The federal government is a big sponsor of research and development, and it awards R&D funds specifically targeted at small businesses. Federal agencies distribute a lot of this money through two programs, the Small Business Innovation Research (SBIR) program and the Small Business Technology Transfer (STTR) program. Startups like this funding because it is “non-dilutive,” an entrepreneur’s favorite word, which means you don’t give up a portion of ownership for cash. One agency that distributes a lot of the programs’ money is the Department of Defense.
Despite having a major military presence — 147,000 DOD personnel, fourth-largest in the country — and world-class research universities, North Carolina does not rank that high in landing SBIR/STTR grants from the Department of Defense. This drew the attention of the North Carolina Board of Science, Technology & Innovation. The board created a task force, which is close to finishing its work and making recommendations, possibly by the end of the year. To learn more about this, I talked with the board’s chairman, Michael Cunningham, and its executive director, Dr. John Hardin.
Cunningham is the former executive vice president and general counsel of Red Hat. He retired after Red Hat’s $34 billion acquisition by IBM two years ago. The science and technology board has been around since 1963, when it was established by then-Gov. Terry Sanford and the legislature to foster innovation that would promote economic development. This current work of digging into the arcane world of SBIRs and STTRs is the kind of difficult task I imagine Sanford had in mind for the board.
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What the numbers look like
The DOD budget for SBIR and STTR funding in 2019 was around $1.8 billion. Congress set them up to funnel a portion of each agency’s R&D budget to help small businesses grow and create more science and technology jobs. Since 1983, North Carolina’s share of DOD SBIR/STTR funding has been around 1.1%, which ranks us 20th, according to figures provided by Hardin. We have traditionally done better getting a share of SBIR/STTR funds from Department of Health and Human Services agencies through our life sciences startups.
For example, DOD hands out around half the SBIR and STTR money nationally ($3.73 billion in 2019), but only around 26% of the money that we have gotten over the years has been from DOD. HHS has distributed 28% of the SBIR/STTR money nationally, but 61% of the SBIR/STTR money that we have received came from DHHS.
One reason is that in the past 40 years, North Carolina has grown one of the nation’s largest life science sectors. This didn’t happen by accident. In the early 1980s, the state launched a major effort to recruit life science companies and researchers. The state funded the NC Biotechnology Center, in part because of the recommendation of the science and technology board that Cunningham now chairs. That combined effort from the state government and its universities is in large measure why we have more than 750 life sciences companies here today doing the kind of research that attracts SBIR/STTR grant funding from DHHS agencies.
How we compare
The opportunity for defense agency SBIR/STTR money becomes apparent when you look at the 1983-2021 pie chart of the states. California (21.5%), Massachusetts (13%), and Virginia (8.5%) have gotten the most. Another six states have gotten between 4 and 5%. So our 1.1% stands out.
The state has run an SBIR/STTR matching fund program since 2006. Periodically, the board’s staff reports back on the program. “It was through the process of us reporting on that program that this information came to the attention of the board,” said Hardin, “and they immediately perked up and said ‘Hey, what’s going on there with DOD? And they asked us to look into it.”
A task force was set up, and the membership gives me some confidence that it will come back with some useful recommendations. Among its members are Kathie Sidner, the UNC system’s director of defense and military partnerships; Scott Dorney, executive director of the North Carolina Military Business Center; Nicole Fox, SBIR/STTR program manager at the Army Research Office; and retired Major General Nick Justice, who led the Army’s Research, Development and Engineering Command. It also includes representatives of two companies that have been successful at acquiring multiple SBIRs, Tad Dunn of Corvid Technologies of Mooresville and Luke Burnett of KeraNetics of Winston-Salem.
“We’ve identified that there’s a plausible basis to think we’re under-represented” in military SBIR and STTR awards, says Cunningham.
“The harder thing to do is now to come up with three or four or five recommendations that could either be recommended to policy makers in North Carolina such as the governor and the legislature or that the board could carry out itself.”
A relatively small number of companies tend to win the most SBIR/STTR awards from DOD, not just in North Carolina but around the country. “There’s a company in California that has won more than 1,400 DOD SBIRs,” says Hardin.
“And so, DOD has a much higher level of concentration than many other federal agencies do. And that’s one of the things that’s kind of different about DOD that – once you’re in the system – you’re a known player. But breaking into the system is a little bit hard. But there are ways through informal networking and through just outreach that North Carolina companies can integrate themselves into that network. And that will likely be one of the recommendations, is how to do that.”
North Carolina has been working to increase DOD R&D funding. It has done this through the Small Business and Technology Development Centers at UNC system campuses, and through the Military Business Center and the North Carolina Defense Technology Transition Office (DEFTECH). DEFTECH is a particularly valuable part of the ecosystem. If I were looking for a door into the world of defense SBIRs, I would be on the DEFTECH coffee call every Friday at 9 a.m., and the session right before at 8:30 on the latest defense contracting opportunities, when Denny Lewis, a retired Army colonel, and Bob Burton, a retired Special Forces sergeant major, explain what the military wants.
There’s a fair amount of resources for small businesses that want to tap into the DOD funding programs. But it is a different world. For one thing, Hardin says, people in academia and academic spinouts who are used to grants learn that DOD is contract-focused, procurement-focused. “It’s just a much more business-oriented process than is typically the case for an academic grant.”
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“It’s just a different form of interaction that they’re not used to, and so part of what might come out of this task force also is a way to familiarize people with how the whole contracting process works,” he says.
So this work that the task force is doing is at a very granular level, trying to find the barriers that keep companies from going after the money.
“Federal procurement in general is among the more complicated processes for any company to go through,” says Cunningham. “Those are all reasons to have a healthy regard for the complexity of the problem we’re going to try and find some ways to influence and make easier.” That’s why the board has focused narrowly, for starters, on SBIRs and STTRs. “We’ll hopefully start to move the needle at least with respect to that.”
