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Mar 25, 2020

Is it worth going after a Phase III

Time to read: 8 min

It’s probably not worth going after a Phase III…

Our analysis suggests that you should only go after a Phase III if you are already an active government contractor or you are deeply committed to breaking into the Government market. If you only did an SBIR to get funding for your commercially oriented product then the data says you should stop at the end of your Phase II.

I’m more interested in commercial sales but the government asked for this and I’ve put a ton of time into it…

We can appreciate this feeling, but that’s all sunk costs and effort.  Now it’s time to decide whether it’s worth putting in even more time and effort to make that Phase III sale, so I’d suggest having a very direct conversation with your main customer (end user type customer, not your contracting officer) and ask them:

  1. Do they currently have money to buy your thing?

  2. Do they have leadership support to buy your thing?

If the answer to both is an enthusiastic yes, then I guess its worth taking a detour into federal sales.  But if there is even a hint of uncertainty then we recommend finding a federal channel partner that will work on commission and sell for you.

How did we get here…

We broke the Phase III pursuit decision into three parts:

  1. What do you get if you’re successful?

  2. What are your chances of success?

  3. How much work will it take to find out? 

 

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1.     What do you get…

This is probably the easiest piece to quantify.  We looked at 730 companies who won Phase IIIs between 2007 and 2019 and we found that the average Phase III at civilian agencies was about $500K  and the average Phase III at a defense agency was about $1.5M (see chart on left), which is about the same as a Phase II.  So that’s the upside for most people

BUT Phase IIIs have produced huge payouts for product hit big (see chart on right)

Phase III value.jpeg

2.     What are your chances of success..

At both defense and civilian agencies we found that about 15% of Phase IIs go on to become Phase IIIs. However, for a variety of reasons we suspect that this is about 30-40% higher than reality, so we predict that the actual transition rate is around 8-10% (for more please see the notes on methodology at the bottom).

Phase III transition rates.jpeg

A 15% chance of getting a few mil may seem like a good investment but there’s more to the story. When we looked at that 15% of Phase IIs that went on to become Phase IIIs we found that the vast majority of the companies were deeply invested in the federal market (e.g. they were going after ordinary government contracts, not just SBIRs). Hence, we think that you should only go after a Phase III pursuit if you too are deeply invested.

Non-SBIR K.jpeg

We also found that only 20 new companies (those that were 1 or 2 years old at the time) have ever won a Phase III. This isn’t super surprising. A phase III requires lots of time and government contracting knowledge, which very few young, product oriented companies have.

Age at PIII.jpg

3. How much work will it take to find out…

Great question, and sadly we have very little good data here.  We know how much time we are putting in for our Phase III pursuit but we’re not into sharing data with an n of 1 so here is how we’ve been thinking about sizing the effort:

  1. How much work are we going to have to do to get the customer excited and ready to advocate to buy our thing?

  2. How much work will we have to do to identify the money in their budget to buy our thing?

  3. How much work will we have to do to help the contracting office draft the contract?

And sadly, none of this data is publicly available.  So, if you find yourself in this position we recommend talking to your customer about 1 and 2, and talking to people who’ve been down this road about 3.

We know this last section isn’t very data driven (it hurts us too) but here’s a consolation prize.  Here are the offices that we found that have made the most Phase III award, and the last year they did a Phase III so at least you can target customers who are familiar with the process

PIII offices.jpeg

NOTEs ON METHODOLOGY: For those of you that want to recreate our findings at home here are our steps, and if we made a mistake or you find something new that’s interesting please let us know!

 

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Our general process:

  1. Downloaded list of companies that had won SBIRs between 2015 and today from SBIR.gov

  2. Used the companies’ DUNS numbers to download all their contract wins from usaspending.gov

  3. Removed duplicate awards and award modifications

  4. Identified SBIR PI, PII and PIII using the “Research” column

Note on Phase III value analysis: We treated each award independently, so if a single Phase II generated multiple Phase IIIs then those Phase IIIs were each treated as separate values.  We used the Base and all Options Value field for the amount

Note on Phase II to III transition analysis:  It was almost impossible to connect specific Phase IIIs to their Phase II records, so we looked for instances where a company had more Phase IIIs than phase IIs at a given agency, and in those cases we reduced the number of Phase IIIs to the number of Phase IIs. We then conducted a cohort analysis to assess transition rates.

While we tried to account for instances where one Phase II led to multiple Phase IIIs our intuition is that our analysis still double counts MANY Phase IIIs and hence why we believe that our analysis overstates the transition rate by 30-40%

Note on company years of experience: To generate this chart we cross referenced our list of Phase III winners with SAM data

Note on HHS, Energy, Education and the NSF…

We looked for Phase IIIs from these agencies and we could barely find any which makes sense since they are policy and R&D oriented agencies, for example the Dept. of Energy doesn’t produce electricity or transport gas instead they encourage companies to find new ways produce electricity and transport gas and the resulting technologies are sold to industry rather than the agency. Contrast this with the Navy which is funding technologies that they themselves will use.

Note on GSA: As you may have seen the GSA awards Phase IIIs but not Phase II.  This is because the GSA is the bulk buyer of the federal government so if multiple agencies might want your product you can go for a Phase III from the GSA.

 

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