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Sunday, 21 July 2013 22:00

Money on the Table: Grand Rapids companies pass on federal research dollars as others cash in

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West Michigan businesses have complained for years about their lack of access to capital, but it turns out they’ve been mostly passing over two potential funding sources: federal grant programs that pay for developing innovations and commercializing intellectual property.

Grand Rapids lags other areas of the state and similarly sized cities across the nation such as Huntsville, Ala. and Louisville, Ky. in the use of federal Small Business Innovation Research and Small Business Technology Transfer grants, commonly known as SBIR and STTR.

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The approximately $2 million in federal research funding in Grand Rapids from 2009 to 2012 trails even the smaller Kalamazoo region, where firms brought in $7.2 million in grants.

Experts attribute the disparity in Grand Rapids to the absence of a research university in the area, a lack of awareness of the programs and, to some degree, the region’s cultural resistance to government-funded programs.

“We just haven’t gone after the dollars,” said Karen Benson, director of innovation services at The Right Place Inc. in Grand Rapids that’s now making the attraction of federal research funding to the area a higher priority.

The U.S. Small Business Administration-managed SBIR and STTR programs are set asides for small businesses in the research budgets of several government agencies. Experts say the amount of SBIR and STTR funding can also provide clues to the level of capital available to entrepreneurs in a region.

From 2009 to 2012, Grand Rapids-area companies landed seven SBIR or STTR grants totaling $2 million.  On a per capita basis, the grants represent just $3.14 per person in the city’s working-age population, up from $1.03 from 2005 to 2008, according to an analysis by Grand Valley State University’s Seidman College of Business in its recent Empowering Entrepreneurism report.

While the performance in Grand Rapids improved, it significantly lagged the nearly $100 per person in Kalamazoo for seven grants totaling nearly $7.2 million. Both cities also paled in comparison to Ann Arbor, where companies secured 309 grants for $125.1 million — about $1,100 per capita — based largely on the strength of the University of Michigan, which acts as a magnet for federal research funding.

An MiBiz analysis of SBIR/STTR grants during the same time period found that Grand Rapids also trailed cities like Lansing/East Lansing, which together received $10.6 million in grants; Houghton ($3.5 million), Jackson ($3.3 million), Midland ($3.3 million) and even tiny Calumet ($4.4 million) in the U.P.

The collective data essentially means Grand Rapids is leaving a lot of money on the table that could fund research and the commercialization of intellectual property.

“It’s like paying your taxes and not getting any roads in the area,” said Kevin McCurren, executive director of GVSU’s Center for Entrepreneurship and Innovation. “It really is frustrating that we really haven’t used [the SBIR/STTR programs].”

To be clear, the grants aren’t for everyone. The recipients of the grants tend to be companies in the technology, life sciences, energy and defense industries.

While the number of companies that are a good fit for the grant programs may be limited, McCurren believes that SBIR or STTR grants should become at least a regular consideration for those seeking capital to fund research and development.

“There’s no reason we shouldn’t be doing it,” he said. “We need to build it into our funding plans and it needs to be early on. It needs to become part of our DNA.”

A rigorous vetting process

Offered by a variety of federal agencies, SBIR and STTR grants support research and commercialization projects through a competitive and rigorous grant process.

A company can win up to $150,000 for six months in a Phase 1 SBIR grant to help pay for validating a new technology. A Phase 2 SBIR grant, available only to Phase 1 recipients, awards up to $1 million over three years.

Agencies can award STTR grants of up to $100,000 for one year in Phase 1, and up to $750,000 over two years for Phase 2 to move an innovation to commercialization. STTR grants are intended for innovations coming out not-for-profit organizations such as university research labs.

McCurren and others cite a variety of reasons as to why the Grand Rapids area lags in the use of the two federal grant programs. The excuses range from the lack of awareness and a lack of expertise in the region, to the lack of a major research university and West Michigan’s conservative culture.

John Novak, principal at law firm Miller Canfield’s Kalamazoo office, believes part of the issue is the amount of work and time it takes for companies to apply for a grant and to go through a rigorous review process.

“In startups, capital is scarce and time is money,” Novak said.

At a maximum of $150,000 for a Phase 1 grant, companies may not see SBIR or STTR as significant enough to make it worth their time and instead prefer to pursue other forms of capital, perhaps venture or angel funding, Novak said.

