Earlier this fall, the Department of Energy (DOE) announced its award of grants totaling $57 million to help 33 small companies scale up manufacturing capabilities for their proven clean-energy technologies. The news might have passed unnoticed amid the steady stream of funding announcements that have flowed out of DOE as a result of last year’s American Recovery and Reinvestment Act (ARRA), but for the description of the funding source. The Small Business phase-three Xlerator grants that were unveiled on 15 September are the first instances of a new source of early stage federal financing intended to bring small businesses’ innovative energy technologies to the marketplace.

Whereas the long-standing Small Business Innovation Research (SBIR) program leaves off at successful demonstration of the technology, the phase-three Xlerator grants are meant to help businesses take their product down the path toward commercialization. What’s more, the grants—up to $3 million—are far bigger than other SBIR technology development grants that have been parceled out by DOE in amounts rarely exceeding $1 million since the advent of the program in 1982.

“What this [phase three] focuses on is giving companies staying power to get across the so-called valley of death”—the point where many technology startups fail for lack of capital—says Kristina Johnson, the DOE undersecretary who championed the new funding mechanism. The concept, she says, stemmed from her own experience starting up a 3D movie technology company during the 1990s. The business, which was later bought by RealD, won a grant from NIST’s Advanced Technology Program. With that support, her startup was able to gear up manufacturing of its product, 3D glasses that are now used in movie theaters.

Despite having had to operate since 2008 under a series of temporary extensions by Congress, the SBIR program is healthy and continues to grow in tandem with the inexorably rising R&D budgets of the largest federal research-sponsoring agencies. All 11 SBIR agencies, which include DOE, the Department of Defense (DOD), the National Institutes of Health (NIH), NASA, and NSF, are required to set aside 2.5% of their extra-agency R&D budgets to pay for competitively obtained awards to businesses with 500 or fewer employees (see Physics Today, November 2008, page 22). Phase-one SBIR grants of up to $150 000 go to technology feasibility studies. Once those are completed, a company becomes eligible to apply for a phase-two grant of up to $1 million to develop the technology through the prototype stage. Grant sizes vary somewhat by agency, and NIH and DOD in particular have routinely awarded multimillion-dollar phase twos.

“How do you go from a prototype in a laboratory or a demonstration process, from making a one-off, usually requiring some pretty sophisticated hands-on integration, to something that can be automated and sold in the millions at low enough cost to penetrate the market?” asks Johnson. “That’s what we are trying to fund.’

The trouble is, the SBIR kitty is offlimits for phase-three commercialization funding. Though phase three has been an explicit component of SBIR since its establishment in 1982, no funding for it has ever been set aside. Government-wide, SBIR now collects more than $2 billion, including $150 million at DOE. But any funding for phase three is expected to come from the private sector or other, unspecified federal sources.

While he supports the concept of phase-three awards, Jere Glover, executive director of a trade group for SBIR awardees, says his members are concerned that tapping the SBIR set-aside fund to pay for a relatively small number of expensive commercialization grants will “crowd out” small companies that are seeking grants for the earlier SBIR phases.

At DOE, Johnson and her colleagues located their phase-three funding source in a provision of the 2005 Energy Policy Act that instructs the agency to spend a minimum of 0.9% of its clean energy R&D on commercialization.

Composite Technology Development Inc (CTD) in Lafayette, Colorado, won a $1.9 million DOE phase-three grant to commercialize a new electrical insulation material for motors used in geothermal energy systems and other high-temperature applications. Mike Tupper, CTD executive vice president, says that if the project succeeds, it will likely attract $3 million from his customers to adapt the product for their applications.

“Assuming everything goes well from a technical standpoint, I believe we have the resources to put this thing on the market, where without the phase three, it would have been a lot more questionable,” Tupper says. The award also turned up the heat on CTD’s customers, suppliers, and manufacturers to commit to their respective parts in bringing the product to market. “Fortunately in this case, they all said we’re in,” he notes.

Tupper knows something about SBIR grants, given that CTD has won 58 phase-one and phase-two grants since 2000 from DOD, DOE, NASA, and NSF and may snare a few more before the year ends. In 2009 two-thirds of the company’s $5.8 million in revenues were supplied by the federal government, with two-thirds of that from SBIRs, he says. CTD is hardly alone among small companies in winning serial SBIRs; there is no limit on the number of SBIR grants a company can receive.

Johnson doesn’t have a problem with that: “In my view, if there is an innovation that, for example, DOD needs, and you’ve got a crackerjack engineering team that can solve the problems faster than otherwise, why wouldn’t you want them to continue to work?’