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Bioinformatics Firms Turn to Uncle Sam s SBIR Program to Fund New Product Development

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You’re the CEO of a small bioinformatics company. Maybe your revenues are healthy, maybe you’re barely making ends meet. But when an intriguing project proposal crosses your desk and you’re not sure whether it’s worth putting up the company’s money to support it, chances are you’ll do what many bioinformatics companies are doing these days — apply for a Small Business Innovation Research grant from the NIH or NSF and keep your fingers crossed.

In lean times, more and more bioinformatics companies are turning to the government to support their high-risk R&D projects. Even companies with a strong customer base and a steady revenue stream are looking to federal funds to support their projects in order to conserve precious resources for a rainy day.

In a sector where it’s vital to stay on the cutting edge of new technology, firms are finding that SBIR grants allow them to carry out research that will keep their product portfolios fresh down the road, while still devoting their core resources to customers and existing products.

The SBIR program, first established in 1982, sets aside 2.5 percent of federal agencies’ extramural budgets to support R&D with the potential for commercialization. Currently, 10 agencies participate in the program, including NSF, NIH, DOE, and DOD. NIH alone awarded 1,704 awards totaling $420 million in 2001. Firms first apply for a Phase I award, generally around $100,000, which acts as proof of concept for the larger Phase II grants, which are generally in the neighborhood of $1 million.

The prospect of free government money is certainly appealing, but bioinformatics companies who have been through the process warn that it’s not as easy as it sounds. For one thing, the application process is lengthy, time-consuming, and tedious. In addition, all that work still doesn’t guarantee that you’ll win a grant.

But some companies coping with the slowdown in capital spending and venture capital investment in the biotech sector have found that a sound SBIR strategy is helping them stay afloat while many of their competitors are floundering.

 

When it Works

Michael McManus, COO at AnVil and principal investigator on two recent Phase I NIH SBIR grants, noted that the company does not view this funding “in lieu of revenue.” Rather, he said, the grant will accelerate development of clustering and visualization technology that the company would have developed using its own resources, albeit at a much slower pace. “In a small company, your resources are consumed satisfying customers. If you can use these extra resources to bring to bear on a problem that would be well worth solving, then it’s good for everyone,” he said.

In addition, because SBIRs fund high-risk projects, many companies find they can get support from the government in areas that commercial investors wouldn’t touch. As an alternative to VC funding, SBIRs offer another benefit, according to Todd Smith, CEO of Geospiza: “There’s no equity given up to get this money.”

Smith, who is the PI on Geospiza’s recent $1.1 million Phase II SBIR grant to broaden the application base for the Phrap assembly program, cautioned that “if you’re into rapid capitalization to get something out the door, it might not be an appropriate funding path,” but added that the award is already paying off for Geospiza in the form of potential partnerships. “People say, ‘Hey, you’ve got money, let’s work together.’”

Indeed, while SBIRs aren’t technically a revenue source and don’t count as income in the eyes of investors, a million dollars in the bank doesn’t hurt a company’s chances for survival. “It provides capital, and money is money,” said Maciek Sasinowski, CEO of Incogen. Potential partners, customers, and investors see SBIRs — particularly Phase II awards — as a promising sign. Not only do they validate the value of a company’s science and technology, but they’re a selling point for those “who don’t want to do deals with fly-by-night companies that won’t be around in a year,” according to David Rubin, CEO of Cognia, which was recently awarded a $1 million SBIR to develop a proteomics database system (see p. 4).

Sasinowski, whose company won a $2 million Advanced Technology Program grant from NIST to develop a web services-based XML bioinformatics framework, said that the award sparked “regular calls from venture capitalists.” The ATP program is similar to the SBIR program, but is broader in scope, generally faster, and tends to fund riskier projects. Sasinowski said that Incogen is also thinking about funding some smaller-scale projects with SBIRs. Incogen has already parlayed its ATP grant into a matching grant from the State of Virginia, Sasinowski said, and the project is now supported with a total of $6 million in funding, of which only $1 million came from Incogen.

While some VCs shy away from companies who rely too heavily on SBIRs, the investment community generally considers companies with one or two awards under its belt a safe bet. “We’ve always been strong supporters” of companies with SBIR funding, said Rob Nelson of Arch Venture Partners. Steve Burrill, CEO of life science merchant bank Burrill & Company, expressed a similar view: “In a capital-constrained market I would argue that any creativity in financing is rewarded. I certainly don’t see it as a blemish on the science or the technology that they sought out SBIR funding, I see it much more positively as leverage.”

An alumni of the SBIR system, Silicon Genetics CEO Andrew Conway said the company relied on Phase I and Phase II grants to support the early development of its gene expression software, “but now that we’re successfully selling products to customers, we don’t need them any more.” Conway estimated that SBIR funding contributed around 5-10 percent of the development costs for GeneSpring and around 20 percent of the company’s recently launched MetaMine.

 

When it Doesn’t

But there’s a downside, of course. The chief complaint among applicants is the snail’s pace of the SBIR process. Smith bemoaned the “dreaded gap” of six to nine months that applicants must endure before finding out whether they have been awarded a grant. For the complete Phase I/Phase II cycle, “this program is realistically a two-and-a-half to four-year deal,” he said.

Conway also warned that SBIRs are purely a long-term funding option: “For a company that doesn’t have a product and has been relying on VC funding, which has suddenly gone away, and needs to raise a whole lot of money in the next month or so, it’s no use.”

And the investment community is often a bit skittish about SBIRs. Rubin said that Cognia’s investors were initially wary of its plans to apply for SBIR funding, thinking they would “pull the company in a direction it wouldn’t otherwise grow or dilute our strategy to appease our new bosses in the government.”

Nelson agreed that his thinking puts him in “the minority” among VC firms, who generally view SBIR grants as “distracting.” Firms must keep their grant-writing strategy in line with their business goals, he said, in order to overcome this perception when seeking venture funding. It’s easy for companies to catch “SBIR fever” and apply for disparate grants that lead to dead ends within their business plans. “Just amassing a bunch of SBIR grants and doing random technology all over the world isn’t a way to build a company,” said Burill, who added that SBIR grants should not be included as part of a company’s valuation.

Finally, companies must keep in mind that a clear commercialization plan is an essential component of an effective SBIR strategy. “Don’t presume you can write a compelling piece of research and get funded,” said McManus. “You have to understand the science and how you would apply it in a commercial setting.”

Added Conway, “Make sure you have a plan for what to do when [the grant] is finished … The SBIR grants are designed to get a company up and started, not to keep a company going.”

— BT

Thinking of applying for an SBIR?
Here are some pointers from bioinformatics companies who have been through the process:

• Be ready to wait. The application and review process for a Phase I award can take six to nine months. If you’re setting your sights on a Phase II, be ready to wait up to four years.

• Have an advisor or someone on your staff who is familiar with the grant-writing process. It’s not a guarantee you’ll win the award, but it will save you a lot of time.

• Make sure you have a clear commercialization plan for the technology you are developing.

• Ask questions. The grants management offices of all the federal funding agencies are there to help you, and by all accounts are actually helpful.

• Don’t apply for projects that are too far outside the core focus of your business.

• Don’t rely on SBIRs as your primary source of funding.

 

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