Connecting Good Ideas with the Cash Needed to Fund Them

Of the $787 billion in stimulus funds to be allocated by the American Recovery and Reinvestment Act (ARRA) passed earlier this year, $8.2 billion has been designated as extramural funding to the National Institutes of Health (NIH) for the advancement of scientific research.

So far, nearly 5,000 grants totaling over $1 billion have been awarded by NIH. Most have been awarded to research labs at large universities and small colleges, while some have been awarded to small, privately owned research and product development companies. With an already existing annual budget of $30 billion to fund scientific research, an additional $1 billion above the primary funding these institutions already receive is not having a significant impact on the scientific community.

In fact, NIH is experiencing a logjam in its efforts to review and process the overwhelming amount of applications they have received, which in some instances has caused delays in the processing of the regular grants that many institutions depend on as their main source of funding.

Dr. Joan Slonczewski is a biologist at Kenyon College in Gambier, Ohio who runs a small laboratory that focuses on bacteria research, specifically E. Coli and pH regulation in bacillus subtilis. She manages five to six undergraduates who work at the lab part-time during the school year and full-time in the summer, and also employs one full-time graduate assistant manager who works year-round.

“I think that we’ll be hearing later perhaps about the regular grant request that I had put in because there has been so much more work reviewing all these new grant opportunities,” she says. “It’s a huge burden to process so many grants so quickly, but I think they have been handling it the best they can, and in a very sympathetic way.”

Acting Deputy Director for Extramural Research at NIH Dr. Sally Rockey says that a major analysis of its peer review system has just been completed to not only make it more efficient, but also to allow for the funding of more diverse types of projects and to help NIH become more adaptable to the rapidly evolving nature of contemporary scientific research. Some of the specific changes to this process include more streamlined electronic applications, a new scoring system, and a reduction in the amount of re-submissions that can be made by project applications that have already been rejected.

“We are always striving to make the process as efficient as possible for the applicants and the review community,” Dr. Rockey says. “Although the basic division between applied and basic research remains constant, we have evolved to support more multidisciplinary and transformative science in recent years. NIH has to be flexible to adapt to changing science so that the most relevant and high quality research can be supported to improve public health and advance science.”

Delays in fund allocation can be very damaging to a small laboratory, but fortunately for Dr. Slonczewski, things worked out very nicely. Although her regular funding was delayed (she typically receives between $100,000 and $150,000 per year through the NIH Academic Research Enhancement Award), she was granted an extension for her primary grant and awarded an additional $68,000 grant that came directly from the ARRA, which she was not expecting. These extra funds enabled her not only to employ her students, they also enabled her to purchase a new fluorescence microscope, which in turn created a sale for the microscope manufacturer.

“In terms of the short run, we’re actually benefiting from the stimulus in a very positive way,” Dr. Slonczewski says. “Our concern is what happens next year, because next year there won’t be another stimulus.”

It is this concern about tomorrow that has created an air of conservative caution and has caused lab managers to hold back on purchasing new equipment, which ultimately hurts their vendors. They had gone into survival mode long before the ARRA was signed into law, and while these stimulus funds have had plenty of small success stories, they have done very little to allay the fears of what the economy is going to do down the road.

In addition to halting equipment purchases and finding other ways to reduce operating costs, many lab managers have been forced to reduce salaries, and some have had to make the very painful decision to lay off employees. As for companies who are doing well enough to consider hiring or have received some of the larger grants that have been awarded, they are reluctant to do so for fear that they would have to let these new hires go as soon as the money runs out.

Dr. Richard Greenwald is founder and president of Simbex LLC in Lebanon, New Hampshire, a research and development company of sixteen employees that focuses on injury prevention research and product development. Simbex already receives most of its funding through the NIH Small Business Innovation Research (SBIR) program, and it recently received an $11,000 supplemental grant through the ARRA that enabled Dr. Greenwald to hire an intern for the summer.

In the midst of a recession that began in December 2007, Dr. Greenwald could not afford to wait for the government to bail them out. Survival was going to have to come from within, and the necessary steps for doing so were taken long before lawmakers even started talking bailouts.

“You could see that there was the possibility and likelihood of some kind of recession coming, and we scaled accordingly,” he says. “We didn’t leverage ourselves to the hilt like a lot of people did. I think good management and a little bit of restraint, staying within your means, allow a laboratory to weather any kind of financial storm.”

By the time he finally received his ARRA grant, it was nowhere near enough to have any significant impact.

“The only reason it’s had a little impact because it was just a little bit of money,” he says. “If it had been a bigger amount, then it would have had a significant impact. The challenge, of course, is if you get money through this Act and then you go and staff up, two years from now that money goes away. And if there’s no additional funding, you’re kind of back to square one, and you may have to let people go again.”

Dr. Raymond Thompson, founder and manager of Vista Engineering and Consulting in Birmingham, Alabama, is in a similar position. Vista employs nine people at its lab, which is working on the development of a technology that grows diamonds from methane gas to use as a coating for biomedical implant devices.

