Strategic Partnering for SBIR Companies

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Strategic Partneringfor SBIR Companies
Paul Grimmer Eltron Research Development
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An Eltron Brief

• Founded 1982 (same year SBIR started)
• Have done a lot of SBIR projects
• 179 Phase Is
• 71 Phase IIs
• Never commercialized a technology (!)
• Have had 2 small and 1 large license agreement
• Ownership management changed 6/05
• Emphasis on commercialization of existing and new
  products
• Strategic Partnering is a key focus area

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The Customer

• The federal agency in most cases is not the
  customer for the SBIR companys technology.
• The agencies want
• For the technology to be used by the U.S. public
  (or in the case of the military or NASA by them
  also).
• A credible plan in the SBIR proposal on how we
  intend to make the above happen.
• If possible, a history of how well the SBIR
  company has done this in the past.

The customer for the new technology is not
necessarily the end-user.
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Development Funding
Depending upon the technology, post-Phase II
development can cost over 100 million and take a
decade to get to market!
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Post-Phase II Development Options

• Internally develop
• SBIR company funds it all.
• SBIR company takes the product to market.
• Requires cash skills not common in small
  businesses.
• Joint Venture
• 3rd party buys in to the new business. SBIR
  companys contribution is its technology.
• Both parties share in future costs and revenues
  of the growing business.
• Requires cash skills not common in small
  businesses.
• Requires the 3rd party to give up some control.
• Sell technology to 3rd party
• 3rd party funds remaining development.
• 3rd party manufactures and sells the product(s).
• Most of the risk value goes to the 3rd party.
• License technology to 3rd party
• Funding from 3rd party in return for use rights.
• License can be exclusive or non-exclusive.
• License can have restrictions on geography, use,
  time etc.
• Similar to the sale option but retains some
  upside/downside risk for the SBIR company.

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Small Business vs. Large Business

• Small Business Advantages
• Generally privately-held
• No pressure for quarter-on-quarter earnings
  increases from operations
• Less bureaucratic
• Easier buy-in from internal stakeholders
  (departments)
• Quicker decision-making process
• No manufacturing / marketing
• Total focus on innovation
• Management not trying to avoid the big mistake or
  efficiency
• Large Business Advantages
• Development resources (people funds)
• Market Access
• Manufacturing / marketing / sales
• Back-office
• Lack of emotional tie to the technology
• Better analytical tools
• More rigorous evaluation decision-making systems

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Pre-Phase I Situation

• We dont know if our idea will technically work
• We dont know if a market exists
• We dont know who does what in the value chain
  (if it even exists)
• We dont know the strategies of the players in
  the market
• We dont know if the players want to have
  anything to do with a small business

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Value Chain (Post Development)

• Service and post-sale support
• Marketing sales
• Manufacturing / warehousing
• Manufacturing facility construction
• Manufacturing facility design
• Parts Feedstock suppliers
• Each has all of the steps above
• Raw material providers
• Each has all of the steps above

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We Must First Understand Where Our Technology
Will Fit into the Value Chain

• Sensors might be sold to end-users.
• Li-ion cathode material would be sold to battery
  assemblers (manufacturers) who may or may not
  market (Sanyo OEMs batteries to Sony who sold
  them to Dell, HP etc., some of whose customers
  had serious problems with thermal events.
• HTM would be part of a H2 production/CO2 capture
  system incorporated into a new, larger processing
  plant.
• FT catalyst might be a drop-in replacement within
  existing plants or into new plants.

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Challenge of Finding the Right Partner

• We have to find the company that is interested in
  controlling and/or owning the technology.
• It is not easy finding the right spot in the
  value chain to hit.
• The companies who might benefit from the
  technology may not even know it exists or that
  the product would be a good fit within their
  portfolio.
• Companies who sell to end-users (e.g., oil
  companies who might use the FT catalyst) likely
  want an exclusive but quite often have a small
  market share.
• In general, we want to target partners who can
  sell our widget or product to the whole industry
  (preferably globally).

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Big Company Hurdles

• Do we really need new technologies/products?
• Do we need the specific technology in question?
• Is it okay that they arent generated internally?
• Is it okay that the company we have to work with
  is a tiny fraction of our size?

Resolution of each of these questions can be very
sensitive politically and can take months or even
years to resolve!
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Partner Challenges Pre-Phase I

• Time
• You have 2 months from date of topic list issue
  to proposal submission
• Technology
• You dont even know if the concept works and if
  so, how well.
• You dont know how much it will cost and how long
  it will take to get the tech ready for the real
  world to use.
• Markets
• You are a scientist/engineer and dont know/care
  about current and future markets.
• The market may not exist yet.
• You dont know the value chain and/or market
  shares.
• Target Companies
• You dont know the strategic direction of the
  potential partner companies.
• You dont know how to get access within the
  companies to even begin to talk to the
  decision-makers. Further, you dont know how
  those companies make their decisions (do the
  good ideas have to come from the top dog or do
  they have to bubble up from the technical staff).
• Terms
• How much are we willing to give up in return for
  funding when we dont even know with all of the
  unknowns above?
• Agency
• Is there really a correlation between
  commercialization plan and SBIR success?
• How good is good enough to win a proposal for a
  given agency?

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Typical Technology DevelopmentRisk Exposure vs
Time
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Suggestions

• You cant start too early in considering
  strategic partners, even pre-Phase I.
• For a given technology, figure out where in the
  value chain you want to attack.
• Do you homework on the players (or potential
  players if the market doesnt exist) to pick the
  right ones to reach out to.
• Never talk to just one potential partner
  (competition is a wonderful thing).
• Avoid asking for monetary commitments early on.
• Focus on the strategic value-add to their
  organization.
• Get them interested in the possibilities more so
  than your need for .
• Understand your development risk profile. The
  farther you can take the technology yourself, the
  better return you will make since you dont have
  to make others take risks for you.
• Balance the sales pitch
• Credibility is hard to earn but easy to lose.
• Enthusiasm is necessary but dont underplay the
  risks or the rewards.
• Contract RD can be very beneficial
• Provides short-term cash flow so you can fund
  some things yourself.
• Establishes a relationship with an outside
  company that basically is for their benefit
  (i.e., you are not asking them to take your
  risks).
• Can set you up as the 3rd partys RD group.

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Paul Grimmer [phone] x105 pgrimmer_at_eltronre
search.com President Eltron Research
Development Inc. www.eltronresearch.com 4600
Nautilus Court South Boulder, CO 80301