Ever Evolving, Inc.

How to get the Federal Government to Help Fund the Development of Your Product Line Identifying and Leveraging Government Programs to Fund your Company’s R&D

Abstract

Until small businesses in the metro DC area have access to the Venture Capitalist funding found in San

Francisco and New York, businesses owners will need to find alternative methods to fund their Research

and Development. Luckily, the Federal Government provides two procurement types that will help

businesses fund their development efforts, while allowing the business owners to retain their Intellectual

Property Rights.

Ever Evolving, Inc. info@everevolving.biz December 2016

2 http://everevolving.biz

Introduction to the Scene

Businesses within the Washington DC metro area have traditionally been linked to the federal government. Between Congress, federal government positions, federal government contracts, think tanks, and lobbyists, it seemed that everyone was working for the government either directly or indirectly. However, over the past decade, with the evolution of technology lowering the barrier of entry into markets that were once impenetrable, and the Affordable Care Act making healthcare available to the masses, the Metro DC area is beginning to see signs of life within its startup sector.

In July 2016, Forbes contributor Joan Siefert Rose wrote an article including Washington DC as one of the areas delivering great startup investment value. She maintains that “[t]he fact that [communities such as D.C.] are showing up regularly on lists of places to watch validates the caliber of entrepreneurial startups in these emerging ecosystems….”1 And that makes sense because according to Carol Morello and Dan Keating from the Washington Post, the DC region is the nation’s richest and most educated supplying the wealth, initiative, and intellect required to bring ideas to the mass market.2 Additionally, the area is home to many coworking spaces, such as WeWork, that provide a stimulating location to work while simultaneously providing their tenants with access to the resources they need to grow a build a business (including unlimited coffee and beer!). Incubators and various Meetups provide entrepreneurial-minded individuals with a way to learn a new skill, master new technologies, and network with individuals with diverse backgrounds to gain new perspectives and meet future partners.

However, there is a catch that comes in the form of investment dollars. Investment funding in the Washington DC area has not historically been on par with what entrepreneurs in New York and Silicon Valley have enjoyed. Chris Bing is a staff writer for DCInno, the authority for local innovation in the D.C. area, quotes New Atlantic Ventures’ John Backup as saying that “[the D.C. area has] lots of tiny check writers here. But what we do not have here is scale or volume of ISS rounds (Institutional Seed Syndicates) -- FKA Series A.”3 Mr. Bing goes onto to quote a PricewaterhourCoopers and National Venture Capital Association report that of the $575 million in funding the Metro DC companies received during the first half of 2015, only $50,000 was considered seed-stage funding which is essential to help entrepreneurs get their ideas off the ground.

With less than .01% of venture capital funding going to the early development stages, it can be very difficult for an entrepreneur to get their idea off the ground. While the DC Startup scene continues to mature and funding becomes more readily available to early startups, local entrepreneurs need to look

1 Joan Siefert Rose, The Unlikely Places Delivering Great Startup Investment Value, Forbes,

http://www.forbes.com/sites/joansiefertrose/2016/07/17/the-unlikely-places-delivering-great-startup-

investment-value/#41affc2f474a (17 July 2016). 2 Carol Morello and Dan Keating, D.C. Region is Nation’s Richest, Most Educated, The Washington Post,

http://www.washingtonpost.com/wp-dyn/content/article/2010/12/14/AR2010121407680.html (15 December 2010). 3 Chris Bing, Why Seed Funding is so Tough to Get in DC Right Now, DCInno,

http://dcinno.streetwise.co/2015/08/21/dc-tech-funding-venture-capital-seed-investing-dc-va-md/ (21 August 2015).

Ever Evolving, Inc. info@everevolving.biz December 2016

3 http://everevolving.biz

outside of venture capitalists. Luckily, the largest source of seed funding for American entrepreneurs is headquartered in the capital region.

