Launching a tech startup? Try national security

Although defense contracts traditionally conjure up images of large government contractors, the government has been working toward including more small businesses and startups in the mix.

For entrepreneurs, working with the government, and in particular, agencies related to national security, may seem difficult given the use of different accounting standards and contract protocols. Despite this, many opportunities exist for small businesses and entrepreneurs to work in the national security space.

The main method of gaining access to funding is through the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. Created by the National Science Foundation 30 years ago, the program seeks to find venture capital for high-risk, high-potential ideas.

“[The NSF] saw in the environment at that time not much venture capital… not a lot of funding for early-stage, high-risk but high-payoff ideas,” said Robert Brooke, Director of Federal Funding Programs at the Center for Innovative Technology at the Tandem NSI Deal Day on May 7. “They wanted to be the first high-risk funder for your idea if it meant their mission.”

The competitive awards program consists of 11 agencies, including the entire DOD enterprise and its agencies. Only companies with 500 employees or fewer are allowed to compete for awards—on average, the companies involved are made up of 10 to 20 people.

The program consists of three phases:

• Phase 1 is a feasibility study that provides up to $150,000 for up to six months. Under the STTR program, funding can be provided for up to 12 months.
• Phase 2 is intended to create a prototype demonstration—the phase has awards of up to $1 million for up to two years.
• Phase 3 is commercialization, or selling the product through the standard DOD acquisitions process.

DOD and its components make up the majority of the SBIR/STTR program. Of the $2.2 billion dollars allocated for the overall program, DOD is budgeted for about $1 billion, nearly half of the program.

“We put out five solicitations per year, and in 2015 there’s going to be six—three of them are SBIR and three of them are STTR. In those solicitations there’s about 700 topics,” said Christopher Rinaldi, DOD Program Administrator for the SBIR/STTR Program. “We take in about 10,000 proposals a year, and award about 2,600 awards a year. So if you think about it, about one in six proposals get funded for a Phase 1 award.”

Making it to the third phase is much more difficult, however. The Homeland Security Department, which also participates in the program, has identified several problems that SBIR companies have to deal with.

“When we surveyed all our Phase 2 companies last year, we concluded there were three barriers to commercialization,” said Frank Barros, SBIR Program Analyst at DHS. “One was technical maturation, the second was business maturation, and the third is end-user knowledge.”

Technical maturation refers to moving the product along the technology curve. Companies have had trouble reaching a beta prototype of a product rather than an alpha prototype, and in finalizing their products. Additionally, SBIR companies have tended to have an insufficient knowledge of the market and were not very good at future planning. Finally, SBIR companies are struggling with end-user knowledge—finding some way to get their products out to the market.

DHS has attempted to remedy some of these problems with several different solutions. Barros said the department DHS has chosen to pay for technology-driven market intelligence to be provided to SBIR companies, giving them targeted marketing intelligence for better knowledge and forecasts. DHS also is planning on paying to place SBIR products into specialized databases for better connections with end users.

While government agencies have been working on solutions to include more small businesses into the national security space, program officers have noted a more general problem with the acquisitions process.

To facilitate better communication between non-traditional performers, the Defense Intelligence Agency started an initiative late last year called NeedipeDIA.

“Instead of a six- to nine-month process of releasing a RFP or BA, [NeedipiDIA] goes specifically and tactically out to the world with the things that we’re looking for, easily and efficiently. And if we forgot to ask, to give you a channel where you can submit the ideas that we didn’t know we were looking for,” said DIA CIO Dan Doney.

The solution seeks to circumvent traditional acquisitions process by linking individuals, companies and academia through DIA’s needs listed on the website.

“Our innovation problem is a communication problem two ways—us effectively saying to the people who have talent to solve our problems in a really high-fidelity way,” Doney said. “We need to come up with new models of communicating our challenges. And vice versa—there’s an enormous amount of talent we haven’t discovered.”