Government & Non-Dilutive Funding Mechanisms
How does the government fund innovation?
In our first post, we laid out our core mission for Innovation Waypoints: to move past what is funded and demystify how public funding is designed, deployed, and managed. We argued that the “wonky” details of program design and implementation, often overlooked, are critical to building a better innovation ecosystem.
We promised to kick off this discussion by focusing on three main themes. This post tackles the first and most foundational of them: Funding Mechanisms.
Before we can analyze risk, critique program design, or highlight what’s working, we need a common vocabulary. The federal government, particularly the Department of Energy (DOE), doesn’t just write checks. It uses a complex and often confusing toolkit of legal and financial instruments (grants, prizes, cooperative agreements, and more) to support innovation from basic research through to deployment.
Understanding this toolkit is essential for everyone. For innovators, entrepreneurs, and researchers, it’s a map for navigating a system that can otherwise feel impenetrable. For the program managers and “implementers” we championed in our introduction, it’s about choosing the right tool for the job.
This post serves as an introductory primer. We’ll provide a 100,000-foot view of the primary non-dilutive mechanisms DOE uses to fund the private sector. In subsequent posts, we’ll dive deeper into each one, discussing the implications for both applicants and program designers, and exploring how these mechanisms are mirrored in the philanthropic world. But first, let’s build the foundation.
How the Department of Energy Funds the Private Sector – Non-Dilutive Mechanisms
The Department of Energy - and many other agencies across the federal complex - distributes billions in annual funding to support technology research through deployment. This comes through various mechanisms. These mechanisms are important to understand and consider for two different reasons: (1) understanding the various mechanisms can help potential applicants navigate federal funding; (2) having a strong foundational understanding of different mechanisms is critical for program managers and designers in the federal government and their management, up to political appointees.
But as a primer, it’s important to spend some time recognizing the myriad ways that the federal government delivers funding to the private sector and state/local/Tribal governments.
Why is it worth understanding the different types of mechanisms? If you’re ever considering working with the federal government to secure funding, it’s important to understand the positive and limiting attributes that each mechanism has to offer.
There are two primary ways that federal funding is distributed(with many notable exceptions) : financial assistance and contracts. 2 CFR 200 - otherwise known as Office of Management and Budget (OMB) Uniform Guidance - applies to grants and cooperative agreements awarded to non-federal entities, while the Federal Acquisition Regulation (FAR) applies to federal government agencies acquiring goods and services through contracts. The Federal Grant and Cooperative Agreement Act of 1977 (P.L. 95-224, 31 USC 6301 et seq.) establishes the basic distinctions between procurement contracts, used to purchase products and established services, and federal financial assistance programs.
Within the world of financial assistance, there are two typical forms of funding: (1) non-dilutive mechanisms like grants, prizes, and other transactions; or (2) debt. For the purposes of this post, we’ll focus on the first category, though DOE does a substantial amount of work in loans/debt as well, which will be addressed in a future post.
DOE also directs a substantial amount of funding through different mechanisms at the 17 National Laboratories, and there are a number of ways in which private industry and academia can work with the Labs, which we will also cover in a future post.
Non-Dilutive Funding Mechanisms
Non-dilutive funding is provided by the federal government with no accrued interest or equity taken as part of the federal funding. This often requires cost share (or matching funds) from the recipient, whether that’s financial (cash) or in kind (services or work provided by the awardee and its subrecipients). This type of funding is critical for everything from basic research through deployment.
Several types of non-dilutive funding mechanisms are competitively awarded. This can include both financial incentives, as well as services provided and paid for by the federal government. A substantial amount of this funding flows through Notices of Funding Opportunities (NOFOs) or Funding Opportunity Announcements (FOAs), which are government terms meaning “requests for proposals”.
There are other nondilutive funding options that utilize contracting that is commonly used by other agencies (i.e. NASA - broad agency announcements and procurement), but they’re not as frequently used (if ever) for DOE research, development, demonstration and deployment (RDD&D). DOE uses procurement extensively for other purposes, but not as frequently for the research arms of the agency.
