business

Entrepreneur David Reamer is looking for funding for his business, which is developing sensors to detect dangerous gases as far as a kilometer away. But he's not asking angel investors or venture capital firms for money.

Instead, Reamer is courting the U.S. Defense Department.

"To get the technology on a path of success, we need a large amount of money to do that, and angel dollars won't really get us to the next level of funding," Reamer said.

Start-up companies like Reamer's Stillwater-based ASCIR Inc. are turning to the U.S. military for money at a time when angel investors have grown more wary of financing emerging businesses and venture capital firms have shifted their focus to more mature firms. The Defense Department has become an unlikely ally, providing funding for research and development as long as the companies meet the government's needs and have the potential to sell their product or service commercially.

"The focus of venture and angels have changed to later-stage development. ... It's very difficult to find money at the high-risk stage," said Betsy Lulfs, executive director of the Minnesota Science and Technology Authority, an organization that will help link tech-oriented small businesses with federal grants and make recommendations to the state on how to grow the industry.

The Defense Department gave $1.2 billion for Small Business Innovation Research (SBIR) last year and is one of 11 federal departments and agencies participating in such programs.

To participate, small businesses must have fewer than 500 employees, be more than half owned by U.S. citizens or permanent residents, and meet a need posted by the departments, among other requirements. Companies write proposals based on those needs, and government scientists and engineers select the winners based on commercial viability, soundness of the technology or innovation and the qualifications of the company.

SBIR is just one of several ways companies can receive federal funding for research and development.

Reamer, co-founder of ASCIR, said he is working with the Defense Advanced Research Projects Agency, an office of the Defense Department, on getting funding such as seed grants, and is considering the SBIR program in the future.

Applications are up

More local companies are applying for this type of funding. Last year, Minnesota companies received 55 SBIR awards and 312 proposals, up from 38 awards and 274 proposals in 2008, according to data compiled by the Ohio-based nonprofit State Science and Technology Institute.

Unlike venture capital firms, the U.S. government is more willing to pay for higher-risk projects, where the technology may not be fully developed for commercial success, analysts said.

"What is proposed on paper isn't always proven that it will work," Lulfs said. "The beauty of it, is that if [the product or service] doesn't work, [the company] doesn't have to pay the money back."

That was the case roughly 10 years ago with Minneapolis-based Third Wave Systems, which provides software to analyze and optimize how to efficiently manufacture parts for the aerospace and automobile industries. The company had approached venture capital firms and angel investors without much success.

"We were trying to raise money and we were trying to explain what we do to people that made money in medical devices or real estate," said Kerry Marusich, Third Wave Systems' president. "They didn't understand. We didn't have that seasoned team of 'been-there-done-that' people."

Marusich said if it wasn't for SBIR funding, his company probably wouldn't have made it. So far, the company has been awarded 23 SBIR projects and successfully commercialized many of those projects.

For example, the company had worked on past SBIR projects on how to use software to improve the manufacturing of titanium and aluminum for airplanes. Third Wave Systems later adapted that software to help Bell Helicopter reduce the manufacturing time to produce a component by 37 percent. This year, Marusich estimates 40 percent of the company's business will be from federal research and development grants, while 60 percent will be from commercial sales.

"SBIR is a great revenue [source] for providing really small companies with pre-venture capital," Marusich said.

Minnesota Wire is working with an undisclosed athletic apparel company on wire that can be used inside a sports jersey. The wire will be used to measure data such as an athlete's heart rate, oxygen level and temperature, said communications director Chip Laingen. The company originally developed that technology on a project to improve the wiring in Air Force aircraft.

Today, about 30 to 35 percent of the company's sales are related to the defense industry, Laingen said. That's compared with just 5 percent six years ago, he added.

But Laingen, who is also director of the Defense Alliance of Minnesota, an organization dedicated to expanding the state's defense industry job base and promoting its contributions to the defense industry, said small businesses should be aware there may be potential administrative burdens, competition and financial auditing involved in the SBIR program. Small businesses must also meet certain parameters to receive additional funding. But Laingen said he believes it's worth it.

"If you have the patience to wait, the payoff can be huge," he said.

Wendy Lee • 612-673-1712