercialization and public benefit.
Another reason for this limitation is that the US government aims wants to avoid the risk of misuse of funds or fraud by limiting the use of funds to specific activities. By prohibiting the purchase of large equipment with SBIR funds, the government can ensure that the funds are being used on R&D activities.
That being said, there are some exceptions to this rule, such as the purchase of equipment that is essential to the R&D project and cannot be obtained through other means. In such cases, start-ups should discuss these needs with the Program Officers and seek approval from the funding agency.
6. You Need Short Turn Around Times
SBIR funding isn’t always suitable for startups that require a quick turnaround. The SBIR application process can be lengthy, and it can take several months or even a year to receive funding.
If you have seen my videos on the KeepYourEquity.co Youtube channel, you would know that I usually advise start-ups to start at least 3 months before the deadline to prepare a Phase I application and even up to 5 or 6 months if you are going for a larger Phase II application. Once you submit your application, it can take 4 months to even 6 months, depending on the agency, to learn whether or not the grant got funding.
So if your startup needs funding quickly to meet a deadline or seize an opportunity, SBIR funding isn’t going to be the best option for you. In this case, you may want to consider alternative funding sources that can provide funding in a shorter timeframe.
7. Your Start-Up is Not US-Based
SBIR funding is not available for startups that are not US-based. The SBIR program is a federal program that is only offered to US-based small businesses. If your startup is not based in the US, you will not be eligible for SBIR funding. Instead, these startups should consider funding sources that are available to startups in your country or region.
8. The Startup's Founders are not US Citizens
Similar to number 7, number 8 on my list of reasons SBIR grants may not be a good funding opportunity for your start-up is if the Principal Investigator or Founders are non-US citizens.
Non-US citizens may be able to participate in SBIR projects as employees of the small business, but they cannot receive SBIR funds directly. Additionally, non-US citizens may be subject to certain restrictions and requirements, such as obtaining a visa and work authorization, in order to work for the SBIR-funded small business.
It's worth noting that some federal agencies may have additional eligibility requirements or restrictions regarding SBIR funding for non-US citizens, so it's important to review the guidelines for each agency's SBIR program before applying.
9. You Have A Non-Profit Organization
Last but not least, the ninth reason is that SBIR funding isn’t suitable for non-profit organizations. The SBIR grant program is designed to support R&D activities carried out by small businesses. As such, non-profit organizations are not eligible to apply for SBIR funding directly.
However, non-profit organizations may still be able to participate in SBIR projects as subcontractors or collaborators with a small business that is receiving SBIR funding, such as research hospitals or universities. In such cases, the small business that is receiving the SBIR funding would be the primary recipient of the funds and responsible for the management and oversight of the project.
Additionally, some federal agencies that administer the SBIR program may have additional funding programs or mechanisms specifically designed to support non-profit organizations engaged in R&D activities. Non-profit organizations interested in pursuing R&D activities may want to explore these other funding opportunities.
Reasons To NOT Use SBIR Startup Funding Key Takeaways
Federal small business funding like SBIR grants can be an excellent way to obtain non-dilutive financing for your start-up, though it is not ideal for every situation.
Essentially, if you do not have extensive time and resources, are not US-based, or are not-for-profit, SBIR grants are not a viable funding opportunity. Additionally, if you need capital of more than $2-$3 million or need to obtain large, expensive equipment, SBIR grants aren’t likely to meet your needs and goals.
If you would like to learn more about STTR/SBIR grants, check out the KeepYourEquity.co website or YouTube channel and reach out to one of our expert federal grant consultants. Getting non-dilutive small business funding is hard, so here at KeepYourEquity.co, we are here to help!
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