|Articles|August 1, 2003

BioPharm International

  • BioPharm International-08-01-2003
  • Volume 16
  • Issue 8

The Grant Story: Why Pursue, Where to Find, and How to Win Research Funding

Author(s)Randy Grimes

A less-than-favorable venture capital market and a sluggish economy have compelled companies to seek grant money to fund their growth and development activities. Follow these winning strategies for obtaining your next grant.

What do companies like Amgen, Biogen, Genzyme, and Immunex have in common? If you said they are among the top publicly-traded biotech companies, you would be correct. You would also be right if you said they all made use of federal research funding to fuel their early growth and development. If your company hasn't taken advantage of grant funding opportunities in the past or is struggling to win grants in today's hyper-competitive environment, it may be time to reassess your efforts.

The Benefits of Grants

The benefits of receiving research grants are hard to overstate. For some young companies, grant funding is the only source of capital supporting their early high-risk research. For others, it's a way to enter government procurement with a bid advantage status. For still others, it's the best way for founders and employees to retain ownership of their companies. Grants are one of the best ways to reduce investment dilution and increase long-run returns to founders, employees, and early-stage investors.

Table 1. Founder-retained investment from a new company with capital acquisition rounds before reaching $400 million in liquidity and Table 2. An example of the difference that grants can make; by eliminating two investment rounds, the founder share at liquidity increases from 17.8% to 31.6%.

Consider a new biotech company that goes through six rounds of investments before hitting a $400 million liquidity event (Table 1). In this case, founders and employees retain just 17.8% ownership of the company by the time the company reaches liquidity. Had the company obtained grants and reduced those investments (while maintaining the value trajectory), the founders' ownership would have increased. Had the company eliminated its first round (angel funding), the founders' share would have grown to 23.7%. Had it eliminated two rounds, their share would have grown to 31.6% (Table 2). In terms of dollars, the founders and employees could have gained between $23 million and $96 million at liquidity by financing their early research and development efforts through grants.

For companies that have matured beyond the embryonic stage, grants can also reduce dilution and benefit early investors. Had the above company replaced the second and third rounds of investments, the founders' ownership would have swelled to 31.6% and the company's angel investor would have doubled his or her return.

Although grant funding offers tremendous benefits, a company should not rely on grants as its sole source of funding for several reasons:

Cost sharing. Many programs require or consider cost sharing as part of the award process. The National Institute of Standards and Technology (NIST) Advanced Technology Program (ATP), for example, requires a minimum cost sharing of indirect expenses (1). You cannot share costs with funds from other federal grants or credibly claim that you have no indirect expenses.

Restricted uses. Grants typically prohibit the use of funding for business development, marketing, or sales. You may be able to fund your product's development with grants, but it's unlikely you will sell many developed products or reach liquidity without investing in other critical business functions.

Variable funding. Grants are not a stable reoccurring source of capital. A company can receive $5 million in one cycle and come up empty for the next several years. The best plan is to diversify your funding with venture capital, partnerships, or early product sales.

The Basics of Securing Grants

Once you have decided to add grant funding to your company's financial strategy, cast the broadest possible net to capture the best opportunities for your company. Look beyond the Small Business Innovative Research (SBIR) solicitations on the National Institutes of Health (NIH) website (grants.nih.gov). NIH is an excellent place to start, but there are a number of other funding mechanisms and agencies to consider. The better the fit between the funding agency's needs and your company's goals, the better your chances of success. Because the quality of your search is so fundamentally important, a variety of solicitation methods, funding agencies, and search strategies need to be explored.

Funding mechanisms including SBIR, ATP, Broad Agency Announcements (BAAs), and Program Research and Development Announcements (PRDAs) offer varying levels of topic freedom, structure, and funding (Table 3) (2,3). The SBIR program provides over $1.5 billion in funding annually to small companies that conduct research of interest to the soliciting agencies. (See the SBIR funding sidebar.) Projects are broken into three phases; the first provides up to $100,000 to prove the feasibility of a technology or technical approach. In the second phase, up to $750,000 dollars is provided to develop the technology. In the third phase, companies commercialize their technology with other government or private partners without the financial support of the soliciting agency. Despite the limited variety of topics funded and the small size of phase 1 awards, SBIR grants are a valuable source of funds because of their sheer number and variety.

Table 3. Available grants. Amounts are in thousands of dollars (7).

BAAs and PRDAs also request proposals for technical feasibility and technical development research on topics of interest to the soliciting agency. Unlike SBIRs, these solicitations vary widely in terms of structure and funding level. One BAA may limit research to $200,000, whereas another may accommodate $5 million. Look for BAAs and PRDAs to obtain larger chunks of funding for good matches between your interest and that of the funding agency.

The ATP, unique to NIST, provides perhaps the most flexibility. Unlike other agencies, NIST awards ATP funding based not on its interests but on the technical merit and potential economic benefits of the proposed effort. Projects can be up to three years in length and supported by as much as $2 million for a single applicant. Because of the topic flexibility and amount of funding provided, ATPs are one of the most sought-after and prized awards.

The agencies funding these awards include those you would expect, and some you might not. Obviously, begin your search at NIH, which supports over $15 billion in health-related research annually, including close to $500 million in SBIR awards (4). But did you know that the Department of Defense is second only to NIH in its support of health-related research, providing over $1 billion each year (5)? Have you checked for opportunities at the National Aeronautics and Space Administration (NASA), the Department of Agriculture, or the Department of Veterans Affairs, which all support substantial health research? Look for opportunities wherever there is the slightest chance for a connection between your work and an agency's needs. You never know what NASA or the Department of Agriculture might want.

SBIR Funding

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