The Federal Government - Funding America’s Small Businesses

According to the United States Small Business Administration (SBA), the “federal government typically spends approximately $500 billion in contracts every year and the law requires that 23 percent of these dollars be awarded to small businesses.”4 However, not every contract is ideal for developing internal Intellectual Property (IP) as the government maintains the IP rights for services support contract. The challenge is finding opportunities that will allow your company to retain the IP rights for their development efforts.

The government does this through two types of solicitations, the Small Business Innovation Research (SBIR)/Small Business Technology Transfer (STTR) program and Broad Agency Announcements (BAA).

Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs

The SBIR/STTR program is promoted as America’s Seed Fund. With its roots tracing back over thirty years, the SBIR program encourages domestic small businesses to engage in Federal Research/Research and Development (R/R&D) activities that have the potential for commercialization. The goal is to include qualified small businesses in the nation’s R&D arena to stimulate high-tech innovation. To participate in the SBIR program, a business must meet certain criteria, including qualifying as a Small Business Concern (SBC) as defined by SBA regulations at 13 C.F.R. §§701-705.5

STTR has the same ultimate goal of promoting R/R&D, but its focus is on the expansion of public/private sector partnerships. This can be beneficial if the research being performed requires expensive equipment that small businesses may not have the funding to purchase, and otherwise do not have access to as it allows them to partner with local universities.

Both SBIR and STTR are three phase programs, where Phase I can be funded up to a year with a $150,000 investment to be used for the initial R&D and prototyping efforts. Phase II can extend up to two years and $1 million for the initial prototype developments. There is no funding cap on Phase III, as the small

4 Caron Beesley, 8 Tips for Finding Government Contracting Opportunities, United States Small Business

Administration, https://www.sba.gov/blogs/8-tips-finding-government-contracting-opportunities (3 September 2015) 5For more information on what it takes to qualify for an SBIR award, visit their website

https://www.sbir.gov/faqs/eligibil ity-requirements

Funding Fact: The United States Navy accounts for

approximately 12 percent of all federal SBIR/STTR funds. From 2000-2013, that accounted for

nearly $2.3 bil l ion, divided across 2,734 separate contracts.

Ever Evolving, Inc. info@everevolving.biz December 2016

4 http://everevolving.biz

businesses work with the government agency to bring bring the products to market. Both SBIRs and STTRs are released on a quarterly basis, and are centrally managed by SBA.

Broad Agency Announcement

A Broad Agency Announcement (BAA) is another solicitation used to obtain proposals for R&D efforts, but it differs from SBIRs/STTRs in a few key ways. First the good. A BAA can be allocated as a multi -year award, meaning your corporation would not need to proceed through the same three phase program SBIR participants are forced to. Another benefit is that the awards can go for larger amounts. Instead of the initial investment being capped at $150,000 SBIR Phase I investment, companies can receive BAA awards for multiple millions spread out across multiple years. Having that much funding up front allows an organization to more thoroughly research a topic, and try multiple avenues before ultimately deciding on a direction. Whereas the $150,000 upfront funding participants of the SBIR program receive may curtail a corporation's R/R&D efforts early, causing the firm to jump to a conclusion before extensively researching a topic.

The downside to BAAs is that there is a lot more upfront work to procure. The SBIR/STTR P rogram is centrally managed by the SBA, meaning that topic releases are made together, on a set scheduled, in a centralized location. BAAs on the other hand, are managed by the various organizations releasing the BAA. This can make finding topics potentially more difficult because:

1) You need to what agency is releasing the topic

2) You need to know when the agency will be releasing the topic, and

3) You need to know where the agency will post the topic

Bottom line, while the contract value can be worth more and lead to earlier profits and greater stability; however, there is additional work that goes into it up front. While it is recommended to engage the program managers for SBIR topics, it is an absolute requirement to get to know your potential clients if you want to pursue a BAA.

When Applying to a Government Funded R&D Proposal

Having worked on both a SBIR and a BAA, there are a few things to remember if your company is considering applying for either program.

