In the innovation game, R&D is only half the battle
Road to market requires equal outlay of time and money
By Ellen Chang
Congress in December reached an agreement on the FY 2022 defense authorization bill (i.e. “NDAA”) that increases research funding by $7 billion and includes support for expanding the Defense Innovation Unit’s (DIU) reach, research at minority-serving institutions, and commercialization pilots.
It also has several provisions to improve the commercialization potential of the Small Business Innovation Research (SBIR) program. This blog intends to break down this commercialization topic and share some of our learnings over the last couple of years as we built and experimented with a program designed to accelerate SBIR awardees. To learn more about how the SBIR program can help Deep Tech companies, reference this link.
Improving the SBIR commercialization rate is a recurring theme. Every few years, the issue about poor commercialization rates of the SBIR programs surface. Certain Congressional representatives raise concerns about continual funding of “SBIR mills,” companies that continue to be awarded SBIR after SBIR. This year is no different, given that the SBIR program is authorized through September 2022 and faces a renewal vote.
When the SBIR program was conceived in 1982, fulfilling governmental research needs was seen as an end in itself. Commercialization was not the primary motivation. The wild success of Qualcomm, ViaSat and several other companies that started with a Phase I SBIR, hinted that the SBIR program could be the impetus for successful commercialization. Hence, over the last two decades, the call to encourage commercialization has risen to higher levels. Commercializing SBIR-supported innovation is necessary if the nation is to capitalize on its small business research investments.
The graphic above is from the National Institutes of Health, one of 12 agencies that run an SBIR program. It shows NIH’s attempt to accelerate basic research (Phase Is) all the way to commercialization. Phase IIB irecognizes that statutorily limited Phase 1 and II amounts might not be sufficient for certain technologies to be commercialized. NIH is attempting to address this “valley of death” by making congressional officials recognize that commercialization approaches - and amounts - are not one-size-fits-all even though the dollar amounts per SBIR phase are set.
The bridge funding also recognizes the difference between funding a group of scientists so they can realize their research and funding development and scaling of a product. The transition is challenging. It requires a small firm with an innovative idea to evolve quickly from a narrow focus on R&D to a much broader understanding of the complex systems and missions of federal agencies, as well as the interrelated challenges of managing a larger business, developing sources of finance, and competing in the marketplace. The knowledge and skills needed to be successful at commercialization versus R&D are simply different.
Those looking for a speedy commercial return on initial SBIR funding often ignore key realities
Numerous additional development steps are often needed after the research has been concluded. These involve technical product definition and integration, in addition to market assessment and opportunity analysis. A single, direct line between research inputs and commercial outputs rarely exists in practice. How does one truly write a credible commercialization plan?
Research rarely results in stand-alone products. The output from an SBIR project is often combined with other technologies. In some cases, the full value of an “enabling technology” that can be used across industries is difficult to capture.
There are often long lags between an early-stage research project and an eventual commercial product. This means that for a significant number of the more recent SBIR projects, commercialization is still in process, and sales—often substantial sales—will be made in the future.
Commercialization Plans Do Not Necessarily Lead to Commercialization
One would think there would be an abundance of website references or materials to help with commercialization. Not so much. Google “SBIR Commercialization,” and the first few links that surface are about building out the commercialization plan. Then come a ton more by consultants who espouse ways to write a commercialization plan. But these provide a means to satisfy the proposal. None really addresses the skills or knowledge needed to assess markets, address the problems in those markets, think about applications or devise strategies for market entry.
My observations come from working with more than 20 R&D focused companies over the last several years. Their research might have had a destination, but most research results in component technologies that rarely are end products in and of themselves. In most cases, more development was needed.
While helping founders/investors ideate around what the technology could be used for, I found they had a myriad of ideas. But, they did not know how to whittle down and focus on a market domain. I worked with the founding teams to conduct market segment opportunity analyses. For example, one company had developed some disruptive tech that leverages photonics. Their tech could be applied to oil/gas, aerospace (original domain where they received numerous SBIRs), healthcare, and even building infrastructure. Which should they go to first? We worked with them to research and assess, based on contacts, growth rates, policy shifts, and several other elements, to develop their own framework to choose their beachhead market.
Company founders had to switch from an engineering mindset to a customer/market focused mindset
I also found that, even if a company determined which market would be its beachhead, leaders did not know how to get started in validating their assumptions about the market domain. This is where customer discovery comes in. We coached teams on how to elicit and synthesize information about what potential users in the market might value.
Most companies did not have the know-how or network to start customer discovery. It is a process that applies rigorous hypothesis testing toward learning about a market and how one’s product or idea might fit. Many founders thought they had to grow sales right away. Others didn’t have connections or know how to begin to get them. I often caution that these conversations are not sales conversations, rather interviews to better understand customer pain points and validate, or tweak these hypotheses of utility.
Once a beachhead market is identified, there remains the need for funding to mature and develop the technology into a product. Where does that funding come from? Should the founders take in private capital? If so, how much control will they cede? Because of the general lack of knowledge about private capital, including venture capital, many companies either go without and try to bootstrap, or look to the government again. But, securing government dollars can be slow and cumbersome. The commercial markets move faster, and there is private capital for the right team and product that is targeting a growing market.
How does one start? I learned that most technical founders do not quite know how to position their products in a growing market with slides and a pitch that resonates. It isn’t about showmanship. It’s about conveying the vision while addressing technical as well as business/market issues. I also helped the teams think through who they should take money from. One can leverage the same customer discovery process to learn about investors, then tease out which investors would be relevant and interested. In my view, an interested investor is not sufficient. That investor should also be able to add strategic value to the company. Do they have a network, do they have domain/technical expertise and have they commercialized products before?
Choosing from a set of options about how to commercialize can be difficult and confusing. See the table below, which enumerates several approaches to get technology/product into the marketplace. Each avenue takes considerable focus and resources in its own right. How does one choose?
Take Licensing, for example. One might think licensing is easy; all one does is find a lawyer, come up with a licensing agreement, then shop the tech around, right? Well, not so fast. How does the world even know the tech exists? Marketing has to be a component of this approach. Then, how does one choose the right partner? Once the partner is chosen, even after negotiating the license, one needs to teach and instruct the recipient about one’s technology, perhaps even help them understand how to market it. Licensing, to many, seems to be an easy pathway -- throw the technology over the fence with a licensing agreement, then the recipient takes it and runs with it and royalties just roll in. Those who have gone down this path have learned — not so much!
In summary, commercialization is hard work. There are many reasons why commercialization takes so long, and often the grants and research contracts the government provides, as well as the assistance, do not help these teams with commercialization -- which is as costly and challenging as conducting the research itself.
The process of bringing an idea to commercialization requires much time and effort. You need to orient your mindset, surround yourself with relevant advisors and roll up your sleeves. But, it isn’t impossible - and it’s tremendously rewarding to see one’s invention in the hands of users/customers.
Federal Register: Small Business Innovation Research and Small Business Technology Transfer Programs Commercialization Benchmark
Is Government Funding Good for Your Startup? | Stanford eCorner
2021 Congressional Research Service Report on the SBIR Program
Government Accountability Office (GAO) Report and Site covering the SBIR Program
Can the SBIR and STTR programs advance research goals? | Nature Immunology