“In my mind, if you’re a startup, that much capital is really not a lot if you are a little more ahead in your business plan and your technology is a little more developed,” he said. “It has to be meaningful to their company and for their time spent. But it can be helpful for the right technology and the right technology fields, depending on what (a company’s) capital needs are.”

Intangible positives from grants

Some companies may be put off by what’s perceived as a daunting bureaucracy behind the grant process, but businesses that might consider the SBIR and STTR programs are well advised to take the long-term view. The grants may require a lot of upfront work, but their intangible benefits transcend the initial funding, said Paul Skentzos of Grand Rapids-based software firm DornerWorks in Grand Rapids, which has landed two SBIR grants from the U.S. Navy.

“It’s not a simple process,” Skentzos said. “It is a good source of funding, but it’s very difficult to win these.”

DornerWorks is using its $150,000 in SBIR funding on a project to develop software for the Navy that runs multiple operating systems on a single piece of hardware.

One intangible benefit of securing an SBIR grant is that the process puts a company in a better position to approach private-sector investors later on because they can show their technology has been vetted by a third party, Skentzos said.

“That we can walk in the door and say, ‘We’ve been through this funding process,’ it makes them sit up and pay attention,” said Skentzos, who’s landed SBIR funding in the past with other companies and terms himself a “big supporter” of the grant program.

“We can say we’ve actually proven the concept with actual work,” he said.

At The Right Place, Benson attributes the low use of SBIR and STTR grants locally to a lack of awareness. The Right Place is seeking to change that and plans to hold two to three seminars annually on SBIR and STTR funding with Ann Arbor-based BBC Entrepreneurial Training & Consulting, a firm that specializes in the grant programs.

The first seminar was held last week in Grand Rapids and a two-day event is coming this fall that The Right Place will gear toward the life sciences industry.

“It’s out of place, out of mind,” Benson said. “People just don’t know how to do it and they just don’t know what a tool it can be.”

GVSU’s McCurren said he’d like to see consulting services with an expertise in SBIR and STTR grants open in Grand Rapids to assist companies in the federal grant process.

While the SBIR and STTR grant process is rigorous, winners of the competitive grants can secure funding that’s non-dilutive to a business owner’s holding, said Lisa Kurek, the managing partner of BBC Entrepreneurial Training & Consulting. That alone makes SBIR and STTR worth considering.

“It’s very compelling money,” Kurek said.

Kurek disagrees with the notion that the SBIR or STTR grant processes are cumbersome. Seeking venture capital funding can take just as long and can become a time-consuming process that also involves numerous pitch meetings.

“It’s not any slower,” she said of the federal grant process.

And if you get the grant, you have a better chance of getting VC money or some other form of capital and at better terms because you haven’t diluted your equity, Kurek said.

Culture change required?

While there’s a movement afoot to increase awareness of SBIR and STTR grants and bring more federal grant funding to the region, GVSU’s Paul Isely suggests that overcoming a powerful cultural force could be required as well.

The Grand Rapids area not only lacks a major research university and the expertise that comes with it, but it also has to overcome what some still see as somewhat of a stigma toward accepting government money for your business, Isely said.

“(The) culture is not one that says, ‘I need help from the federal government,’” said Isely, chairman of the economics department at the Seidman College of Business.

Isely believes advocates of SBIR and STTR grants can overcome that thinking and create greater interest in the grant programs by focusing on the successes of companies that have used them to bring a new product to market.

“People need to see somebody who is successful. They need to see some evidence that it works,” he said.

Isely co-authored the recent GVSU entrepreneurial climate report and was somewhat surprised that the much-larger Grand Rapids area lagged Kalamazoo in per-capita funding through the federal programs.

“It’s money that we are choosing to leave on the table. It’s a resource we’re not accessing to create new ideas, new companies and new jobs. As a community, we need to say, ‘We’re not going to leave that on the table,’” Isely said. “If we leave it on the table, then somebody else is going to spend it. They’ll use it to create new ideas, new companies and new jobs.

“And then we wonder why we’re falling behind.”


MiBiz Managing Editor Joe Boomgaard contributed to this report.

 

Read 9801 times Last modified on Saturday, 20 July 2013 23:40

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