Small Firms Get Head Start With R&D; Program
Seven years ago, when San Diego entrepreneurs Sandra Hutchins and Jan Zimmerman sought to launch a software firm, a lack of funds threatened to deflate their start-up spirit.
But that’s when the duo stumbled across a research and development funding program sponsored by the federal government that makes grants available exclusively to small, American-owned businesses.
Since 1983, when they founded Emerson & Stern Associates, a publisher of speech and language development software, Hutchins, 44, and Zimmerman, 42, have received 19 Small Business Innovation Research (SBIR) funding awards--a total of $3 million that has allowed their company to grow to the point that it now employs 20 at its Sorrento Valley plant.
Although highly competitive, the SBIRs are fairly straightforward and painless--a breath of fresh air, in essence, for those who have already jumped through bureaucratic hoops to garner federal R&D; funds through other programs.
Administered by the Small Business Administration in Washington, the SBIR program has financed nearly all of the development costs of Emerson & Stern’s four commercial products, including a software program that helps the hearing-impaired develop speech skills and one that helps foreign students learn English.
“None of these (products) would have happened without SBIR funds,” said Hutchins, the company’s president and chief technical officer. “For that matter, having SBIR funds was absolutely critical to the notion of us running an R&D; company.”
Cliff Toulson, an SBIR program manager based in Washington, said many other entrepreneurs and small business owners have duplicated Hutchins’ and Zimmerman’s success.
In fiscal 1988, the SBIR program awarded roughly 2,700 contracts--worth more than $386 million--to the nation’s small businesses. California companies netted the lion’s share, $98 million, of which nearly $16 million went to businesses based in the San Diego metropolitan area, SBA spokesman Michael Stamler said.
The nationwide total is up sharply from 1983, the program’s first year, when about 700 grants totaling $50 million were awarded.
Its advocates say the SBIR program is more than just a handout to small business. At a time when many fear the United States is losing the technological race to Asian and European competitors, the SBIR program allows the government to foster innovative ideas from the nation’s small businesses.
Concerned that the government was not doing enough to tap the nation’s pool of entrepreneurial talent, Congress passed the Small Business Innovation and Development Act of 1982, directing certain federal agencies that conduct R&D; to solicit innovative technology and products from small enterprises.
Federal agencies with R&D; budgets equal to or greater than $100 million are required to set aside 1.25% of their research budgets for the SBIR fund. Only American-owned, for-profit businesses that employ 500 or fewer people are eligible to apply for SBIR funds, Toulson said.
The program is designed for small businesses that have good ideas but can’t compete with larger, better-known companies, Toulson said.
“That’s the whole purpose of this program. We want to give the small business people a chance . . . to compete with the IBMs and the General Dynamics of the world.”
The 11 participating agencies identify the R&D; work they want conducted out of house and express those needs to the SBA, which announces such requests in a quarterly publication available free to interested parties.
The following agencies participate in the SBIR program: the Environmental Protection Agency, the National Aeronautics and Space Administration, the National Science Foundation, the Nuclear Regulatory Commission and the Departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services and Transportation.
“It is a highly competitive, three-tier award system whereby small businesses can compete for government R&D; projects,” Toulson said. “This is not a social program. It’s not set aside for minorities. This is an open competition that awards contracts to the company that can deliver the best product.”
Applicants first compete for Phase I contracts. Participating agencies provide winners with up to $50,000 to conduct a feasibility study. If the study is accepted, the agency then awards the applicant a Phase II contract worth as much as $500,000 to develop a product or technology within two years.
“The initial proposal can be no more than 25 pages,” said Zimmerman, who is Emerson & Stern’s chief executive officer. “By the time you do budgets, references and a cover page, you’re probably down to a 15-page proposal. And they give you an outline. . . . How much easier can it get?
“Phase II proposals typically range from 65 to 200 pages,” Zimmerman added. “It’s definitely more work, but, then again, you’re competing for 10 times the amount of money you get in Phase I.”
If applicants successfully complete the Phase II contract, the Small Business Administration helps them sell their new products or technology by providing entrepreneurs with information about potential customers or venture capitalists. However, Toulson said the SBA does not provide any financial assistance during this process.
The government receives substantial benefits from the SBIR program, too, Toulson said.
“For example, about 55% of all the (Department of Defense) outside R&D; work is done through SBIR,” Toulson said.
Zimmerman added: “They’re getting innovative research and they’re getting it far less expensively (than contracting with big companies that charge higher prices). And they tend to get (results) faster because small companies are often a bit more nimble.”
But there are some drawbacks to the SBIR program.
It is a highly competitive process with only a few winners. Of the 17,039 Phase I proposals received for fiscal 1988, only 2,013, or 12%, received contracts. Typically, only 40% of Phase I winners go on to receive Phase II contracts, Toulson said.
According to a 1988 SBA survey of 353 Phase II award recipients, 23% of them had successfully sold a product or were on the verge of selling a product as a result of SBIR funds.
And applicants say there is often considerable lag time--as much as six to nine months--between completing a Phase I feasibility study and waiting for Phase II approval and funding.
“Just as you get going on a project you have to set it aside and wait,” Hutchins said. “The funding gap is hard to juggle. You get the right people to do the project, and then what do you do with them for six months?
“Sometimes we’ll move people around to another assignment, but sometimes we have to let (prospective) employees know that their job is tied to the funding that we get,” Hutchins said. “That can make recruiting a difficult task.”
Emerson & Stern Associates was founded in 1983 to escape the corporate bureaucracy that often slows the idea-to-product process. Hutchins previously held communications engineering posts at TRW and ITT, while Zimmerman was a San Diego-based media consultant to a variety of high-technology clients.
“Instead of beating our heads against the wall, we decided to do it ourselves,” Hutchins said. “We thought we could do much better.”
Among the company’s four commercial products is ESL Writer, an educational software program that checks spelling and grammar for students whose native language is not English. ESL Writer is distributed by Scholastic Software, a division of Scholastic Inc., a major New York-based educational publisher.
The company also developed SAY & SEE, a software program that analyzes dysfunctional speech sounds made, for example, by the hearing-impaired. By representing such sounds visually on a computer monitor--the program re-creates images of the person’s tongue movement--the software enables a teacher to analyze faulty enunciation and to show the student how to correct it.
“It’s been used primarily with deaf children,” Hutchins said. “It’s an opportunity for them to ‘see’ sound on the screen, and then the teacher can tell them what they’re doing right or wrong. It gives them feedback that they can’t possibly receive otherwise.”
SAY & SEE is distributed by Interactive Learning Materials, a New York-based publisher.
The company has also developed rehabilitation software that helps people who have suffered head injuries regain reading, writing, reasoning and mathematical skills, and a word processor that allows an individual to write in American Sign Language.
Companies interested in obtaining the SBIR quarterly publication or more information about the R&D; funding program should write to the Small Business Administration, Office of Innovation, Research and Technology, 1441 L St. NW, Washington, D.C. 20416, or call (202) 653-6458. Or contact the local SBA office, 880 Front St. 4-S-29, San Diego 92188. The quarterly publication is published in December, March, June and September.
