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Federal funds, which include grants, contracts, and purchase orders can be a valuable source of capital for early-stage companies. In addition to providing money to a company in its early days, federal funds can also increase the likelihood of obtaining venture financing later. According to one venture capitalist: "We use [federal funds] as an IQ test of the entrepreneur. Is she getting free capital before coming to ask us for capital? While we do not follow a sector simply because the government is putting money it, it is indeed a criterion for us."4

Indeed, government funds are widely considered "free" money. Although the actual terms of funds differ depending on the type of request and the agency involved, the intellectual property generated with public capital generally belongs to the company.5 Conditions are usually limited and include submitting periodic reports to the funding agency. There can be two drawbacks to pursuing government funds. First, the process of writing a proposal, providing a panel with requested information, and waiting for a funding decision can be prolonged and tedious.6 Second, because federal funds are such an attractive financing option, there may be many applicants competing for the same grants and contracts. The likelihood of success may therefore be low.7

Many folks in industry believe that the funding process is relatively objective. In some cases, however, funding decisions might rely on the credibility of the founding scientists and their relationships with the reviewers. If the founding scientists are reputable, they are more likely to succeed in obtaining federal funds. As one established professor put it, "For us, it was just a matter of writing."8

Federal agencies have several mechanisms to support start-up companies such as small business innovative research (SBIR) grants, small business technology transfer (STTR) grants, Advanced Technology Program (ATP) grants, and Defense Advanced Research Projects Agency (DARPA) grants. These grants have been crucial for many nanotech start-ups. As Table 12.1 illustrates, many nanotech start-ups have been able to survive without venture financing because of federal money.

TABLE 12.1 Examples of Nanotech Companies Receiving Federal Grants

Company

Technology

Agency/Type

Amount ($M)

VC

Npoint

Nanopositioning and control hardware

Various

NIH/SBIR; NSF/SBIR;

$3.0

YES

Nanosys

Various, molecular electronics

various military agencies

S6.0

YES

Nano Group Inc.

(Inframat and

U.S. Nanocorp)

Coatings, water filtration, and fuel cells

DOD, NIH, NSF

$18.3

NO

Nanosphere

Nanoparticle probes for disease detection

NIH/SBIR

SI.5

YES

FeRx

Drag delivery

NIH/SBIR

$0.1

YES

Nanolnk

Dip-pen lithography

NIH/SBIR

Si.3

YES

Nanomix

Carbon dioxide nanoelectric sensors

DOE/I&I

$0.1

YES

Espin Technologies

Polymeric nanofiber mats

NIST/ATP

$2.5

NO

Echo Technologies

Dendrimer-assisted DNA detection

Army

$0.1

NO

NanoBio

Emulsion against biological agents

DoD

$11.8

NO

Physical Sciences

Carbon nanofiber networks

Army/SBIR

$0.1

NO

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