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Should your startup seek Small Business Innovation Research (SBIR) grants?

In response to Sam Altman’s great post “Hard tech is back,” someone on Hacker News pointed out that hard tech companies should apply for Small Business Innovation Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants (both programs provide funding to small companies that are commercializing research). There are excellent reasons to apply, which we’ll recapitulate: most Federal agencies are required to make SBIR/STTR funds available; grants for Phase I go up to $225,000, and Phase II grants go up to $2 million; a large amount of money is available (most years see SBIR/STTR budget allocations in the billions); unlike venture capital (VC) funding, federal money doesn’t require giving up shares in return for funding; and, finally, the feds may fund ideas VCs won’t. The “feds may fund ideas VCs won’t” is particularly but not exclusively true of hard tech projects.

So far, so good. But while the upsides are real, and we’re incentivized to emphasize them, the downsides are too. One is simple timing: if the appropriate SBIR / STTR funding cycle just concluded for that year, your startup may have to wait another year to apply.* Then another 2 – 3 months for a decision. Then longer for final budget approval and contract execution. A year is a very long time for a startup. The other day a potential client called whose best potential SBIR source had had a deadline the month prior.

Second, Phase 1 grants can just be too small for the amount of effort that goes into them.

Third, SBIRs/STTRs don’t come with the advice, community, or expertise of good VCs. Applicants may still get to meet some professors in their field or other experts, but those connections seem to be weaker than the connections good VCs generate.

Fourth, applications take a lot of effort to prepare, and for first-time grant writers they can be quite hard. The alternative is to hire someone like us. While I’m biased towards doing that for obvious reasons, we also cost money. I can’t say whether our fees are low, high, or just right—as discussed at the link, we get all three reactions—but our fees are real and no qualified grant writer will ever work for contingent fees.**

Just finding the appropriate SBIR/STTR program and RFP can be hard, since different Federal departments publish RFPs at different times and focus areas typically differ in each competition. Reading the RFP is hard for the uninitiated, for the same reason that reading legal documents is hard for the uninitiated. Most of us who don’t know Python would find Python source code hard to understand.

Fifth, I can’t think of any major companies that got started through SBIRs/STIRs. I did do some searching, and the NIH website gives us some examples, like Genzyme, MARTEX, Sonicare and Abbot Medical Optics. There must be others, and if you know of them I’d love to hear more. In contrast to SBIR/STTR-funded companies, the number of VC- and Y Combinator-backed startups is too long a list to bother reciting, especially since it includes almost every large tech company.

While I don’t want to talk anyone out of applying for a SBIR/STIR, I do want to emphasize that the downsides are considerable. For many if not most startups, applying to Y Combinator is going to be more efficient than seeking SBIRs/STTRs. Still, it’s possible to do both, and for some hard tech companies “both” may be a more interesting answer than either one on its own.

EDIT: A few readers (and some callers) are incredulous that we can write scientific and technical grants; this explains how we do it, as well as some of our strengths and limitations. We’re not experts in any scientific engineering, or technical disciplines, but we are very good at integrating material from a particular discipline for a particular project and we’re also good at asking questions, listening to the answers, and using those answers.

* We’re using the word “startup” as VCs and founders themselves use it—as a term that denotes a small company that plans to grow fast and become a big company, usually via technology and technological innovation / deployment. In this sense most small businesses are not startups: They’re restaurants and consulting practices and nail salons and so on.

** One time I talked to a Y Combinator-backed nonprofit that wanted us to work for contingent fees, and my contact person didn’t grok why grant writers won’t work that way.

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You Don’t Have to be in a Shithole Nonprofit

Seliger + Associates’s main offices recently moved to Downtown Santa Monica. Those of you who have visited Santa Monica recently know that the area has finally upzoned (which is great) and has tons of new buildings that make it somewhat urban. Santa Monica has some of the world’s most valuable real estate, so insisting on one- or two-story houses makes no sense, but that’s classic American urban policy.