It is NOT “No Strings Attached” Money

Neither the SBIR nor BAA are grants, so realize upfront that by entering this contract, the government becomes your customer. And understand that during this process, the government’s goal is to maximize its Return on Investment. And just like a bank or other institutions that lends money, the higher risk of default, the higher the interest rate is. In the government’s eyes, with your organization being a small

Ever Evolving, Inc. info@everevolving.biz December 2016

5 http://everevolving.biz

business, it is by default high risk. As such, the government can set up a lot of checks and balances to ensure that your organization stays on target.

A perfect example is the progression from Phase I to Phase II in the SBIR program, where the government is comparing its various competitors. From their perspective, they are looking to eliminate any underperforming teams and reduce the number of performers down to a manageable number based on their budget. To help them, they ask all their small business participants to:

1) Give an hour-long presentation to the various stakeholders and explain what make s your

company the “best of breed”

2) Write a 40-page Final Report detailing the work your team accomplished during the initial R&D

period

3) Write a 10 page “Initial Proposal” highlighting where your team wants to take the work moving

forward

And what is the Small Business’ reward for completing the gauntlet? That depends on whether your team is selected to move forward or not. If your team is not selected, then you get a pat on the back, a “thanks for your effort” email, and you get your funding cut. If you are one of the participants that are selected to proceed to Phase II, then you have the privilege to provide the government a more detailed “Final Proposal” with cost breakdowns, identified tasking, and commercialization strategy.

It is a lot of work, so be prepared for it because you are “high risk.”

The Technology needs to be Relevant for the Government, but how do I know what is Relevant?

Just as you would not try to sell ice to an Eskimo, your proposed R&D needs to be relevant to the government. For the BAA I worked on, we proposed helping the Marine Corps gain insight into their Supply

Chain through advanced data modeling techniques. We knew that the Marine Corps had deficits in their Supply Chain visibility because one of my teammates was a former Marine. If your business does not have that “insider information,” fear not, there are a few sources you can turn to.

Start with the United States Government Accountability Office (GAO). The GAO is an independent, nonpartisan agency that work for Congress to investigate how the federal government spends its money and where improvements can be made. They are constantly releasing reports6 on anything from the

6 For the latest reports, visit http://www.gao.gov/browse/date/week . You can search by date, topic, or agency

Ever Evolving, Inc. info@everevolving.biz December 2016

6 http://everevolving.biz

Department of Defense to the current state of the country’s infrastructure. A fter these reports are released, agencies that do not grade out well are under pressure to improve. As a small business, this is an opportune time to help Agency X to solve their Problem Y, that your team is uniquely qualified for because of Past Performance with A, B, and C.

Another avenue into an organization is through their Small Business Office. Fair warning, you will need patients, and, while starting with an email is preferable, you will need to be prepared to go see them in person as not all are responsive. However, if you persevere and are able to build a relationship with the Small Business representative(s), you end up with an insider who can advocate for you on your behalf which is a powerful thing for government agencies. And, a final tip when dealing with Small Business Offices, it is better if you approach them with “we have done our research and we want to help.” They see so many companies that are looking for a handout, if you do their work for them, they will be much happier to oblige.

A third approach would be for contingency hires. Soldiers are constantly transitioning home and looking for good employment opportunities, and in my experience, they are fantastic hires. If you are not sure where to find veterans, there are fantastic organizations such as The Capital Post whose mission is to “…serve as a platform for military veterans and spouses growing sustainable and scalable businesses or transitioning into new careers….”7

Write your Proposal to Address an Issue that Matters to the Agency Who is Fun ding the Work

As you begin to put your proposal together, do not forget to gear it towards the agency who is funding the work. Reference statistics, technologies and capabilities that are relevant to that agency. Do some research on specific issues that the agency is trying to work through, and target your proposal to address ONE of those problems.

