The Move That Shook The Startup World

In 1977, a small company in San Francisco had a technology that worked and investors who wouldn’t fund the full version of it.

Genentech had been founded the year before on a single idea, to use recombinant DNA to make human proteins commercially. The commercial prize was clear: human insulin, human growth hormone, a new pharmaceutical industry. But insulin is a complex molecule. Proving it in bacteria would take years and capital they didn’t have. No investor was going to fund the full vision on an unproven concept.

So Genentech proved somatostatin first.

Somatostatin is a 14-amino-acid hormone with essentially no commercial application. But it was the simplest human protein they could build: small enough to synthesize in months, simple enough to characterize and publish. When their paper appeared in Science in December 1977, investors had something they could evaluate rather than just believe. The insulin proof followed within a year. By October 1980, Genentech went public at $35 a share as the very first biotech IPO in history, all before a single product was approved.

The hidden breakthrough wasn’t insulin, but somatostatin: the simplest proof that the underlying technology worked.

That story hides a lesson that became critical decades later.

Read on to find out!

In the fall of 2025, something unprecedented shook the world of research. The flagship research funding programs SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer) stopped because legislative authorization expired September 30, 2025. These programs had collectively provided $8 billion in funding just in FY2025. Disagreements in Congress dragged the standoff to 195 days. The impasse ended on April 13, 2026. Agencies are back online, working through the backlog, but the restart is uneven and slow.

But the impact on the startup world was deep.

Startups lucky enough to already be positioned to raise outside money had to reconfigure their entire execution roadmap to accommodate a path with no additional “free” grant money. As painful as this was, these startups still had a decent shot at survival.

But many startups were caught in the “capital desert”, where they couldn’t access equity capital yet because the technology was too risky or unproven, or the time to a marketable product was too long. If you’re such a founder, a freeze like this can become an extinction event.

Both types of startups need equity capital to successfully commercialize their technology. But there is a twist.

Economist Sabrina Howell analyzed more than 7,400 DOE SBIR applicants across 400+ competitions over 20 years and found that getting a Phase I research grant roughly doubles the probability of subsequently raising venture capital.

In essence, what these grants do for “capital desert” founders that equity-track startups don’t need is that they provide a concrete equity trigger - an objective, provable milestone that makes that capital accessible for the first time . For capital desert founders, the question is no longer how to get more grants. It’s how to survive with or without them.

The Unlock

The role of grants in your capital stack depends on whether you’re in the capital desert or past it. If you’re in the capital desert, the question is no longer how to win grants.

It’s reconfiguring what your equity trigger is: what proof you need that will open the line to get investment capital, and your fastest path to producing it.

That proof might winning a grant, but it might also come from a different application of your technology, a different initial market, or a simpler version of the proof that gets you there sooner.

The equity trigger is an event or proof point specific to your industry, that reduces risk in a measurable way for investors. It might be, for example:

• In medtech: Bench data showing the device performs at clinical sensitivity.

• In defense hardware: A Letter of Intent from a program office or a prime contractor.

• In advanced materials: A repeatable 100-gram batch versus the 1-gram lab result that got them the Phase I.

Your equity trigger might require that you change the application for your technology.

iRobot spent a decade proving its robotics platform through grant and government-funded defense contracts: the PackBot, deployed to great effect at Ground Zero in the immediate aftermath of 9/11.

The Roomba wasn’t a new technology. It was the same autonomous navigation system, redirected to a consumer market that could evaluate and buy it immediately.

That reframe from military to commercial application is what made the underlying technology attractive to investors and accelerated their path to a 2005 NASDAQ IPO.

A different market isn’t a compromise. It’s often the faster path to the proof that unlocks the larger vision.

The practical question for you is:

“What is the version of this proof I can actually reach, in this market, with this scope, on this timeline, that changes who talks to me?

It might be somatostatin rather than insulin. It might be a robot vacuum rather than a bomb disposal unit. But it is always specific, always investor-readable, and always what your roadmap and grant strategy should be focused on.

(Hint: For a smart approach to doing this, check out this episode.)

From The Capital Playbook

Verify your agency’s actual status before you plan any cash date.

NIH is live as of this writing with next deadlines in September 2026 and January 2027. DOD has active solicitations running through fall. NSF is targeting July. DOE is in significant internal restructuring with no committed timeline. All agencies are clearing a backlog with reduced contracting staff and new review requirements added by the 2026 act. The timeline is no longer twelve months, it’s longer and varies by agency. Don’t anchor a milestone to a cash date you haven’t confirmed against the actual solicitation schedule.

Aim every application at your equity trigger.

Know what specific result will make investors open to funding you. Is it a functional prototype, a Phase I dataset, a paying customer outside your network? Structure your grant scope to produce it specifically, and not just to extend your runway. And if that trigger still seems out of reach, ask whether a different application, a different initial market, or a simpler proof gets you there sooner.

File your broadest FY 2026 portfolio before submission caps take effect in 2027.

Starting FY2027, every SBIR agency must establish per-firm proposal limits for Phase I and Phase II. Frameworks are due by October 1. At 15 to 25 percent acceptance rates, you have a short window to build a multi-agency portfolio — all aimed at your equity trigger. Move now.

Pro Tip

Acceptance rates vary more than the headline numbers suggest, and FY2027 caps will permanently change the volume strategy.

Phase I success rates run 15 to 25 percent depending on agency and topic density. NIH runs 15 to 18 percent against more than 3,500 applications per typical cycle; narrow DOD topics with small applicant pools run considerably higher.

First-time applicants typically land 5 to 10 percentage points below published averages — which is the range that matters for most readers of this newsletter.

Building a multi-agency grant portfolio is how to tilt the odds in your favor. Starting FY2027, that strategy has a ceiling it has never had before.

The One Thing

For each grant on your cash inflow forecast, figure out:

• What is the earliest realistic cash date — twelve months from today as a pre-lapse floor, longer for agencies still clearing backlog.

• If this comes in at zero, does your plan still hold, or does a milestone move or become unachievable?

• If a milestone becomes unachievable, what action would make it achievable — a different application of the same technology, a different initial market, a simpler proof that gets you to the investor conversation sooner?

September 2025 ran this test for thousands of founders without warning. You get to run it first.

Build wisely!