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The Honolulu Advertiser
Posted on: Tuesday, November 12, 2002

More startups turning to federal grants

By Shannon Henry
Washington Post

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. Then the corporate investor, a telecommunications company, was hit with its own disasters. The deal fell through.

Murray looks back at that moment as good luck. He began to hunt for other kinds of funding, and was willing to try anything. One of his employees had 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, with several demanding milestones, but in the end, no one but StreamSage will own StreamSage. Murray's thrilled.

He's not alone. As venture funding has dried up for companies in their earliest stage, executives are flocking to the federal government.

From 1998 to 2001, the grant program saw 400 to 500 proposals per year. In 2002 so far, it's 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 that otherwise may never turn into businesses. While many private investors in the headiest days of the Internet frenzy also funded such infant companies, they're now looking for businesses with established products and customers.

NIST is looking for the opposite: the unproven, the unfundable, the barely visible question mark of a company. It's happy to take over where venture capitalists are leaving off.

Venture capitalists "want to go directly into the market with something that has been proven," said NIST Director Arden Bement. "We tend to be more patient capital."

Bement said, however, that he doesn't think of the technology grant program as a competitor with venture capitalists, but rather as a warm-up stage before venture capitalists come in. Many investors track companies supported by the grants and consider funding them at the end of the program, he said, when they're more fully formed.

Since 1991, the grant program has been holding competitions, usually two a year. About 40 companies receive funding in each competition. The program has an 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.

Applicants are expected to show not a complete product or service, but a concept with "scientific merit." The main criterion is development of an innovative technology. Companies also must demonstrate to NIST that the product would have an impact on an industry, and that they intend eventually to make the product or service commercially available.

The program considers a company a success if it develops a project that has impact on the nation. After the grant period is over, the government doesn't own any part of the business.