Space VCs urge startups to pursue government contracts but stay focused on commercial success

WASHINGTON — Space technology startups should carefully weigh the risks and rewards when bidding on Small Business Innovation Research (SBIR) government contracts, a venture investor said Feb. 6 at the SmallSat Symposium in Mountain View, California.

The SBIR program provides crucial early funding for young firms, and can be a lifeline for many space entrepreneurs when they’re just getting off the ground. 

But the competitive contracts can also consume outsized time and resources, and keep many companies in a cycle of continuously chasing SBIRs and not putting enough focus on commercialization, said Timur Davis, investment director at Munich Re Ventures.

“I’d say the government is absolutely a double-edged sword, mostly on the good edge, but not always,” said Davis.

VCs that years ago were beating the “commercial is king” drum have now changed their tone as governments have taken on a major role in nurturing space technology, he said. Space startups simply can’t ignore agencies like NASA and the Space Force and miss out on important sources of funding, particularly over the last couple of years, he added.

While venture capital has retrenched, “the government has stepped up and created a tailwind for the space industry that, frankly, doesn’t exist in other venture backed categories that are suffering more so than space,” said Davis. 

“Particularly in the defense world, we’ve seen government come in in a big way and support startups that otherwise may have had a tougher time raising funds.”

Be careful about ‘scope creep’

However, Davis warns startups to not become overly reliant on SBIRs, especially if the project is so demanding that a company risks missing their product window and losing out to competitors that move faster to market. 

“We always advise our startups to be careful about ‘scope creep’ and what you’re signing up for,” he said. 

The SBIR program awards grants and contracts to small businesses to conduct R&D on technologies that have potential commercial applications. Government agencies also use the STTR program, which stands for Small Business Technology Transfer. STTR awards grants and contracts to small businesses that partner with research institutions.

“It’s great to apply for a bunch of SBIR grants,” said Davis. “But ultimately you have to deliver on that project, and sometimes that can take you away from your critical path” building commercially viable products. 

SBIR funding phases 1 and 2 can be worth up to $1 million. For many firms, phase 3 and subsequent commercialization often fail to materialize.

These government technology investments remain vital for capital-intensive space fields, and many recipients have successfully parlayed SBIR into viable companies. “But when you are a small startup with limited resources, every day that you’re not working on your core product is a day that you’ve basically wasted,” said Davis.

Again, he cautions startups “to be deliberate and thoughtful about what programs they apply for, and to be very clear about the scope of these projects.”

Startups also should be aware that the funding they win is not necessarily available at the time that the project is won. 

That can happen when SBIR awardees win what is known as a strategic funding increase, or STRATFI. These are agreements where the government commits to fund a project that also gets matching funds from private investors. A $20 million STRAFI, for example, gets a small portion from SBIR and the rest comes from other government agencies and from VCs. 

“We’ve seen on many occasions when startups trumpet that they got $20 million in STRATFI money. And then they have to spend the next two years chasing people to get that $20 million.”

Mike Collett, managing partner at Promus Ventures, said companies generally are “very clear on the rules of engagement when working with a government.”

It’s easy to forget after the recent space investment boom just how few options entrepreneurs had not too long ago, Collet said. Just 20 years ago,  the funding prospects for space tech startups were extremely limited, he added.

Although there is a lot of private money, government funding is essential, he said. “I would much rather have a team struggle with trying to figure out what to do with a $10 million contract from NASA than not have that at all.”

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