The primary non-dilutive mechanisms awarded at DOE include:
Grants (Financial)
Cooperative Agreements (Financial)
Prizes (Financial)
Other Transaction Authority (Financial)
Partnership Intermediary Agreements (Financial & In-Kind)
Technical Assistance (Primarily In-Kind, can include Financial)/Vouchers (In-Kind)
Grants/Cooperative Agreements
The most recognizable term for capital provided from the government is grants, but in reality this term covers two types of funding: grants and cooperative agreements. Both cooperative agreements and grants are “a legal instrument of financial assistance between a Federal awarding agency or pass-through entity and a non-Federal entity” as defined in the OMB Uniform Guidance (§200.24 for cooperative agreement and §200.51 for grant agreement). Both cooperative agreements and grants “transfer anything of value from the Federal awarding agency or pass-through entity to the non-Federal entity to carry out a public purpose.” Bottom line – grants and cooperative agreements provide funding either directly or through intermediates for the purposes of conducting any activity it deems fit within its authority and in line with appropriations direction from Congress.
A brief note on the content below. All the project durations, recipients, federal funding values, and cost shares listed below are meant to be illustrative of the common values we have seen during our experience at DOE. There are instances when specific programs may deviate from what we have listed.
Grants
Grants are used as a funding mechanism across the federal government. Grants are used when (1) the principal purpose of the relationship is to transfer a thing of value to the State or local government or other recipient to carry out a public purpose of support or stimulation authorized by a law of the United States instead of acquiring (by purchase, lease, or barter) property or services for the direct benefit or use of the United States Government; and (2) substantial involvement is not expected between the executive agency and the State, local government, or other recipient when carrying out the activity contemplated in the agreement.
Project Average Duration: 36 - 60 months
Type of Recipient: Academia, National Labs, Industry, Small Businesses
Federal Funding Amount: $100,000 - $100,000,000+
Cost Share: It varies. Some programs like the Small Business Innovation Research (SBIR) program that primarily distributes grants requires no cost share. Other grants may be subject to 20% or 50% of the total project cost including the federal portion of the award, depending on the purpose of the grant, although the exact cost share requested may vary and is decided on by the funding agency when a request for proposals is released. As an example of cost share math, if you get a $1,000,000 federal award and cost share is 20% you are required to put in $250,000 making the total project cost $1,250,000.
Cooperative Agreement
A cooperative agreement “is distinguished from a grant in that it provides for substantial involvement between the Federal awarding agency or pass-through entity and the non-Federal entity in carrying out the activity contemplated by the Federal award.” Basically, “substantial involvement” refers to the degree to which federal employees are directly performing or implementing parts of the award program. In a grant, the federal government more strictly maintains an oversight and monitoring role. In a cooperative agreement, federal employees participate more closely in performing the program, such as having input on project budgets and technical milestones, from project negotiation to completion.
Project Average Duration: 36 - 60 months
Type of Recipient: Academia, Industry, Small Businesses
Federal Funding Amount Per Award: $100,000 - $100,000,000+
Cost Share: Yes, with limited exceptions. The most common amounts are 20% or 50% of the total project cost including the federal portion of the award.
Prizes
Prize competitions are tools for incentivizing the achievement of scientific and technological innovation by offering monetary and nonmonetary benefits (including recognition) to competition participants. Prize competitions have a long history of use in both the public and private sectors but have gained popularity in recent years. Federal prize competitions are an alternative policy instrument for spurring innovation, not a substitute for more traditional methods of federal support for research and innovation such as competitive research grants/cooperative agreements and procurement contracts.