(In addition to five- and six-story apartment buildings, Santa Monica is also now filled with $30 plates of pasta and $5 cups of pour-over coffee, but that’s a separate issue.)

Isaac found a European tailor near the office who’s had a shop in Downtown Santa Monica for over 30 years. One day, Isaac asked Gabor if he loves the new developments, since the tailor now has a ton of customers within walking distance. He does. What did Downtown Santa Monica used to be like? Gabor just said, “The houses were shitholes.”

We’re naturally telling this story for a reason. We’ve heard the same kind of description from some clients when they discuss their own agencies. But nonprofits are more like businesses than most people realize. If you don’t like your neighborhood, you might have to wait decades for the political winds to shift regarding development.

But if you don’t like the nonprofit you’re working for,* grab a hammer and go build your own. You’re not beholden to the existing nonprofit. Maybe you can do a better job. Nonprofits aren’t that hard to start, and if you don’t want to deal with the paperwork, you can hire an account or lawyer to do it for you. People create nonprofits all the time.

Think your local nonprofit is a shithole or is otherwise doing a lousy job? Go do it better down the street. We’ve worked for a number of nonprofits started by disgruntled members of the dominant nonprofit who then went on to compete for the same kinds of grants. Dominant nonprofits are often made lazy by success and start to forget that success is never final.

* Or the one serving your neighborhood. Plenty of nonprofits start this way.

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February Links: Writing, NIMBYs, Nonprofits-as-startups, Affordable Housing, Baltimore, Washington DC, Washington Monument Syndrome, Porn Star Study and more!

* In Writing, First Do No Harm.

* “The emergence of “YIMBY” [Yes In My Backyard] organizations in American cities would be a welcome counterpoint to the prevailing tides of NIMBYism that often dominate local government. But it is worth saying that broader institutional reforms are what’s really needed.”

* Nonprofit Startups Are Just Like Their Counterparts, according to Paul Graham. We’ve never seen a nonprofit really behave like a startup. Maybe Watsi, the nonprofit featured in the article, will be different.

* Who pays for healthcare also explains why prices are so high. In my view we also spend too much time debating insurance coverage and too little time discussing access to care and how that can be improved.

* “Home craft project: replacing broken laptop screen.” Why haven’t we seen job-skills training programs focused on computer and electronic repair? This may be more viable than Project NUTRIA, but it doesn’t involve small animals.

* From Shlomo Angel’s Planet of Cities:

Like many other observers, such as John Turner (1967) in Latin America, I found that wherever the urban poor could obtain affordable access to minimally serviced land, they could build their own homes and create vibrant communities with little if any support from the government. When free of government harassment and the threat of eviction, their houses would quickly improve over time with their investment of their savings and sweat equity. People could house themselves at the required scale and create many millions of decent homes, while leaving very few people homeless, something that all governments (save that of modern-day Singapore, an outlier on every possible scale) have consistently failed to do. Admitted, the expanding settlements of the poor did not conform to building codes, land subdivision regulations, land use and zoning requirements, or even property rights regimes. (52)

In many jurisdictions, governments nominally devoted to affordable housing prevent its creation. Key words in the above paragraph—”could obtain affordable access to minimally serviced land”—aren’t going to apply to downtown Seattle, or even the downtown Seattle periphery—but the basic idea is an important one. So is the recognition that land use controls in places like New York, Boston, and San Francisco decrease affordability more than any set of programs could increase it. And then there’s Detroit, but that’s another story.

* Baltimore is headed toward bankruptcy. Maybe they need an Outer Harbor to go with the Inner Harbor. Sort of an inni-outti approach to economic development.

* How Washington works: “Many 2011 federal budget cuts had little real-world effect,” and many of the nominal cuts turned out not to be real, by reasonable definitions of “real.”

* “The Dissertation Can No Longer Be Defended,” which makes points that should be obvious to damn near everybody involved in the humanities section of academia.

