Bridging the Funding Gap for Diverse Founders and How SBIR Can Help

As a startup founder, one of the biggest challenges is securing funding to bring your ideas to life. Unfortunately, for female and minority founders, this challenge is even greater. Studies have shown that only a small percentage of venture capital funding goes to women and minority-led startups, despite the fact that these companies are just as capable of success.

The funding gap for diverse founders is a well-documented issue in the startup world. Companies with all female-founding teams raised about $800 million, or 2.1%, out of the estimated $37 billion invested in U.S. startups in Q1 2023, according to PitchBook. In dollar terms, that is a 53% year-over-year decline from the $1.7 billion all-female founding teams raised in Q1 2022. As for Black-founded startups, they were hit disproportionately by the decline, Crunchbase data shows. Such startups saw their share of the market drop from 1.5% in 2021 to only 1.1% last year.

These are just some of the reasons why historically underrepresented founders struggle to raise capital.

• Lack of access to networks. Diverse founders are less likely to have access to the same networks as white male founders, which can make it difficult to find investors who are familiar with their businesses and willing to take a risk on them.
• Implicit bias. Even well-intentioned investors may have implicit biases that make them less likely to invest in businesses led by diverse founders.
• Stereotypes. Investors may be more likely to believe that businesses led by diverse founders are riskier or less likely to succeed.
• Lack of role models. There are fewer successful diverse founders to serve as role models for aspiring entrepreneurs, which can make it difficult for them to believe that they can succeed.
• Lack of funding opportunities. There are fewer funding opportunities available to diverse founders, which can make it difficult for them to get the capital they need to grow their businesses.

This is where federal grants come in.

This is where federal funding programs, such as the Small Business Innovation Research (SBIR) program, can help bridge the funding gap by providing provide seed capital to startups. Unlike venture capital funding, these federal grants are not based on a company’s potential for high returns, but rather on its potential to contribute to scientific and technological advancements.

Moreover, the SBIR funding program prioritizes the participation of women, socially/economically disadvantaged, and historically underrepresented founders.

The percentage of SBIR|STTR grants awarded to female business owners rose between 2015 and 2017, from 8% to 11%, but the share awarded to socially or economically disadvantaged business owners remained essentially flat at 8%. (Brookings)

The SBIR program has awarded over $30 billion to small businesses led by women, minorities, and people with disabilities since its inception in 1982.

Federal grants can help diverse founders in a number of ways.

• First, they can provide much-needed funding to help launch and grow businesses.
• Second, they can connect founders with mentors and other resources that can help them succeed.
• Third, they can help to build a more inclusive entrepreneurial ecosystem.

What is the SBIR funding program and how it can help diverse founders

The Small Business Innovation Research (SBIR) program is a United States government program that provides federal funding to small businesses for research and development (R&D) projects that have the potential to lead to commercial products or services. The SBIR program is divided into three phases: Phase I, Phase II, and Phase IIB.

Phase I awards are typically for $100,000 to $275,000 and are used to develop a prototype or proof of concept. Phase II awards are typically for $750,000 to $1.5 million and are used to further develop the prototype or proof of concept into a commercial product or service. Recently, some agencies have started to offer also investment incentives to Phase II awardees offering ~$500,000 matching funding if the companies bring additional investments from third parties.

The SBIR program can help diverse founders in a number of ways.

• First, it can provide seed capital for R&D projects that might not be able to be funded through other sources. The companies do not have to dilute any equity or return the money.
• Second, it can provide access to government agencies and potential customers.
• Third, it can help small businesses to develop the skills and knowledge necessary to commercialize their products or services.

To be eligible for the SBIR program, a small business must be based in the United States, at least 51% owned by US citizens and have fewer than 500 employees, and must be organized for profit. The business must also be innovative and must have the potential to commercialize its R&D results.

Conclusion and Next Steps for Securing Federal Grants for Your Startup

Federal grants can be a valuable source of funding for startups, particularly those led by women and minorities who face additional hurdles in securing venture capital funding. However, applying for federal grants can be a complex process that requires careful planning and attention to detail.

If you are interested in securing federal grant funding for your startup, the first step is to research the different grant programs that are available and determine which ones are the best fit for your startup. From there, you can begin the application process and work to develop a strong research proposal that highlights the innovative aspects of your startup’s idea.

By following the tips and best practices outlined in this article, you can increase your chances of success and help bridge the funding gap for diverse founders.

If you’re an early or growth-stage company looking for SBIR funding, schedule a call with an iFund Lab advisor today to learn more about available grants and eligibility criteria. Send a call request at funding@ifundlab.com