At our recent Meetup, David Cuccia, CTO and CEO of Modulated Imaging gave a great from-the-trenches presentation about using Federal grants to get to product market fit. David and his co-founders at startup Modulated Imaging have funded their company’s product development since the beginning with grants.
David answered lots of questions from the rapt audience!
Fred Ayers, the company’s COO/CFO, prepared a checklist of 12 key items he tracks after MI wins a grant, tips for things to think about and the top 4 considerations you should keep in mind as a founder.
Things to think about for a grant from a budget perspective.
1) Think about the timing. Our experience with funded grants at the NIH, is that it takes about 9-12 months, or more, from the grant deadline to when the grant will start. If you do not receive a fundable score and want to resubmit, the timing will be pushed back another 4-8 months.
2) Things are more expensive than you think. For example, if you want to hire employees a $50k salary will cost your company about $60k (in CA) to cover Federal and State payroll taxes and workman’s comp. This will be more if you offer paid vacation or benefits. If you rent space, you’re landlord might require General Business Liability insurance. When pricing purchases for your budgets, don’t forget sales & use taxes, shipping and handling, etc.
3) Think about how you are going to spend the grant money (make a budget) and actually write it down. $150,000 or $1m is a lot of money to most individuals, and unless it’s written down it’s easy to double spend imaginary amounts in your head.
4) NIH allows a 40% F&A rate without a negotiation. Take that to start even if you don’t think you have that much in O/H. You can always move it around later, but it will help your budgeting by giving you cushioning for Pt. 2.
5) Academics may be used to getting their direct cost budget while the F&A budget goes to the University. This means PI’s need to spend more time coming up with direct cost justifications for what a small business would consider overheard items (e.g. a computer)
6) A common thing for first grant – what do we definitely need to buy for this grant, what’s left, and can any of the founders working on the project afford to live on this.
7) Know the budgeting rules of the agency you’re applying to. NIH doesn’t allow commercialization activities (costs of applying for patents, marketing a product, etc.) as a direct or indirect costs, The DoD has slightly more generous rules. The latest re-authorization imposed stricter limits on budget ceilings. NIH can still go over by 50%, if well justified.
8) Google “NIH Welcome Wagon” for good information concerning the assorted requirements of the NIH when being awarded an SBIR grant.
9) Typically, SBIR/STTR’s allow the SBC to “make a profit” on the grant. For the NIH, this called a fee and can be up to 7%. Take the 7%, this will help seed “unallowable” costs like those patent filings, beers for your team after hard week of work, etc.
10) Grant “best” money -> “less best money”: Profit/Fee (completely unregulated), F&A (some rules), direct costs (most rules.)
11) Trade-offs of grant funding. (P)ro or (C)on: (P) clean cap table, (P) slightly lower threshold of funding, (C) government time scale to get the money, (C) additional reporting requirements, (P/C) government maintains certain rights to your IP and other assets, but generally less restrictive than a private investor, (P) the accounting requirements could be seen as a way to help a new business engage in good accounting habits
12) After you win the award, get a copy of Quickbooks and make your own chart of accounts. You’ll waste a lot of time trying to fit your business into the default accounts in Quickbooks. Sample:
- 5000 – Direct Cost Accounts
- 7000 – Indirect Cost Accounts
- 9000 – Unallowable Costs Accounts
Top four things in general for using federal grants:
1) Apply early and often. The best university professors are always applying for the next grant. This is a good habit to emulate.
2) Your proposal needs to have a real pain point you’re addressing and some study to test the hypothesis that you’re idea/technology will bring relief to this pain point.
3) Get a mentor, someone who has gone through the process – both for proposal portion as well as parsing through the application process
4) Pairing with a University can be beneficial for a number of reasons
- Academic PI’s have experience in navigating the application process and writing compelling research proposals
- The reviewers are academics
- You can leverage the infrastructure of the University for things such as animal or clinical research.
We thank David Cuccia for his great presentation and answering all of the attendees’ questions. We also thank Fred Ayers for providing us with the valuable checklist above.
David Cuccia’s complete presentation is now posted. You can download a PDF here:
Wireless Health entrepreneurs, join us at our next Meetup. Find more info here.