My team and I once submitted a SBIR Phase I proposal to the Defense Logistics Agency (DLA). As a Logistics IT company, we felt that we had a lot we could offer DLA, and we felt that we had the past performance to back that up. Unfortunately, we were not selected for the SBIR. Upon receiving this disappointing news, we requested and were granted a debrief , where we learned that they received 48 proposals for 3 topics. While each topic can have multiple awardees, the SBIR program was not designed to award 48 Phase I offers. Their feedback was that they thought it was an interesting proposal, but they could not identify which topic it was best suited for, so they did not select it .

This is a similar problem faced by businesses that are trying to bring a product to market. When you first set out, you need to identify a small, targeted market first. Solve their problems, and then you can expand your product for other users later. In our proposal, we targeted all users everywhere and it failed to find any of the established markets.

7 More information on the Capital Post can be found on their website, https://thecapitolpost.com/

During this process, the Government’s goal

is to maximize its Return on Investment

Ever Evolving, Inc. info@everevolving.biz December 2016

7 http://everevolving.biz

It is the Government’s Property too, so do not Expect to Sell your P roperty Back to the Government at its Conclusion

At the conclusion of a SBIR and BAA procurement, your corporate strategy cannot be to sell the technology back to the government once the contract is complete. That does not mean that there may not be additional follow on support work, but the IP that is developed during the SBIR or BAA contract is owned by two entities, your company and the government.

What these programs are designed to do is they allow you to do is sell the IP that was developed within these programs to non-government entities. Back to the Logistics company that I support; we took the work that we researched and built during the BAA, kicked in a little internal funding of our own, and we are preparing to sell it to commercial companies that could benefit from greater insight into the supply chain. Potential customers include shipping companies, freight companies, warehousing companies, and companies that rely on any or all three.

Separately, we also spoke with a variety of military and government civilians who we knew could benefit from our product, identified a transition home, and working to make it into a Program of Record. The goal is after it transitions in October 2017, that the company will be uniquely qualified for any new support contracts that the government may require. So, while the government will own the code, we are in a prime position for the follow-on work as the experts who built it.

Products with High Transition Capacity are Regarded More Highly

The National Research Council (US) Committee for Capitalizing on Science, Technology, and Innovation performed an Assessment of the SBIR program in 2008. During that report, it noted that “[i]n this era of globalization, optimizing the ability of innovative small businesses to develop and commercialize new products is essential for U.S. competitiveness and national security.”8 It is the same reason that SBA’s Office of Government Contracting & Business Development works to ensure that 23 percent of all prime government contract dollars go to small businesses.

Small businesses are the heart of the American economy. But for that heart to function and supply blood and nourishment to the body, the small businesses cannot just develop new products. The small businesses and their owners need to bring those products to market. The SBIR and BAA

8 National Research Council (US) Committee for Capitalizing on Science, Technology, and Innovation: An

Assessment of the Small Business Innovation Research Program, Policy and Global Affairs; Wessner CW, editor, https://www.ncbi.nlm.nih.gov/books/NBK23744/

SBIR BAA

Procurement Effort Moderate High

Period of Performance 6 months initially Multi -year

Funding Amount $150,000 ini tially Multi -million

Intellectual Property Spl it with Government Spl it with Government

Sponsoring Organization SBA, in coordination with

sponsoring agency

Sponsoring Agency

Table 1: Comparison of SBIR and BAA Procurement Opportunities

Ever Evolving, Inc. info@everevolving.biz December 2016

8 http://everevolving.biz

evaluators know and understand this, and that’s why if two products have equally viable proposals, the evaluators will choose the proposal with the higher transition probability.

Therefore, especially when you are developing your proposal for an SBIR topic, be sure to identify potential commercial opportunities. Build out customer profiles and identify stats that showcase the gap in customer needs versus what is currently fielded. Give the proposal evaluators every reason to believe that they are not just funding work that will support the government, but work that will also support the larger American economy.

BAA and SBIR is NOT an Either/Or Approach

Realize that, as long your proposals continue to follow the five concepts laid out above, that a BAA or SBIR does not have to be a one and done. Often, a complete solution that can keep a business ahead of its competition for decades requires multiple technological advancements. As long as those technologies can be of value to the government, your company can continue to use BAAs and SBIRs to fund individual parts.

