1. SBIR grants and other federal funding
For Dan Leach, CEO of prosthetic startup RxFunction, the retreat of VC funding in medtech proved challenging, but not unconquerable. Leach’s company is developing a lower-body prosthetic device designed to aid individuals with peripheral neuropathy.
“What I’ve noticed, since I’ve been working with early-stage companies for more than 25 years, is that people aren’t investing like they used to. And even though there seems to be a good deal of wealth out there, it’s wealth that’s only interested in taking on the risk when you’re at the next level – when you’ve verified and validated your product with regulatory authorities, and you’ve verified and validated that you will be reimbursed for your device or product,” Leach said.
Leach and Lars Oddsson, RxFunction’s president, began forming the startup in 2007, first incorporating in 2010. The challenging environment and lack of traditional VC funds led them to pursue different opportunities, finding their way forward with angel investors and government grants.
“We started in a very challenging time in the economic history of this country. Venture capital had almost completely dried up,” he recalled.
RxFunction raised $200,000 from angels and moved on to pursue federal Small Business Innovation Research grants and a contract with the U.S. Department of Veterans Affairs, all while focusing on one operating strategy – controlling expenses.
“We didn’t spend any money on offices, we didn’t spend any money on, well, you name it,” Leach told us. “We followed one rule: Don’t commit the cardinal sin. Don’t run out of money. I wish it was more complicated than that, but that’s the God’s honest truth. That’s it.”
The Small Business Administration’s SBIR grants are designed to support and accelerate R&D at small or startup businesses. The grants aim to fund projects that VCs might deem too risky and can sometimes be used to bring companies to the point where they’re more attractive to venture capital. Companies seeking SBIR grants must show they have the potential for commercialization; winning the money can be very competitive.
The grants work in 3 phases:
- The first phase aims to support businesses in establishing “technical merit, feasibility and commercial potential,” with cash awards generally not exceeding $150,000.
- In the second phase, companies can receive significantly more funds – usually not more than $1 million over 2 years. The government bases funding on company performance during Phase I and the commercial potential of the product.
- Although no funding is provided in Phase III, companies will receive preferential treatment from government organizations and agencies looking to use their offerings. The 3rd phase may also include funding from federal agencies aimed at continuing R&D.