Sustainable Agriculture Startups Chase Venture Capital While Gov’t Grants May be a Better Option
April 3, 2012 | Nicola Kerslake
For a startup, the odds of obtaining venture capital funding are lower than one in 100, likely less for a sustainable agriculture startup as I’ve covered elsewhere. The odds of securing a federal grant on the other hand are more like one in six , and they rise if you’re a student or university researcher. Yet, most agriculture startups spend a disproportionate amount of time chasing venture capital, and comparatively little considering grants as an option.
In the not too distant past, startups developed using government grants as opposed to equity investments were considered less hip than their venture capital backed brethren; the rationale being in part that those receiving grants would be less apt to move their idea speedily towards commercialization. This perception changed during the recent recession as startup funding became as scarce as it has ever been and venture capitalists became enamored of the opportunity to extend the runway for their investments by using grant funding. Matthew Nordan – a Boston-based VP at venture capital firm Venrock – recently pointed out that two of Venrock’s nine energy investments had received grants through ARPA-E, a federal grant program funded in 2009 to encourage high-risk, high-return technologies, that includes three categories – biomass energy, water, carbon capture – which coincidentally are applicable to the aims of many sustainable agriculture startup companies.
Typically, agriculture companies initially focus their energies on obtaining grants from the Department of Agriculture (USDA). The types of USDA grants which these companies pursue include those that help them to market their business and to achieve organic certifications. For example, the ‘Organic Cost Share Program’ reimburses the cost of organic certification for producers and handlers up to $750 per year. The ‘Specialty Crop Block Grant Program’ is awarded on a state-by-state basis, with each state USDA office defining its own priorities in researching and marketing crops. About a third of the funds go to marketing projects, 16% to pest and plant health, and a further 15% to research projects. This year, $55 million is available in funding for the Specialty Crop Block Grants Program, and there were 740 projects selected last year. Based on this data, the average award is a little over $74,000.
Outside of the USDA, one of the best sources of available funding for agriculture startups can be found through Small Business Innovation Research – or SBIR – grants. The mission of the SBIR program is to encourage domestic small businesses to engage in Federal Research/Research and Development (R/R&D) that has the potential for commercialization. All federal agencies with an extramural research and development budget exceeding $100 million are obliged to use 2.5% of their research budget to fund an SBIR program. At present, this means that eleven agencies are involved in the program, seven of which generally have sustainable agriculture-related topics selected for their submissions. Participating agencies include the Department of Agriculture (USDA), National Science Foundation, Department of Energy, Department of Transportation, Environmental Protection Agency (EPA), National Oceanic and Atmospheric Administration (NOAA), and Department of Defense.
SBIR grants are split into three phases, the first of which provides funding to test the feasibility of technologies that are at laboratory stage. Your business plan doesn’t have to be especially sophisticated at this stage, as the larger focus is on validating your technology. The awards are for up to $150,000 and you have six months to complete the work. The objective of the SBIR Phase II grant is to continue the research or R&D efforts initiated in Phase I. Funding shall be based on the results of Phase I and the scientific and technical merit and commercial potential of the Phase II proposal. The grant funding for Phase II can be for up to $1 million and typically covers a two-year scale up period and places a far greater emphasis on developing a business plan and finding customers for the resultant product. Phase III funding is designed for the small business concern to pursue with non-SBIR funds the commercialization objectives resulting from the outcomes of the research or R&D funded in Phases I and II. 
It’s not unheard of for SBIR program officers to insist that a team member with business experience remain involved throughout the term of the grant. Application periods are run periodically throughout the year, and typically include a sufficiently detailed description of the desired submission topics so it’s fairly easy for an entrepreneur to decide if it’s worthwhile to apply. In order to qualify for a grant, your company has to be for-profit, have fewer than 500 employees, and be majority owned by an American citizen or Green Card holder. As not all recipients decide to apply for subsequent phases of funding, the odds of receiving funding rise with each successive phase.
The major benefit of receiving SBIR funding is that you don’t have to give up a piece of your company; negotiating your next round of investment is usually easier when there’s no existing equity holder in place. Additionally, in contrast to private investment, SBIR funding is often available to those sustainable agriculture startups at a far earlier stage of product development. On the downside, pulling together applications takes a fair amount of time, and accepting government funding comes with its own set of restrictions and regulations, some of which can be onerous for a small company. Jorge Heraud, CEO of Blue River Technology, which is developing an automatic weeder to replace chemical herbicides using NSF SBIR funding, commented at a recent conference that: “we do actually have to work for it.”
In 2010, SBIR awards from six of the seven agencies outlined above totaled $1.3 billion across 4,400 companies. This isn’t too far off the $1.7 billion in seed financing that the venture capital industry provided across all industries that year. These figures alone should justify a little less attention to Sand Hill, and a touch more to Washington.