Thanks to the small-screen magic of “Shark Tank”, most people understand the theory behind traditional startup investment: A person with money to spare (the investor) agrees to give the person with the idea (the entrepreneur) a significant chunk of funding to build and grow their fledgling business. In exchange for this investment, the investor requests a partial ownership stake in the business – equity. The goal for the entrepreneur is to secure as much money as possible while sacrificing as little equity as they can.
There is a good reason for this goal. Equity is essentially the total value of the business. The more equity you own, the more value you can extract from that business. And all too often in the early days of a startup, companies give up large amounts of equity in exchange for much-needed investment, thinking of the short-term benefit rather than long-term goals.
Before I go any further, let me be clear: Outside investment can be a very good thing for a startup. It can help businesses overcome early hurdles and invest in strategic and game-changing pathways. But it is important for entrepreneurs to understand that outside investment is not the only way to secure funding. In fact, there is a way to raise money for your startup without sacrificing equity.
It’s called non-dilutive funding.
What Is Non-Dilutive Funding and How Does It Work?
Non-dilutive funding is a way for entrepreneurs to bring capital into a business without any of the requirements of traditional (or dilutive) investment sources. Common sources of non-dilutive funding include contributions from donors, tax credit programs, vouchers, grants, competitions, and even family members. These programs exist at the federal and state level, as well as the institutional or organizational level, as universities and other organizations will host their own competitions or create grant programs specifically designed to fund entrepreneurs and their startups.
If you’re looking for a concrete example, perhaps the most well-known non-dilutive funding opportunity was the Paycheck Protection Program (or PPP Program), which was established during the height of the COVID-19 pandemic and provided small businesses with funds to cover payroll costs and benefits. Essentially, it was a free gift from the federal government to ensure small businesses kept individuals on their payrolls in a tumultuous economic environment. But the concept has existed both before and since, with a variety of options to provide entrepreneurs with a cash infusion without sacrificing equity or decision-making power.
There are also non-dilutive funding models that are not grants or government-based options. For instance, several organizations provide non-dilutive funding to startups based on annual recurring revenue, or ARR. These options function more like traditional small business loans, and businesses pay back the investment with interest over time. Lighter Capital is one such organization. It provides up to $4 million in funding for startups in the software, SaaS and tech services industries with at least $200K in ARR. RevUp Capital, meanwhile, focuses on startups producing $500,000 to $3 million in annual revenue and typically invests between $350,000 – $400,000. The loan also comes with hands-on support to help startups scale.
Exploring Federal Options
Most notable are the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs, which provide equity-free funding through federal agencies to small businesses in the U.S. Created in 1982, these funds focus on supporting entrepreneurs working in the areas of technology, research and development.
One of these agencies is the National Science Foundation, which provides non-dilutive funding for startups to create the next game-changing technologies. The program has certain requirements, notably that the project “must have the potential to positively benefit society and to lead to significant outcomes in the commercial market.” But if you pass that test, you could be eligible for up to $2 million over the course of roughly four years.
Another is the National Institutes of Health, which has its own non-dilutive fund focused on supporting startups in the life sciences. The programs included in the fund allocate more than $1.4 billion per year in non-dilutive funds, all of which go toward small business research and development.
Top State Programs for Non-Dilutive Funding
Each state has its own funding opportunities for entrepreneurs. Often these are focused around supporting the types of businesses and ventures that are priorities for the state. For instance, in California, early-stage entrepreneurs have the opportunity to access CalSEED, which is focused in helping founders develop technologies focused on clean energy generation, efficiency, and storage and “ensuring these technologies are working to serve California’s most vulnerable populations. The program offers two different funding opportunities – the Concept Awards, with a maximum grant amount of $200k, and the Prototype Awards, with a maximum grant award of $500k.
In Virginia, the Virginia Innovation Partnership Corporation offers startup grant funding through the Commonwealth Commercialization Fund. Eligible startups must fall within one of roughly a dozen industries, mostly focused on innovation and technology, and grants can support early technology and market validation efforts including development of prototypes or MVPs, customer pilots or intellectual property protection. Maximum grant amount is $75,000, and applications have a relatively short turnaround time of roughly 90 days.
The programs also vary depending on requirements for application or consideration and in the creativity of their non-dilutive offerings. In Texas, an organization called VelocityTX created the largest cash prize pitch competition in South Texas last year, awarding more than $100k to promising local startups. You have to compete for a chance to win, but a $100k upside is significant motivation. In New York – another hub for technology startups, an innovative program called START-UP NY offers new and expanding businesses the opportunity to operate tax-free for 10 years on or near eligible university or college campuses in the state. And any business owner will tell you – not having to pay taxes constitutes a cash infusion in and of itself.
Non-Dilutive Funding Opportunities in North Carolina
The North Carolina state government has compiled an exhaustive list of all available state grant opportunities here. We have highlighted a few of these opportunities below.
NC IDEA – NC IDEA is an active part of the entrepreneurial community in North Carolina – a 501(c)3 with a vision to help entrepreneurs across the state “achieve their entrepreneurial ambition to start and grow high-potential companies.” Most notable among their many programs is the NC IDEA SEED fund, which focuses on supporting early stage companies looking to scale fast. The maximum grant award is $50,000, and it comes with mentorship and guidance from the NC IDEA team.
Andrews Launch Accelerator – The Andrews Launch Accelerator was established through a $1 million donation to the NC State Acceleration Fund. It provides equity-free seed capital to startups that complete the 14-week accelerator program. Grants awards can go as high as $15,000 for participating startups.
KickStart Commercialization Grants – KickStart Commercialization Grants are offered through the University of North Carolina Chapel Hill Innovate Carolina program. They are designed to help early-stage, faculty-founded companies meet commercial and technical milestones. This means the range of potential founders is limited to faculty members of the university, but they are eligible to receive a grant amount of up to $50,000.
LiftOff – LiftOff is a unique program focused not on awarding the non-dilutive funding to entrepreneurs, but on helping entrepreneurs find, apply for and secure this funding. This is another program specifically targeting science-based startups, and since 2016, they have helped startups secure more than $16 million in non-dilutive funding.
NCBIOTECH Flash Grants – These grants are designed to serve as a “quick jolt of funding at a critical early point when a small, targeted influx of funds can be crucial to shaping innovative research ideas into high-potential life sciences technologies.” Maximum awards for these grants is up to $37,500.
One North Carolina Small Business Program – This state program is intended to serve as a complement to the federal SBIR and STTR non-dilutive funding options, offering grant-matching to North Carolina-based startups that have received an initial award from these programs. It also provides partial reimbursement for the costs of submitting SBIR and STTR proposals. So think of it as a federal grant, multiplied.
As an entrepreneur, it is important to understand the variety of funding options available to you as you build and scale your business. Only with the right information can you make the right choices for your venture. We hope this serves as an important resource on your entrepreneurial journey.
At Dualboot Partners, we specialize in technology development, but we are entrepreneurs, first and foremost. We speak your language, and we’d be happy to answer any questions you have about our services and how we can help your business.
