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Using SBIR to Bootstrap Your Company

Warren Katz, Founder and Chief Operating Officer, MAK Technologies

When my partner, John Morrison, and I left Bolt, Beranek and Newman (BBN) in 1990 to start MAK Technologies, we thought that the primary market for our software to link, simulate, and visualize the virtual world would not be the military that originated the technology.

At BBN, John and I worked on the SIMNET project, the prototype technology to network remotely located simulators to each other for large-scale war games or experiments. I was the resident drive train simulation expert and John was the manager of system software. Our goal for MAK was to commercialize the technology and make it available to game makers and video arcades.

Knowing it would be next to impossible at that time to attract outside investors, we started writing proposals for contract work. One of those proposals was to the U.S. Department of Defense (DoD) Small Business Innovation Researach (SBIR) program.

Small Business Innovation Research Program

SBIR was mandated in 1982 under the Small Business Innovation Development Act to encourage businesses of 500 or fewer employees to develop technology and to provide incentives for these small businesses to profit from its commercialization. Each year, eleven federal departments and agencies are required by SBIR to reserve a portion of their R&D funds to award to small businesses.

SBIR is the largest government source of early-stage technology financing in the country The DoD SBIR program, which accounts for nearly half of all SBIR funding, awarded $1.16 billion in fiscal year 2006.

Under the program, companies can apply for a Phase I award of up to $100,000 to test the scientific, technical, and commercial merit and feasibility of a concept. DoD issues three SBIR solicitations a year for Phase I proposals on various research topics. If Phase I proves successful, the company may be invited to apply for a two-year Phase II award of up to $750,000 to further develop the concept, usually to the prototype stage. More than 40 percent of Phase I projects subsequently are awarded Phase II contracts.

Studies show that over 39 percent of Phase II projects result in commercialized products or services. In 1991, MAK's first contract, a Phase I award to develop a distributed simulation networking toolkit, was just such a project. Today, MAK creates commercial off-the-shelf simulation tools and toolkits, develops PC-based military tactical trainers, and crafts custom simulation solutions, primarily for the defense industry. Many of these products were developed from R&D supported by the approximately fifty Phase I and twenty Phase II SBIR grants we've been awarded since the company's inception. The VR-Link we developed from that first Phase I contract not only remains our flagship product but is now the world's leading simulation networking toolkit.

Venture Capital from the Government

From an entrepreneur's standpoint, what's most remarkable about the SBIR program is that it essentially provides free venture capital from the federal government. Under the program, the government offers up to $850,000 in seed capital, requires no money back, takes no equity in the company, and retains few intellectual property rights to technologies developed with the funds. Moreover, if the company is successful in commercializing the product, the government is likely to become one of its biggest customers.

People are often frightened but shouldn't be about the financial implications of becoming a government contractor. Other than compliance with government accounting procedures, federal money comes with few strings attached (certainly fewer than venture capital).

In effect, we used SBIRs to bootstrap our product line. As soon as we started selling VR-Link in 1992, it created its own revenue stream. John and I reinvested the profits in the company and did the same with other products we've commercialized since then. MAK might have grown faster if we'd taken investors, but when the day came to sell the company in late 2006, the current employees still owned 100 percent of the company. (Note that SBIRs are awarded for advancing the technology only and not for actual commercialization activities.

COTS Advocate

My experience with SBIR has made me a vocal advocate for commercial off-the-shelf  government procurement. Sure, the U.S. Air Force can't buy state-of-the-art fighter planes that don't exist off the shelf. The problem is that the whole acquisition system is so accustomed to that kind of procurement that it extends down to things that do exist and can be bought off the shelf, usually much faster and at lower cost. Fortunately, the system does reach a point where it's too humiliating to reinvent items like hammers and toilet seats, and that's the point we're getting to with products like MAK's VR-Link, VR-Force toolkit for generating and executing battlefield scenarios, and Stealth 3-D visualization tool.

Thanks to SBIR, DoD is saving hundreds of millions of dollars because it can buy products like mine off the shelf. In addition, technology is advancing, commercialization of federal R&D is increasing, and small businesses like MAK are making money. When a program does all those things at once, I call it a home run.

© 2007 Ewing Marion Kauffman Foundation. All rights reserved.

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