How one exec used research grants to fuel his small-business success

The technology market might be dominated by large companies, but small business is often where innovation thrives, and helping that process along is the federal government’s Small Business Innovation Research program.

Rick McNeight has learned the program well, using it successfully at his first company Paravant Computer Systems, and now with his current company, Modus Operandi.

“The SBIR program is an attempt of the government to get innovative entrepreneurial small companies to innovate new technology to solve difficult government problems,” McNeight said. He is the president of Modus Operandi, a small software company that serves the U.S. defense and intelligence communities.

Established under the Small Business Innovation Development Act of 1982, the SBIR program encourages domestic small businesses to engage in federal research and development that has the potential for commercialization.

The program’s four goals are to encourage tech innovation, meet federal R&D needs, foster socially and economically disadvantaged persons’ participation in innovation, and increase private sector commercialization of innovations derived from federal R&D funding.

McNeight began using the program in 1985 at Paravant, and it helped him to grow the business, he said.

Later in his career, at Modus Operandi, McNeight found another opportunity to utilize the program.

Modus Operandi combines innovative semantic technology with defense sector software systems development experience in the C4ISR domain. Its customers include the armed military services, the Missile Defense Agency, Defense Threat Reduction Agency and DARPA.

In the market that Modus Operandi is in, serving the customers that it does, there’s always room for innovation, so the SBIR program is especially handy.

Any agency that spends at least $100 million in extramural R&D is required to set aside 2.5 percent of their total R&D budget, McNeight said. In 2011, that amounted to over $2 billion.

Currently, eleven agencies participate in the SBIR program:

• Agriculture Department
• National Institute of Standards and Technology
• National Oceanic and Atmospheric Administration
• Defense Department
• Education Department
• Energy Department
• Health and Human Services Department
• Homeland Security Department
• Transportation Department
• EPA
• NASA
• National Science Foundation

There also is a government website that offers information on how to find and apply for SBIR grants.

“It's a very competitive program; each of these agencies publishes a list of abstracts for the different areas of research they're soliciting companies to bid on, and these abstracts come out anywhere between one and four times a year, depending on the agency,” McNeight said.

The SBIR program is broken up into three phases:

Phase 1 is meant to establish feasibility and commercial potential of the proposed R&D efforts. “You write a proposal, you submit it to the agency soliciting it, and just like any a contract, there's a contract award,” McNeight said.

The six-month Phase 1 award does not exceed $150,000.

It’s not a big award, but a small business must win Phase 1 to move on to Phase 2.

Phase 1 is therefore “critical in this process because the big money comes in the next phase,” McNeight said. “If they like what you did in Phase 1, you can bid on Phase 2,” he added.

Phase 2 is meant to continue the efforts that began in Phase 1. It has a two-year award that can be up to $1 million.

Phase 3 is for the small business to pursue commercialization objectives resulting from what the company accomplished in the first two phases; however, SBIR doesn’t fund Phase 3.

Originally, companies were to go out and find venture capital money, and the government would match it, but that’s no longer the case, McNeight said, but they changed it to allow the phase to be funded by the government.

“So if the government really likes the technology, then a government program can actually fund Phase 3,” he said, and the Phase 3 award is “one of the most fantastic contracts for small businesses because it’s a non-competitive, sole-sourced contract,” McNeight added.

Phase 3 is also “where you see the merging of the small business with the very large companies in this space,” said Eric Little, vice president and chief scientist at Modus Operandi.

If, for example, a company wants to deploy a product on a large scale, such as deploying a fielded piece of equipment in the military, it won’t be able to do it on its own, Little said.

In this situation, the company will team up with a large business like Lockheed Martin, Raytheon, or Boeing to ensure that the product can be deployed, he said.

It’s helpful that some of these large businesses seek out small businesses as partners, McNeight added. “Several of them are really big on trying to find small businesses and proactively have teams of people that go out and try to find small businesses to partner with,” he said.

Large companies will sometimes even approach Modus Operandi during Phase 1 saying that they like what the company has introduced, and that if it progresses to Phase 3, they will act as a commercialization partner, Little said.

This is important, especially because Phase 3’s emphasis on commercialization became more important after the SBIR program was reauthorized by the 2012 National Defense Authorization Act.

“When they reauthorized it, the strengthened the language of the reauthorization somewhat to favor small business that had commercialization plans,” McNeight said.

He thinks that the government emphasized commercialization because it wants to transition the SBIR projects into use by the warfighter, or use by a commercial company, as opposed to being pure research.

This wasn’t always the case; “the program has waxed and waned throughout the years,” McNeight said. When he and his company won their first award, they were tasked with building a computer. The government wanted specific results, he said.

Roughly 10 years later, however, McNeight and his team bid on three more projects, losing them because, as the SBIR program told them, the proposals were not research oriented.

“They only wanted innovative research, and didn’t care if it ever produced anything,” he said.

After another decade or so, the program again changed to re-emphasize more commercialization, likely due to the government’s increasing focus on budgets and what’s really pragmatic, McNeight said.

“As a taxpayer, that makes a lot more sense to me because if you're doing research for the purpose of research, that's not really what the government needs,” he added.

“To encourage [commercialization], the small business owns the rights to what is developed in the program, and has solely exclusive rights to sell it commercially, outside of the government,” McNeight said.

The company is planning to use the SBIR program to push into the health care market, the same way it used the program to build its semantic technology capabilities. To date, it’s won over $40 million of research money through the program, he said.

“Our primary business is providing software to help intelligence analysts find specific unique data and correlations of data within the multitude of databases across the intelligence agencies and the military services,” McNeight said.

The company will pursue SBIR projects to take its semantic capabilities and apply them to analyzing health care data and other opportunities, and Health and Human Services is a rich target with around 25 percent of all SBIR funding, he said.