In addition to his regular grants, Vista received $10,000 from the ARRA to develop technology for nanotechnology- enabled temporomandibular joint prosthesis. Dr. Thompson says this grant has had very little impact on his business, which typically receives around $250,000 per year in grants, but it did allow him to hire two undergraduate engineer students to work for him for ten weeks this summer.

“Obviously, a $10,000 grant over the summer doesn’t make a big impact on our bottom line, but it makes a big impact on those two students,” he says. “From a business standpoint, it’s more community involvement for us than it is to help pay our bills.”

Despite how grim the economy looked at the end of 2008 and the first half of 2009, recent signs a recovery is underway is providing a glimmer of hope for lab managers.

“We’re trying to figure out how to accelerate out of this thing,” Dr. Greenwald says. “Let’s take advantage of these opportunities that are out there. You have a lot of people who are unemployed. That means there are a lot of smart people out there—go find the best ones. And people are willing to do work. If you’re dealing with a machine shop, they need business. So you can go and say, ‘Hey, do this business, but don’t charge us an arm and a leg.’ I think everyone’s in the mood to be lean and mean and fight for opportunities. For those people who are willing to get their head out of the sand, it’s a good time.”

Dr. Thompson, meanwhile, does not believe the recession will have any long-term effects on his business beyond the slowdown in its growth.

“I expect us to do fine long-term,” he says. “I don’t think it’s a good time to bring out the crying cows or start waving white flags around. I think that when industry starts to come back and there is a need for the materials testing and specification development things we do on the engineering side of the house, we can start hiring people again.”

While the biggest impact of the recession on existing firms has been cost reduction, perhaps the biggest impact on the scientific community as a whole has been the lack of new companies being formed, which has always been a major source of new jobs. Without a fresh crop of startups, many highly qualified people are currently out of work fighting over a very small number of job openings.

In the meantime, venture capitalists have been waiting on the sidelines cautiously sitting on large piles of cash to make sure that their existing ventures will have the money they need to operate. Very few are funding new ventures, but some may be starting to feel the itch to get back in the game. In order for these firms to put money into new companies, however, they need to be assured that any ventures they invest in are low risk/high reward.

Dr. Ian Mehr is a Managing Director at Golden Pine Ventures in Research Triangle Park, North Carolina, a “venture creation” firm that specializes in providing seed capital for the establishment of biotechnology companies. Dr. Mehr says the recession hasn’t had much of an impact on the six companies in their portfolio, although their funding sources have changed to some degree from traditional venture capital methods to loan financing and grants.

“The classic venture capital roots are not drying up, but they certainly aren’t as available as they once were,” he says. “The rhetoric I’ve heard from the overall venture investment community has been towards looking for things in the biosciences that are less risky—later stage medical programs, medical devices and so forth. They are steering away from early pre-clinical stage research projects.”

Dr. Michael Powell is a general partner with Sofinnova Ventures in Silicon Valley, which manages a fund of $375 million invested in 20 different startup life science and technology companies. While most of their companies saw staff reductions over the past year (some of them as drastic as half the company being laid off), Dr. Powell is cautiously optimistic that things are starting to turn around.

“We’re on the back side of it now,” he says. “I’m starting to see signs of improvement. I don’t want to sound too optimistic because I still think there’s still quite a long way to go, but I think people are going to start hiring sooner rather than later.”

Meanwhile, gone are the days of freewheeling venture capitalists throwing millions of dollars at mere ideas. Startup firms looking for capital are finding it very difficult to find a willing partner. And, while Dr. Powell acknowledges how much more difficult the fundraising environment has become, he says it’s not impossible, although it now takes a much more detailed and eye-popping business plan to produce results.

“The bar is significantly higher right now,” he says. “We’re asking for things today that we would not have asked for two or three years ago, i.e. a business model even more validated than two guys in a garage kind of thing. We’ll ask for more and more data. Instead of, ‘Here’s a clinical plan that I think would work’, we’d ask them to validate it with a group of experts. We might ask for a budget audit. A lot of these things that in the old days I used to just work out on the fly real-time, now I want to see the whole picture all lined up right now.”

To business owners pitching their ideas, Dr. Powell explains the principle of arbitrage. Venture capitalists are no longer receptive to someone who comes in and says they can take a dollar of their money and produce dollar’s worth of product; capitalists are looking for someone who can come in and say that they can take a dollar of their money and produce five dollars worth of product.

Presentation is also important. With sources of funds having become so scarce, many firms have resorted to producing business plans that are generic enough to be sent to as wide an audience as possible.

“I see a lot of companies, especially in times of desperation, resort to essentially spamming and just trying to find anybody that will talk to them,” says Dr. Mehr. “That’s pretty obvious when that happens. These mass general emails—’To Whom It May Concern’—just aren’t going to get looked at.

“Know who you are contacting. Crafting personal messages to people has always been a critical facet in promoting your business. Always has been and always will be, but perhaps even more so now than ever.”