* “A warning to college profs from a high school teacher,” which is actually about the stakes of student testing.

* New York Times “journalist” John Broder lies in Tesla Motors Model S review, gets called out for it.

Deep Inside: A Study of 10,000 Porn Stars;” highly data-driven and should be safe for work.

* “In early childhood education, ‘Quality really matters;’” that’s one reason Head Start doesn’t work particularly well as education right now. But it works okay as day care and pretty well as a jobs program.

* New York real estate: a study in price escalation.

* The Deadly Opposition to Genetically Modified Food;” this is reminiscent of vaccine scares: people have to die before pseudoscience is really attacked.

* “Taking Apprenticeships Seriously,” which we should have started doing a long time ago. College is not the magic answer to every social and economic quandary, as anyone who has taught at a non-elite college should know.

* Government, illustrated: “the cutback is in accord with what Charles Peters of The Washington Monthly used to call the “fireman first” principle. That is, if bureaucrats are told to take $x million out of their budget, they’ll fight back by making cuts where an $x million loss will be most instantly obvious to the public. Like closing the local firehouse — or canceling an air show.” This is also sometimes referred to as the Washington Monument Syndrome. Isaac has seen this in action personally when he was a redevelopment bureaucrat for cities in Southern California.

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One, Two, Three* Easy Steps to Start-Up a Nonprofit Upstart

My recent post, “Grant Writing from Recession to Recession: This is a Great Time to Start a New Nonprofit,” featured a phone call I received from a “Mrs. Smith” who inquired about using our services to fund her new nonprofit. A few days ago, we received this comment from another real world Mrs. Smith, in this case, one Rev. Loring Pasmore, who asked:

I’m a Mrs. Smith with my ducks in a row and no money to jump start my programs. How do I get started?

To the good Reverend and all the other Mrs. Smiths out there, here are the three action steps to start-up a nonprofit upstart:

Step 1: Resign yourself to the reality that, like for-profit start-ups, your nonprofit will need some working capital to get going between, say, $10,000 and $100,000, depending on the project and how frisky you are. Where does one find the initial capital? Since banks will not lend to an unproven nonprofit and there is no equivalent of the SBA in the nonprofit world, start-up capital is likely going to come from the following sources: a loan from the founder (this is the most common and easiest path), fund raisers (see Step 2 before you do this), and/or a loan from the nonprofit version of an “angel investor,” although he or she is not really an investor, since nonprofits obviously don’t generate profits. Typically this angel will be either someone with money who loves you and/or someone with money who loves your project idea.

Step 2: If you haven’t done so already, obtain a nonprofit corporation charter in your state and apply for a 501(c)3 Letter of Determination of tax exempt status from the IRS. This is the critical path, as the IRS can take a year or more to issue your letter and, until the letter is issued, donations are not federally tax-exempt. It’ll be a lot easier to find an angel and hold successful fundraisers if you have a Letter of Determination, rather than a story about how you plan to get one. This letter will also help separate you from flakey people who merely have an idea with no ability to execute said idea.

Step 3: While you’re waiting around for the 501(c)3 letter to appear, get the word out about your new organization, gather data, scrounge for low cost office space and castoff office equipment, and, unless you already know how to conduct grant source research and write proposals, find a grant writer. See Step 1, because few, if any, qualified grant writers will work free or on the come—there is no free grant writing lunch. Essentially, you need enough money to hire a grant writer to seek funds so that you can repay any initial loans and cover initial start-up and operating costs.

That’s it. Once again, the secret of most aspects of grant writing is that there are no secrets.

Good luck to Mrs. Smith, Rev. Pasmore and everyone else who is trying to do something positive in these tough times. I noted Friday that the official US unemployment jumped to 9.8% in November; there is an ongoing need for spirited people to start new nonprofits to help their communities.

