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The Download, Shannon Henry

Innovators Find Alternative To Venture Capital

By Shannon Henry
The Washington Post
Thursday, October 21, 2004; Page E01

When Paul Brewer, co-founder of high-tech security company ObjectVideo, gave speeches to business school students about how to find funding, he used to focus about 80 percent of his talk on the art of landing venture capital. Now he spends most of his time on how to attract federal government funding, especially through the Small Business Innovation Research (SBIR) program. The managers of the program are more daring than venture capitalists, said Brewer, because they are more likely to fund an idea at its inception, before it has proved anything.

The big difference between an SBIR funder and a venture capitalist? asks Brewer. "The venture capitalists drive better cars."

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Brewer recounted the joke last week at the first Small Business Research Commercialization Awards, held during Virginia's 10th annual SBIR conference at the Sheraton Crystal City hotel in Arlington. The awards were designed to honor the top six Virginia companies that have received grants from the program, which is run by the Small Business Administration, over the past three years. ObjectVideo of Reston is both a recipient of SBIR funding and of an award at last week's event for best "market traction."

Federal agencies, including the Army and Navy, the National Science Foundation and the National Aeronautics and Space Administration, participate in the program and the related Small Business Technology Transfer and Advanced Technology programs. To qualify, a small business must: have a plan to commercialize an innovative technology, have fewer than 500 employees, be located in the United States, perform all work domestically, be majority-owned by U.S. citizens or permanent aliens, and be organized to produce a profit (though there's no requirement to show one at the start).

SBIR had $2 billion to distribute nationally in the last fiscal year.

There are two phases of SBIR funding. In the first phase, while a company tries to develop its idea for a business based on research, grants are for up to $100,000. Companies that make it to the second phase, where more expanded research is needed, may be eligible for up to $750,000.

That's small change by the boom-era standards of venture capital firms. But as venture capitalists and private "angel" investors have become more skittish about investing in very early-stage companies, after losing so much money on them in the technology market crash, small businesses have been looking for other options. Many have found a good match in this relatively little-known program, where Uncle Sam serves as the financier.

One fundamental difference is that at the end of the relationship under SBIR, the company keeps all rights to the research and technology developed through the program, so long as the government is allowed to use it. By contrast, when a venture capitalist invests, he is literally buying a piece of the company, and sometimes ends up with complete control of it.

The awards event, held in a cavernous ballroom, drew a crowd for the conference, where government types from the three- and four-letter agencies mixed with eager start-up executives. "It's great to put a name with a face," Angela Keen, a contracts administrator with Luna Innovations of Blacksburg, said at the evening buffet reception. There was plenty of free wine, beer and food, with pastas, salads, carved beef and cakes and pies set out on long tables. Still, it did not have the ritzy feel of a venture capital firm fete but of a budget-conscious celebration of people who speak the same technological and governmental jargon. As the conference-goers ate, the awards were announced. Each company showed a short video and gave a thank-you speech before receiving the glass globe-shaped award. Virginia's new secretary of technology, Eugene Huang, gave a brief congratulatory speech and posed for photos.

ContraVac of Ivy won the "breakthrough" award for its development of a contraceptive vaccine and a fertility test for men. The company's chief executive, John Herr, said he expects to start selling products in about a year. "It's been a very long road," Herr told the audience. He has been working on these products for more than a decade. Herr mentioned that funding from the Center for Innovative Technology in Herndon, which co-sponsored the event, also had helped greatly.

Flight control systems maker Athena Technologies of Warrenton won the award for best innovation. Sterling-based 4Wave, which develops optical filters, won the "market opportunity" award. Cinea, which sells anti-piracy software to the movie and television industries, won for best "value creation." Cinea was recently bought by Dolby Laboratories in California but maintains its local presence in Reston and Richmond.

Luna Innovations of Blacksburg is a research and development company that works in the areas of nanotechnology, biotechnology, fiber optics and many other technologies. It won for best "serial commercialization" for developing five new stand-alone companies.

As the ceremony went on, anyone wanting to stretch his legs could wander into the exhibit hall, which featured companies seeking SBIR funding, other firms offering products and services to SBIR recipients and agencies trying to explain how the process works. Several companies promised to act as a "coach" in the complicated system. Each offered a souvenir -- a mug, a foam airplane, a pocket knife, a tiny earphone radio.

Craig Collier and his wife and business partner Ivonne, came from Hampton to set up huge posters for HyperSizer, software for designing aircraft. Collier was an engineer at NASA in 1995 when he decided to quit and launch his own company. Collier found this writer's interest in the event amusing. "This is such a nerdy thing," he said. Collier liked the evening's format and said it's otherwise difficult to meet the right people at the agencies. "We have to mingle more," he said. "Times are tough. Research money is very competitive now." He was waiting for a crowd to come through the exhibit hall again after the speeches ended, around 9 p.m. Collier had already made one sale and met the crucial contact people from NASA, the Air Force and the Army. But there was a lot more networking to be done, and he was hoping it would get easier as the night wore on. "After a few beers," he said, "people are a little more open."

Shannon Henry writes about Washington's technology culture every other Thursday. Her e-mail address is henrys@washpost.com.


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