Seth Murray, president of StreamSage Inc. in Washington, had a promise of $3 million from a group of private investors, including venture capitalists and a large corporation. Finally, after months of looking for financing, someone had come through. But then the corporate investor, a telecommunications company, was hit with its own disasters. The deal was pulled.
Now, Murray looks back at that moment as good luck. Worried about his business's future, he began to hunt for other kinds of funding, and he was willing to try anything. One of his employees heard about an opportunity to attract some government money. Murray was skeptical at first -- his company is no systems integrator. Its software searches and indexes video and audio files.
But in October 2001, StreamSage received $2 million from the Advanced Technology Program of the National Institute of Standards and Technology (NIST), part of the Commerce Department. It's a three-year grant, which requires meeting several demanding milestones, but at the end, no one but StreamSage owns StreamSage. And Murray is thrilled.
He's not alone. As venture funding has dried up for the earliest-stage companies, executives are flocking to the deep well of the federal government.
From 1998 to 2001, the federal grant program saw about 400 to 500 business proposals per year. In 2002 so far, it has received 1,075 proposals.
"In the dot-com heyday, people turned their nose up at government funding," said Murray. "It's much more accepted now."
The goal of the grant program is to fund ideas and concepts that otherwise may never turn into businesses. While many private investors in the headiest days of the Internet frenzy also funded such infant companies, financiers are now more likely to look for businesses with established products and customer rosters.
And NIST is looking for exactly the opposite: the unproven, the unfundable, the barely visible question mark of a company. And it's happy to take over where venture capitalists are leaving off.
"VCs want to go directly into the market with something that has been proven," said Arden L. Bement Jr., director of NIST. "We tend to be more patient capital."
Bement said however, that he doesn't think of the technology grant program as a competitor to venture capitalists, but as one that serves as more of a warm-up stage before VCs come in. Many VCs track companies funded by the grants and consider funding them at the end of the program, he said, when they are more fully formed.
Since 1991, the federal grant program has been holding competitions, usually two a year, to find new investments. About 40 companies receive funding in each competition. The U.S. program has a current annual budget of about $184 million. Most grants are about $2 million. Companies entering the program submit quarterly reports with updates on technical achievements, the management team, the business plan, and a budget.
In the past three years, 10 Washington area companies have received the federal grants. There is officially no geographical bias, but Murray said being close to NIST lets him have a closer relationship with his project manager. He drops by often for advice. The types of work the 10 Washington region companies are doing -- in areas from circuits to stem cells -- shows not only what is new in technological innovation, but how diverse the grant-program portfolio has become.
XTremeSpectrum Inc. of Vienna, for example, is creating a radio system designed to locate firefighters inside buildings. Conclusive Technology Inc. of Vienna is developing Internet data encryption; Iomai Corp. of Gaithersburg is working on a cancer vaccine. What these groups have in common is that they are developing projects that are unlikely to be funded by private equity sources.
To get in the running for a federal grant, a company has to show not a complete product or service, but a concept with "scientific merit." The main criteria for companies is that they are creating an innovative, high-risk technology. It also has to prove to NIST that the creation would have an impact on an industry, and that the company intends to eventually make the product or service commercially available.
"It's to jump-start novel projects," says Michael Newman, a spokesman for NIST. "A venture capitalist would look down on some of these projects."
Still, some have criticized the program for its liberal grant-making. The program considers a company a success if it develops a project that has impact on the nation. But after the grant period is over, the government does not own any part of the business.
"There was concern that this would be corporate welfare," said Newman. "But this is definitely not a handout."
There are very few strings, however, to this award, and word is now getting out to executives of start-up companies in search of funding. Robert W. Schumann, chief executive of Cinea Inc. of Herndon, heard about the program after he had made an unsuccessful pitch to an "angel" investing group. He began to talk to one of the other presenters, Seth Murray, who told him about his own experience with the program.
At first, Schumann, whose company is creating an anti-camcorder technology that would stem digital piracy of movies, was leery.
"Your core reaction is 'Oh, God, it's the government,' " said Schumann. But now, Schumann said, NIST's advice and $2 million grant, which he received earlier this month, have helped his business get off the ground. And the process, he said, from initial interviews to cash on hand, was faster than he'd seen with venture capitalists.
"There's not a lot of money out there, but there's a lot of great technology," said Schumann. "We've learned the government is not a terrible abyss."