Gail & Jim Greenwood, Greenwood Consulting Group, Inc.
Copyright © 2013 by Greenwood Consulting Group, Inc.
The Reauthorization of SBIR/STTR in late 2011 included a provision for several agencies to establish pilot programs in which they can allow applicants to skip Phase 1 and just submit a Phase 2 proposal. The only agencies allowed to do this are the Department of Defense (DOD), National Institutes of Health (NIH), and the Department of Education (DoED). We believe this reflects a debate that has existed in SBIR for years: proponents of skipping Phase 1 have argued it should not be necessary to go through a feasibility study if you have already made significant advancements in your technology, while opponents have said that skipping Phase 1 will reduce the “I” in the Small Business Innovation Research program, since the agencies will not make big Phase 2 awards on unproven innovations and therefore they will begin funding only sure bets. The Reauthorization allows these three agencies, at their discretion, to establish pilot programs in which they can entertain Phase 2 proposals on technologies from companies that did not previously receive Phase 1 funding to prove the feasibility of those innovations.
NIH has indicated that it intends to establish a pilot “Phase 1 skipping” program, but we have not seen the details of it yet. Some DOD components, such as Navy, have indicated that they do not plan to allow applicants to skip Phase 1. But the Defense Advanced Research Projects Agency (DARPA) has announced in the current FY14.1 DOD SBIR solicitation that it will allow Phase 1 skipping on most of its topics in a program called “Direct to Phase II.” We thought it would be valuable to address the DARPA program this month, both to help anyone thinking of submitting a direct to Phase II proposal to DARPA, and to offer some insight into what may be required if other DOD components, NIH, and/or DoED implement Phase 1 skipping pilot programs.
For starters, note that not all FY14.1 DARPA topics allow Phase 1 skipping. There are five DARPA topics in the current DOD solicitation, but only four of them permit you to apply directly for Phase 2 funding.
DARPA is requiring that you submit a two part proposal, if you want to skip Phase 1 and go immediately to Phase 2. The first part is a summary of the work you have already done, while the second part is a “traditional” Phase 2 proposal. The first part is extremely important: if you do not convince the DARPA reviewers that you have already done the equivalent of a Phase 1 project (i.e., a feasibility study) with other resources, then they may not look favorably on your Phase 2 proposal. Anyone planning to skip Phase 1 at DARPA should talk to the topic author/TPOC to determine what that person thinks is evidence of the feasibility of a technology that addresses the DARPA topic. It is, of course, also very important that the small company have some definition of what it thinks constitutes feasibility, but we believe the TPOC also must be on board as they could have a crucial role in deciding if the prior work is sufficient to consider funding your Direct to Phase II proposal. Remember that DOD only allows you to speak with the TPOC/topic author during the first 30 days after the solicitation is released, so that conversation must occur by December 19, 2013 for the FY14.1 topics.
DARPA expects the Phase 2 proposal to include a substantial commercialization section, whether you are skipping Phase 1 or not. More specifically, DARPA calls for a 5 page commercialization strategy, in which you are to address 11 very explicit questions about (among other things) market, competition, growth trends, commercialization funding requirements and sources, and sales projections. This is a far more onerous requirement than the 1 page on commercialization expected in a Phase 1 DOD proposal. The lesson? If you plan to skip Phase 1 and go straight to Phase 2 at DARPA, you will need to not only demonstrate convincingly that you have already proven technical feasibility of your innovation, but you also must show that you have already done considerable work identifying and confirming the market, and otherwise advancing your commercialization strategy.
There’s at least one other place where DARPA is going to expect a Phase 1 skipper to have made considerable progress before submitting their Direct to Phase II proposal. That’s in the budget/cost proposal. The agencies historically have not expected you to be as sophisticated in your Phase 1 cost proposal, and Phase 1 contracts and grants are typically fixed-price awards where the agencies have lesser audit requirements and more modest expectations of your accounting system. But Phase 2 projects, both because of their larger size and the common shift to a “cost plus” form of agreement, have much higher requirements and expectations.
So, before you decide whether to embark on a DARPA “Direct to Phase II” proposal, you need to ask yourself several important questions. First, can you convince the DARPA reviewers that your work-to-date truly constitutes a feasibility study, and that it clearly demonstrates your innovation is technically feasible? Second, have you done enough homework to be able to write a strong commercialization plan, including letters of support from potential funders, customers and/or strategic partners? And third, is your accounting system sophisticated enough, can you defend with a straight face your indirect rate, and are you prepared to negotiate with contracting officers and respond to government auditors?
Put another way, it isn’t as easy as just deciding you’ve done some previous work in this area and therefore you are going to skip Phase 1 and try to go straight to the “big bucks” in Phase 2.