* One of my favorite forgotten movies is Billy Wilder’s impeccable One, Two, Three, or Eins, Zwei, Drei, auf Deutsch. Stoic and bewildered Horst Buchholz of Magnificent Seven-fame is hilarious playing opposite the always impressive James Cagney. Check it out for a Cold War blast.

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Grant Writing from Recession to Recession: This is a Great Time to Start a New Nonprofit

I received a phone call last week from a woman (let’s call her “Mrs. Smith”) who just started a tiny new nonprofit in South Central LA during this never-ending recession. She wants to help the growing number of homeless youth and unemployed young adults hanging out on the streets. Mrs. Smith’s call reminded me of how Seliger + Associates got started and the many Mrs. Smiths we’ve worked for over the past 17 years.

During the almost-forgotten recession of the early 1990s, I was toiling in the local government fields as the Community Development Director for the City of San Ramon. To paraphrase Mister Roberts, San Ramon was located somewhere between Tedium and Apathy in Contra Costa County. The recession cut city revenues drastically, and because I was not particularly loved by the City Manager or City Council, one day the ax just fell (“Tangled Up in Blue,” B Dylan). I joined the swelling ranks of the unemployed.

This happened in late 1992, and I had a few months of severance pay to more or less keep the wolves at the door and not in the house. By March, the idea of Seliger + Associates had formed; through some initial connections, incredibly hard work, and luck we began to get clients. The early 1990s was, of course, long before the Internet and email. To get clients, we bombed nonprofits in LA with cheesy direct mail flyers, and once or twice a week I flew down to meet with any nonprofit executive director who called. I spent a lot of time in churches, living rooms, drug treatment centers, half-way houses, and the like, mostly in South Central and East LA, pitching our services for very modest fees.

Our first clients more or less fell into two categories. The first were fairly large United Way-type agencies that seemed amused at the concept of an itinerant grant writer parachuting in every week from the wilds of Northern California. The second category were tiny start-ups, like Mrs. Smith, trying to get grants to help people around them who were being devastated by the recession. As I’ve blogged about many times in the last two years, tough times are good times for grant writers because lots of grant funds are available and lots of organizations need to replace falling donations.

Tough times are also good times for new and nimble organizations that address local challenges. Like Mrs. Smith, such newly minted nonprofits, provided they have taken the time to get their 501(c)(3) letter, can compete successfully against their larger, more bureaucratic brethren. This is because small, new nonprofits are not paralyzed by hand-wringing over drops in donations and lowered United Way grants while simultaneously trying to avoid staff lay-offs. About a year ago, Jake wrote about this phenomenon in “When It Comes To Applying for Grants, Size Doesn’t Matter (Usually).” Such nonprofit start-ups (perhaps “upstarts” is a better characterization) helped us start our business.

In the early years, we wrote tons of funded proposals for such organizations—often LA City or County grants—enabling them to take contracts from ossified nonprofits that had been around since the Watts rebellion. It helped that I was then willing to drive all around the dicier parts of LA to get work. But our small fish clients also saw their neighborhoods being devastated and had an intense desire to do something. Then, as now, doing something at any sort of scale requires grants and someone to write the grants. We appeared at the right time with the right skills. We’re still here and a new recession is growing a new crop of small nonprofits, whose executive directors are calling us for help.

Today, Americans are mired in much worse economic times than when our business started. I just Googled the LA unemployment rate in September 1993, which was 9.8%—compared to 12.5% in September 2010! I could do the same with pretty much any part of the country. I’m writing a proposal this weekend for a client in Yuma, AZ, where the current unemployment rate is 27.2%, which is Grapes of Wrath / Tom Joad territory. It is not surprising that Mrs. Smith called looking for grants to kick-start her efforts to help youth falling through the safety net.

She may or may not hire us, but we’re working for lots of similar organizations once again, as the recession provides opportunities for new nonprofits to emerge to meet emerging needs (whew: this sounds like a proposal sentence). Other kinds of startups have also discovered this. We find ourselves where we started, and to quote the Grateful Dead in Truckin’: What a long strange trip it’s been.