Non-diluting funding is defined as financing that does not require the sale of your startup’s shares. This means that founders do not have to give up equity and there is no dilution for any existing shareholders. For cybersecurity startups, non-diluting funding instruments can be an attractive option for securing startup or growth capital. Non-diluting funding sources generally include:
- Licensing agreements
- Royalty Financing
- Government grants
- Government incentives
Although equity-driven funding for cybersecurity startups is robust, many founders in the cybersecurity sector can understandably, be reluctant to give up equity and in some cases, control of their startup venture. Non-diluting funding can provide the influx of capital necessary to jumpstart growth among cybersecurity startups without giving up equity.
Of the five non-diluting funding sources described above, government grants can be the most appealing because they do not add to the startup’s debt load and do not have a negative impact on cash flow. Unfortunately, government grants for cybersecurity startups can be quite difficult to obtain. Despite what some might say, there is no ‘untapped’ pot of ‘free government money’ waiting to be had.
Largely because of concerns about foreign intervention in U.S. elections, the Equifax scandal and threats to our power grid, water and transportation systems, cybersecurity has increasingly become a stronger priority for governmental funding over the last several years. According to some sources, damages from cybercrimes may top $6 trillion annually by 2021.
Non-Diluting Funding Options for Cybersecurity Startups
There are two primary programs through which the federal government offers non-diluting funding via government grants to cybersecurity startups. These include the Small Business Innovation Research (SBIR)/Small Business Technology Transfer (STTR) program and Broad Agency Announcements (BAAs). The Department of Homeland Security (DHS) Science and Technology Directorate (S&T) also offers some non-diluting funding opportunities.
- SBIR/STTR: SBIR/STTR grants are generally funded in two phases. Phase I grants are usually no more than $150,000. Once the targeted milestones for Phase I are achieved, the company can apply for Phase II funding, which usually is no more than $1 million, although there are some exceptions. Over the last several years, we have seen an increasing number of SBIR/STTR opportunities that offer a ‘Fast-Track’ option. With a Fast-Track application, the cybersecurity applicant simultaneously applies for both Phase I and Phase II funding, reducing the amount of time it takes to utilize the full award. You can search for SBIR/STTR grants on the official program website. Topics of interest vary throughout the year so you may have to check back from time-to-time to find the right non-diluting funding opportunity for you. All federal agencies that offer SBIR/STTR grants will list their open opportunities on this site.
- Broad Agency Announcements: BAAs are used by US government agencies to solicit proposals from third-party groups for particular research and development projects. Agencies will then select proposals and fund them in the form of contracts, cooperative agreements or grants. BAAs are most often used by the various branches of the military. Agencies that offer BAAs include: the Army; DARPA; the Navy; and the Department of Homeland Security, among others. Through BAAs, government agencies can request scientific and technology firms to come up with advanced solutions for a stated security issue or concern. Here, funding amounts range from $50,000 up to $2 million or more, depending on the program.
- Department of Homeland Security (DHS) Science and Technology Directorate (S&T): The Homeland Security’s Office of Science and Technology, supports the core missions of the DHS through research and development. It accepts innovative technologies, solutions, and advanced tools for homeland security enterprise. The office offers various competitions through which cybersecurity startups can secure non-diluting funding. Funding through these prize programs tends to be smaller amounts of $100,000 or less.
How Cybersecurity Startups Can Apply for Non-Diluting Funding
Cybersecurity startups can explore non-diluting funding opportunities with the US government by visiting any of the sites above and selecting ‘funding,’ ‘open topics,’ ‘broad agency announcements’ or ‘doing business with us,’ links, depending on the agency of interest. You can also search for non-diluting funding opportunities through Grants.gov. On the Grants.gov site, simply select the ‘search grants’ tab and conduct a keyword search.
Once you have found an opportunity that is of interest, you can then download the funding program guidelines from the website. These are often referred to as Requests for Proposals (RFPs), Notice of Funding Opportunity (NOFO); Notice of Funding Announcement (NOFA); or Program Announcement (PA). By whatever name, the document will provide complete instructions for applying for funding through the chosen opportunity.
Keep in mind though, that on average, only about 3% to 8% of all proposals submitted for funding through these programs are successful in obtaining the desired funds. I don’t say that to discourage you, but to demonstrate the highly-competitive nature of the non-diluting funding landscape. Awards generally average in the range of several hundred thousand dollars, with exceptional projects being awarded higher dollar amounts.
Interested in learning more non-diluting funding for cybersecurity startups? Contact me today and let’s talk. I have a lot of experience in this field and have secured well over $200 million in grant funding for my clients. I may be able to help your cybersecurity startup to secure the non-diluting funding it needs to launch or grow.
You might want to check out my blog post about funding for cleantech companies for more information.