SBIR Proposal Writing Basics: An Important Commercialization Issue

Gail & Jim Greenwood, Greenwood Consulting Group, Inc.

Copyright © 2002 by Greenwood Consulting Group, Inc.

Commercialization is a very large topic. This month, we want to address one important aspect of commercialization, namely the multiple definitions or meanings of the term that are used by SBIR agencies and competitors.

A very important part of the SBIR/STTR world is "commercialization." It is the main desired outcome of an SBIR project. It is the single word often used to describe the activities of Phase III. It also has multiple meanings that, if you don’t grasp them, may hurt your chances of success in SBIR/STTR.

The first distinction in the definition of "commercialization" is whether it means public or private sector use of the innovation. Most of the contract agencies (i.e., those that make their SBIR awards as contracts as opposed to grants) expect the user to be the agency itself or a related entity. For example, commercialization of an innovation for Department of Defense (DOD) means making it available for DOD’s internal use, with sales to the private sector being important but of secondary importance. In contrast, National Science Foundation (NSF), which makes its SBIR/STTR awards as grants rather than contracts, deems commercialization to occur only when you are selling into the private sector. Therefore, selling an SBIR technology to the U.S. Department of Justice would not constitute commercialization in NSF’s book. NASA has an attitude similar to DOD’s except they like to see both an internal NASA use as well as some application outside of their agency, either in the private or public sector. Although this philosophy may be changing, NASA currently puts considerable emphasis on non-NASA applications, although it is still critical to show a NASA use for an innovation to have any hope of getting SBIR/STTR funding for it. Most other agencies are willing to accept sales to either public or private markets as evidence of commercialization, but it is always a good idea to carefully read the commercialization definition in the solicitation to which you are responding to make sure you are being consistent with that agency’s expectations..

The second important distinction in the definition of "commercialization" is whether it constitutes a viable market for you. Agencies like NASA or DOD may want to buy product that results from an SBIR/STTR project, but just because they want to buy something does not guarantee you that it will be profitable to sell it. For example, suppose you’ve developed a new widget for the Army through an SBIR project. They have expressed an interest in having you produce and sell some widgets to them in a Phase III contract. You do some analysis and determine that, based on that analysis, you can make money if you can sell at least 100 widgets. But suppose the Army only needs three units of your innovative widget. It may be very costly to gear up to produce, transport, and support only those three widgets.

Several lessons can be learned here:

You should consider the size of the Phase III opportunity before you decide to pursue a Phase I or Phase II for a particular topic. Remember that you won’t make much money in Phase I or II, and Phase III commercialization is the deciding point of whether you will make money on this innovation or not.

Just because a topic is in the SBIR/STTR solicitation does not guarantee you there is a profitable market for it even if the agency expresses an interest in using it internally.

You may have to find other markets outside of the agency to make commercialization of your SBIR/STTR innovation financially viable.

By the way, just because the Army only wants three widgets does not mean that you should refuse to sell the widgets to them. First, failure to follow through with Phase III could hurt your chances of getting future SBIR/STTR awards because you begin building a reputation for failing to meet the agency’s needs and the program’s expectations. Second, selling something to the agency may give you greater credibility when you move into other markets with a related product. Third, it may get your foot in the door as a supplier to the agency and lead to other opportunities. Fourth, you may find that selling initially into the private sector might push down per unit costs which would make it more cost effective to sell a limited number of units to the government. Finally, you should negotiate hard with the agency procurement officer to make sure your costs get covered, especially when the costs are higher than they should be due to the small number of units being purchased.

In summary, "commercialization" is a very important term in the SBIR/STTR programs, but it has different meanings among the agencies, and means different things to the agency ("sell us some") than it should mean to you ("sell enough to be profitable to do so"). We encourage you to consider these differences as you decide which SBIR/STTR topics you will pursue, and the commercialization strategy that you follow.