Equity Free Startup Funding

If you’re starting a technology company, the best equity-free startup funding, in my opinion, comes from SBIR grants.


I have been awarded nearly $2 million in SBIR grants from multiple government organizations, and it helped fund my startup in its earliest days and allowed us to research our product, build it, and get it to market.



The Best Path to Equity Free Funding


The small business innovation research (SBIR) grant mechanism is a research and technology funding program offered by the US government. Several government bodies participate in this program, including the Department of Defense, the National Science Foundation, the Department of Health and Human Services, the Department of Energy, the Department of Agriculture, the Department of Education, the Department of Commerce, Department of Homeland Security, the Environmental Protection Agency, the Department of Transportation, and the National Aeronautics and Space Administration.


These grants offered by the US government are completely equity free. They don’t take any ownership of your company, never enter onto your cap table, and never force themselves onto your board. They only seek to help fund innovation and job growth in the US.


This is an incredible asset that I can’t recommend enough. Sure, like any grant (and especially those issued by the US government), there are some downsides. One of the largest downsides is speed.


The Cost of Equity Free Startup Funding


As a technology startup, one of your biggest advantages is speed.


You can build new technology and make product decisions quickly as a small team that doesn’t require bureaucratic overhead. You need to test and iterate rapidly to help find a product that the market will accept before your scant resources run dry.


Meanwhile, an SBIR application takes at least 6 months before it gets reviewed, and usually a bit longer before money actually hits the bank.


And that’s if you win!


If you lose, the cycle starts over.



The good news is that you can, indeed, try again. These organizations issue these grants on a revolving basis every year. Some agencies, like the Department of Defense, regularly issue calls for specific topics of research they are interested in, while others like the NSF issue broad “omnibus” solicitations with specific areas of interest but will generally allow all topics for submission. Others, like the NIH, also tend to offer both an omnibus solicitation as well as periodic specific requests.


If your technology or product idea falls into a category for a specific request, I highly recommend choosing to write a grant proposal for that request before submitting to the omnibus. Your odds of winning will be better.


The other major cost to these grants is the reporting requirements.


You must submit reports to update your granting institution on grant progress and financial accounting.


This is a bittersweet requirement.


Nobody likes writing reports. But in some ways, they are a useful exercise despite the requirement because it forces you to review the past work, your progress, and your current R&D status. This is a great time to reflect on your planned project outline and assess your company's successes and challenges to better address future project management optimization.


The same goes for financial reporting.


Though there are certainly a few extra documents to account for with the grants, the exercise of getting your books in order was a useful exercise for us as an early company. It is easy to push off these tasks until later because they appear to be overhead not necessary at such an early stage. But getting this straightened out early was actually a beneficial process.


Submit Early. Submit Often.



You are allowed to submit as many times as you’d like. Because of this, I recommend submitting early, and often.


The reason I suggest submitting early is to get feedback from the reviewers. The reviewers typically possess business and technology expertise and provide a fantastic service to you by reviewing your application and providing notes.


I have had the pleasure of being a reviewer for SBIR grants, so I have experience on both sides of the grant table.


While I can honestly say not all reviews will make you happy and you may feel like they didn't give you 100% of their time and attention, it is in your interest to take all of their feedback to help guide your next grant proposal, your technology development, and your business strategy.


Even a reviewer that says you should have included X, when you did include X, is useful feedback! Perhaps you didn't make it clear enough? Or consider including it twice if it's that important.


Get Ready for Competition



This form of startup funding is not necessarily easy to get.


The success rates are decent enough such that it is worth applying, but it is low enough to be sufficiently competitive. The chart above shows success rates for SBIR grants at the NIH. As you can see, it varies. But in 2020 the rate of Phase I awards was near 12%. The NSF similarly reports success rates between 10-15%.


And while some of these grants will surely not be very competitive in terms of technology or market potential, keep in mind these SBIR grants are highly marketed to graduate school programs and tend to solicit very competitive grants from top researchers interested in spinning out innovative university research.


Tranches



This form of startup funding is tranched. Your potential equity-free funding of over $1 million in total per project is structured in phases, as Phase I and Phase II grants.


Perhaps you can think of this funding path like a pre-seed funding round followed by a seed round. (Except, of course, this startup funding is equity free!)


Your pre-seed round is on the order of $250,000 when coming from the NIH and the NSF, the two organizations I have experience with.


The key to winning this funding is to put forth highly innovative technology. In the first phase, your company is not yet ready to commercialize the product so your commercialization strategy will get a little bit of wiggle room from the reviewers. It must make sense, but you do not need to execute on the commercialization strategy at this stage.


When it comes to Phase II, you often have the opportunity to get additional $1 million.


Again, equity-free.


To win the second phase of funding, it goes without saying that you have to have successfully completed the first phase. In your proposal, you must have a clear R&D plan for turning your research into a product. And most importantly, a clear path to commercialization.


One of my programs summed up the nature of the R&D work in these two phases nicely. Phase I is "Big 'R,' little 'D'," while Phase II is "Little 'R,' big 'D'."


Winning Multiple Equity Free Grants at Once


If your technology is sufficiently complex with multiple areas of required research and development, you have the opportunity to win more than one of these grants.


That’s exactly what I did with my startup.


My company, for example, developed electromechanical, internet-connected devices that incorporated sensors for different healthcare applications. Therefore, I was able to craft a grant proposal to the NSF for the hardware research and the NIH for research into different sensor technologies and healthcare applications.


Your technology needs to lend itself to this kind of compartmentalization if you want to win multiple SBIR grants, because you are not allowed to get funding from more than one of these grants for the same work. No double-dipping.


But if done well, you have now created the potential, like I did, to bring in multiple millions of dollars in equity-free startup funding to help you get to market without losing ownership to investors.


This has huge advantages.


You might, depending on your market, be able to grow the business organically now that you’re off the ground. Potentially, you may never need to take investor dollars, ever! (Look at Mailchimp’s exit as an example of how tech companies don’t have to take equity funding to reach billion dollar exits.)


You might still choose to raise equity funding, but now you’ve greatly de-risked your company at its riskiest time.


This gives you better odds at getting a seat at the investor round table, and also invariably helps improve your valuation at your first fundraising event.

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