Uncle Sam Can Front You the Money to Launch Your Product

Picture this: You have an idea for a dynamite product, but you need capital for research and development--hundreds of thousands of dollars. You don’t qualify for that kind of bank financing, and you resist approaching private investment groups or venture capitalists for fear they will gobble up your business.

Now ask yourself this question: Would you take on a partner who promises to front your research and development costs with only one string attached: that you give the partner a license to use your product royalty-free for five years? The offer, of course, leaves you free to sell your product to other customers in the meantime, with all profits flowing to you.

If that sounds too good to be true, you need to know about the federal government’s Small Business Innovative Research program. Run by the Small Business Administration on behalf of 10 federal agencies, the program hands out something like $1 billion every year to businesses seeking to develop products that might prove useful to the government.

Much of that money comes from the Defense Department and, as you might expect, it finances research into ideas of interest to the armed forces, many of them very high-tech. A Santa Monica company, Accuwave Corp., for example, won $70,000 from the Navy in 1997 to research and develop a compact optical sensor for detecting and tracking ocean-penetrating laser radar.

But the money also comes from the Agriculture, Commerce, Education, Energy, Transportation, and Health and Human Services departments, along with NASA, the Environmental Protection Agency and the National Science Foundation.

And much of it finances the development of products with real-world use. Advanced Brain Monitoring of Los Angeles obtained nearly $100,000 from the Health and Human Services Department for a portable, cap-like device outfitted with electrodes to monitor the brain activity of the wearer.

In the real world, truck drivers or long-shift workers might use the device to guard against drowsiness. Similarly, it might help children with attention deficit disorder to stay focused.

A Torrance company, Biomed & Neuro-Research Inc., received $100,000 from the Health and Human Services Department to develop a device for aiding memory dysfunction in the elderly, and FEM Engineering Inc. of Los Angeles got $750,000 to develop software controlling the manufacture of sheet-metal products using techniques developed in manufacturing high-tech composite materials.

In short, the SBIR program finances a broad range of ideas and, like other programs detailed in this space last week, it stands out as an often-overlooked source of financing for business owners seeking to bring good ideas to reality.

To find out about the program, check with any SBA office, including the one in Glendale, or visit the home page of the SBA’s Office of Technology (https://www.sba.gov/SBIR). The Web page links you to other pages describing the program and detailing what kinds of projects might interest the agencies involved. The links contain schedules of free workshops on the intricacies of completing an SBIR deal.

Prepare yourself, however. Government does nothing simply, and wading through these pages is a daunting task. In addition, obtaining the financing takes even more doing, for you must satisfy the government that you have a viable idea and that you can comply with volumes of rules and regulations seeking to ensure that you don’t abscond with the R&D; money.

“The paperwork can seem overwhelming, and the biggest obstacles you have to overcome are in the accounting area,” says Gary Breslau, an Encino consultant who oversaw SBIR financing for a Rockville, Md., engineering company involved in artificial intelligence and robotics and who now helps other companies obtain financing for their own projects.

The problem, Breslau says, is that the government wants you to separate the costs associated with any SBIR-financed project, keeping them distinct from all of your other costs--a requirement that forces some companies to install whole new accounting systems.

“If you have a good idea for a product that meets the need of one of the funding agencies, writing the proposal is easy--25 pages or so describing the project and your company, very much like a simple business plan,” Breslau says.

“The accounting is what’s difficult if you’re not already set up for it. And there are mountains of regulations that apply to these contracts.”

The paperwork dissuades some business owners from seeking SBIR financing, Breslau says, but those who overcome the obstacles get a patient partner in researching and developing products useful to the government and the civilian marketplace.

“Lots of business owners with great ideas fear giving up control of their companies when they bring in venture capitalists,” Breslau says.

“But the government has no interest in controlling your company. It wants a product that meets its own needs, and then it gets out of the way so you can commercialize it and get rich. Where else can you get a financing partner who will do that?”

NEXT: How a Los Angeles business owner tapped a close-at-hand source of financing to expand his music publishing company.

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Columnist Juan Hovey may be reached at (805) 492-7909 or via e-mail at jhovey@gte.net.