Grant Funding (eg SBIR) Business Model

November 18, 2024

by a searcher from Duke University - The Fuqua School of Business in Greensboro, NC, USA

Has anyone purchased (or run) a company that has SBIR grants as part of its revenue and business model? I am trying to understand how that is taken into consideration during valuation. In particular, a company that has won several past SBIR grants and actively applies for them as part of their model. My approach is a "sum of parts" valuation. I plan to value the grant revenue separately from the product/research commercialization revenue using different multiples. Other suggestions or comments?

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Reply by a searcher
from Simon Fraser University in Vancouver, BC, Canada

You're right to assume that in many/ most cases, grant revenue seems less certain than customer revenue. For one, third party customers are generating economic value from using your product/ service. In terms of what I would do in this case: (1) how much revenue does grant income generate, (2) how long historically has it been earned / how variable has it been in past years?, (3) how likely are these grants to continue at or above the historic level in the future, (4) is there key man risk associated with grant revenue - i.e. if someone leaves the organization there's no longer anyone who has the grant knowhow?

I don't know about assigning a different multiple, but this would definitely be a higher level of risk, which decreases the multiple that you should use overall. The answer to the questions above would help you assess how much of a risk it is and how much of a discount you should assign.

Reply by an investor
from Dartmouth College in 80 S Main St, Hanover, NH 03755, USA

We have, and adjusted the full cycle of sbir and grant research funding out- but also keeping. Mind that these grants generally fund r&d so are offset by expenses or capitalized r&d, so there is generally something offsetting the revenue (in terms of impact on normalized ebitda). An as important question is how critical the work being conducted with this funding is to your investment thesis and whether the funding seems like it will continue if the work it is producing is improtant to the commercial future you are paying for. Would be pretty cautious if this funding represents a significant portion of the business, particularly a large part of the profitability (the grants aren’t really intended to fund ebitda as I understand them).

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