For example, our solution looked at new and effective ways to build and leverage relationsh ips among data elements. But we soon realized that our solution would be of minimal used while deployed, because the data that was feeding it is subpar. We have found commercial products that could automate some of the data collection, but the military [rightfully] has concerns about the security of products. Now we are working with a variety of agencies to see if any would be interested in funding research into securing these off-the-shelf products.

Reuven Cohen, Chief Technology Advocate at Citrix, wrote in an article for Wired that business success is happening faster than ever – but so is failure. Mr. Cohen notes that “…three out of four companies on the S&P 500 list today will disappear into obscurity by 2027. What was once a 61-year life span for the average firm on the S&P 500 in 1958 narrowed to 25 years in 1980 – to 18 years today.”9

The rationale behind Mr. Cohen’s statement is the advancement of technology. Technology is lowering barrier of entry for many businesses. Innovations that once took mi llions of dollars in R&D, are now being built by teenagers over winter break. But while their ideas are innovative, their technologies are not.

Without that technological barrier to stop it, the innovative idea gets cloned and copied and eventually run out of business. In The Innovator’s Dilemma, Clayton Christensen calls these “disruptive technologies,” and notes that “[f]irms that sought growth by [marketing disruptive technologies] logged twenty times the revenues of the firms pursuing growth in larger markets.”10 In his book Zero to One, Peter Thiel coins the term “Vertical Progress” and notes that “…every business is successful exactly to the extent that it does something others cannot.”11

9 Reuven Cohen, Business Success is Happening Faster than Ever, but so is Failure. How to Adapt, Wired, https://www.wired.com/insights/2014/05/business -success-happening-faster-ever-failure-adapt/ 10 Clayton Christensen, The Innovator’s Dilemma, Harvard Business School Publishing, 1997, Chapter 6, p. 123. 11 Peter Thiel, Zero to One, Virgin Books, 2014, Chapter 3, p. 34.

Ever Evolving, Inc. info@everevolving.biz December 2016

9 http://everevolving.biz

To build these types of products takes imagination, resources, and time. The imagination and time are yours, but through SBIR and BAAs, the Federal government can help you fund the resources. Be sure to take advantage of all that is out there, not either or.

Do Not Dismiss the Federal Government when Looking for Capita l

As coached through business school, there are a few ways to get capital for your business. You can get fund it yourself, building up from small jobs until you have enough capital reserves to go after the larger game. You can ask the bank for a line of credit, and hope that your sales revenues meets your projections so you can pay it off. Or you can look for investment funding in the form of Angel investors.

The purpose of this paper is to point the reader to a fourth potential source, the federal governm ent. In working through the SBIR Program and/or BAA contracts, a small business can both provide value to their country as well as obtain the funding that they require to perform the required R&D.

Ever Evolving, Inc. info@everevolving.biz December 2016

10 http://everevolving.biz

About Ever Evolving, Inc.

The mission of Ever Evolving, Inc. is to help businesses continuously bring “disruptive” technologies to market. We help companies identify and target markets, develop products for that market using the latest technologies and best practices, and help the corporations evolve the products continually after launch. We also help educate and consult corporations on how to best manage their product backlogs so that once they get on top, they stay on top.

http://everevolving.biz/

About the Author

Steve Palmer is a businessman and entrepreneur local to the Washington, DC area. His background is in Technology and Business, and he started Ever Evolving, Inc. as a way to help businesses of all sizes reshape the world as they see fit. Please feel free to contact and follow Steve below if you need with:

1) Obtaining or progressing through an SBIR or BAA 2) Need help decomposing your products into areas of interest for the Federal government 3) Have an idea, but need help building a team to see it through

Steve Palmer

steve@everevolving.biz https://www.linkedin.com/in/steveapalmer | https://twitter.com/steveapalmer