Bankroll for innovation: government grants propel small-business R & D.

• Author: Farmer, Russ
• Position: Small Business Innovation Research

Underscoring Colorado's prowess and promise as a high-tech hot spot, small businesses in the state reap $75 million a year from two government grant programs set up specifically to nurture leading-edge, high-risk research and development.

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That makes Colorado the country's fourth-leading recipient of the grants, and as awareness of the funding spreads, state businesses figure to nab an even bigger piece of the $2 billion available nation-wide each year.

The first of the two programs dates back to 1982, when Congress passed legislation to establish the Small Business Innovation Research (SBIR) grants. This mandated that 0.5 percent of all extramural (non-government-employee) research funding from the government's larger research agencies would be set aside for small businesses. That original set-aside amount has since increased to 2.5 percent, and a "sister" program called the Small Business Technology Transfer (or STTR) program provides another 0.3 percent set-aside. Together these two government grant programs fill a vital small-business funding void, particularly in early stage research, a phase that rarely moves private organizations, venture funds or angel investors to open their checkbooks.

Eleven government departments and agencies currently participate in SBIR and STTR--Agriculture, Commerce, Defense, Education, Energy, Homeland Security, Transportation, Health and Human Services, NASA, the National Science Foundation and the Environmental Protection Agency. These agencies all have extramural research budgets of more than $100 million dollars.

The SBIR/STTR funding channel initially provides up to $100,000 for six months to a year for a Phase I feasibility study. Phase I success can then lead to a two-year, Phase II prototype/demonstration project fund ranging from $225,000 to more than $1 million, depending on the agency. Companies that learn to participate effectively in the program can get multiple Phase I and II awards for different applications of a base technology, thus providing millions of dollars for their research and development.

In addition to the SBIR funding, the program provides for preferential procurement opportunities in the "Phase III" commercialization stage (Phase III is funded outside of the SBIR program) based on the funded technology. These Phase III procurements are for application development and production, and in many cases they can yield contracts in the millions of dollars.

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