Seeding Your Company with Zero Dilution: Part 1

If you are an entrepreneur thinking about taking the leap, I am sure this title has gotten your attention. Yes, we did manage to seed ThousandEyes, a company I started with my co-founder Ricardo Oliveira, with more than a million dollars and zero dilution. Back in 2011, when I had just started talking with investors a year after starting ThousandEyes, they would invariably ask — “so, how have you funded the company so far?” My response would be “It’s your money”. This would almost always take them by surprise. A few would ask me which partner in their firm invested while others just looked at me, not knowing what to say. “And”, I would usually add, “no equity in return either ! ”. Now, I was telling the truth, though it was a bit of a stretch of course. How could I get them to fund us without their knowledge? Read along.

Both my co-founder Ricardo Oliveira and I got our Ph.Ds in Computer Science from UCLA shortly before we started ThousandEyes. When we decided to start a company, one of the first things we agreed on was to avoid going up and down Sand Hill road looking for funding. We were first time entrepreneurs, the market was still recovering from 2008 crash and most importantly, we had not honed in on what exactly we wanted to build. We were well aware that we would be wasting our time looking for funding through traditional means. So, we decided to look for alternatives. We knew a lot of our own Ph.D. research (stipend, college tuition etc) was funded by organizations such as National Science Foundation (NSF). We wondered if there were organizations that we would stand a better chance of getting funding from, given our research background. Upon digging a bit, we came across NSF’s Small Business Innovation Research (SBIR) program, one that seemed to assist early-stage companies with innovative technologies that required additional research and development. Looked like exactly what we were looking for.

Back in 2010–2012, the NSF SBIR program consisted of 3 phases, Phase I, an award of $150k over a 6 month period, Phase II, an award of $500k over a 2 year period and Phase IIB where they would match $0.5 for every $1 raised in in equity investment up to a payout of $500k. Add it all up and that is a grand total of $1.15M with no equity in return — that’s exactly what we received in aggregate from NSF from 2010–2012 to help get ThousandEyes going. As you may have guessed this grant money comes from taxpayer dollars, so if you paid taxes sometime before 2010, you might just have funded ThousandEyes and some others.

The grants we received from NSF were instrumental in bootstrapping ThousandEyes and allowing us to focus on building the first version of our product and acquiring customers. By the time we raised our series A from Sequoia capital, we had a handful of well known brands as customers with annual bookings of more than $250k, i.e. real revenue. Thanks to NSF, we were on our way to commercializing our technology. Over the last few years I have learnt that very few entrepreneurs are even aware of this program and I am writing this post to share our success with this program. When investors don’t want to take a chance on you, take a look at NSF SBIR to start building, the same investors might just have to pay a higher price as a result !

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 good 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

In Part 2 of this post, I share my own experience with the NSF program and some things to consider in figuring out if this is the right avenue for you and your company.

Is funding from NSF the right for you?