Seeding Your Company with Zero Dilution: Is funding from NSF right for you?

Given the funding market seems to be getting tighter, it’s time to look at other options. In part 1 of this post, I wrote about the Small Business Innovation Research (SBIR) program run by The National Science Foundation (NSF). This program helped me bootstrap ThousandEyes with more than a million dollars of non-dilutive funding enabling us to focus on building the company to a stage where venture funding was much easier. The NSF SBIR program may or may not be right avenue for bootstrapping your company. Let’s examine some parameters in a bit more detail.

Relevance

If you are building an app to take pictures of your cat, NSF is almost surely not for you. My sense is that NSF funds projects that aim to solve hard problems and can have a massive impact. I have seen a few University spin outs with research backgrounds but you don’t have to be in a University and doing research to apply. I think what matters is the scope of what you are trying to do and the impact it can have, so it’s fine if you are 2 people operating out of a garage, in fact they might just like that. I understand it’s hard for the review panel to really ascertain who is genuine and who is not, but in an ideal world, more dollars should be going to real entrepreneurs. When we applied for a grant, our grant objective was to mine massive amounts of Internet routing data to provide real time operational intelligence. There were two big problems — one a technology challenge that involved serious R&D and the other figuring out how to productize and sell the innovation. If you have both challenges, you are likely to be a good fit.

Application Deadline and Decision Period

The SBIR program is on a calendar schedule which means there is a specific date they accept proposals by. So if you are not close to a deadline, you have to wait for months for the program to open again. In our case, after we applied, it took nearly 6 months in total to a decision and a first check. So if we were in a rush to raise more than $1M over a week, the SBIR program would not have worked for us. I have heard from the Program Managers that they have been making these cycles shorter.

Payment Schedule

The money then came in installments, not all at once and we had to write periodic reports to show progress and claim the next payment over a two and a half year period. This worked well for us because we needed more time to really figure out what we wanted to build and market. We did know that very few people could understand complex networks like we could, so while the theme was set, it took us some time to find a good product market fit as well as do some core R&D. I do genuinely believe that it’s not always good to have a lot of money at your disposal.

Tax Implications

This is a weird one but since the money from SBIR is not an equity investment, it is considered revenue. This means if that if you are operating only on NSF grants and you don’t consume all the capital, you are profitable and might have to pay corporate tax. In our case, we raised a small bridge round as a convertible note so we could use all the NSF money in the same year towards building the company. Finally, when investors asked us what our revenue was I would always exclude the revenue from NSF, as it was technically revenue but not customer revenue.

Maximizing your Chances

To maximize your chances, find out which program you would fall under and reach out to the program manager before hand and share your vision for the company and let them know how serious you are about building a company. Due to guidelines, they may not be able to give you any indication of your chances of getting in, but it will certainly bring your case to their attention, especially if you are genuine.

NSF SBIR Deadline approaching

The current NSF program provides a higher grant than what we received in 2010–2012. The Phase-I now is at $225k, Phase II is at $750k. This is definitely a move in the right direction and should be great news to all entrepreneurs.

The deadline to apply for 2016 is in June. More information can be found here http://www.nsf.gov/eng/iip/sbir/home.jsp