The use of prize competitions by the federal government has increased significantly since the passage of the America COMPETES Reauthorization Act of 2010 (P.L. 111-358). P.L. 111-358 which encouraged the use of prize competitions by providing the head of any federal agency with the authority to carry out prize competitions that have the potential to stimulate innovation and advance the agency’s mission. Congress has also provided various federal agencies, including the Department of Energy, with additional authority to conduct prize competitions. The utilization of prizes has grown exponentially inside DOE, particularly following the launch of the American Made Challenges platform, where prizes started with the Solar Prize in 2017 and now has hosted more than 100 prizes.
Prize competitions benefit the federal government by allowing federal agencies to (1) pay only for success; (2) establish ambitious goals and shift technological and other risks to prize participants; (3) increase the number and diversity of individuals, organizations, and teams tackling a problem, including those who have not previously received federal funding; (4) increase cost effectiveness, stimulate private-sector investment, and maximize the return on taxpayer dollars; and (5) motivate and inspire the public to tackle scientific, technical, and societal problems.
Prizes typically include cash incentives, and in some instances access to vouchers (discussed more below).
Project Average Duration: 3 - 36 months
Type of Recipient: Academia, Industry, Small Businesses, Individuals
Federal Funding Amount Per Award: $10,000 - $5,000,000
Cost Share: None
Other Transaction Authority
Other transactions (OT) are special vehicles used by federal agencies for obtaining or advancing research and development (R&D) or prototypes. An OT is not a traditional contract like those regulated under the Federal Acquisition Regulations, grant, or cooperative agreement, and there is no statutory or regulatory definition of “other transaction.” Only those agencies (including DOE) that have been provided OT authority may engage in other transactions.
OT authority originated with NASA when the National Aeronautics and Space Act of 1958 was enacted. Subsequently, seven other specific agencies have been given OT authority: the Department of Defense, Federal Aviation Administration, Department of Transportation, Department of Homeland Security, Transportation Security Administration, Department of Health and Human Services, and DOE. Other federal agencies may use OT authority under certain circumstances and if authorized by the Director of the Office of Management and Budget.
Generally, the reason for creating OT authority is that it provides the government flexibility when flexibility is needed for a desired result to be achieved. The government’s procurement regulations and certain procurement statutes do not apply to OTs, and, accordingly, other transaction authority gives agencies the flexibility necessary to develop agreements tailored to a particular transaction. The Competition in Contracting Act, Contract Disputes Act, and Procurement Integrity Act are examples of three statutes that do not apply to OTs.
The key distinguishing factor as a contracting mechanism is that OT agreements are generally exempt from federal procurement laws and regulations. These exemptions grant government officials the flexibility to include, amend, or exclude contract clauses and requirements that are mandatory in traditional procurements (e.g., termination clauses, cost accounting standards, payments, audit requirements, intellectual property, and contract disputes). OT authorities also allow more flexibility to structure agreements in numerous ways, including joint ventures; partnerships; consortia; or multiple agencies joining together to fund an agreement encompassing multiple providers.
By using an OT instead of a contract, an agency and its partners are able to develop a flexible arrangement tailored to the project and the needs of the participants. Other transactions are meant to present the Government and company with a “blank page” from which to begin when negotiating.
OTs are legally binding contracts; they are referred to as agreements to distinguish them from the traditional procurement contracts governed by the FAR and procurements laws. While that may sound appealing, starting from scratch means every single item is up for debate. Successfully executing an OT can take months or even years, and some agreements collapse under their own weight during the process. They are not a silver bullet.
Project Average Duration: 12-36+ months
Type of Recipient: Academia, Industry, Small Businesses, Individuals
Funding Amount: $1,000,000-$100,000,000+
Goals: Fund prototype development, consortia, or other models that would be otherwise challenged by all of the FAR and CFR for award management
Cost Share: Negotiated
Partnership Intermediary Agreements
A Partnership Intermediary Agreement (PIA) is formal contract or agreement between the DOE and a non-profit intermediary organization to promote collaboration and technology transfer between the DOE, its labs, and small businesses, universities, and other partners. These agreements help speed up the development and commercialization of technologies by increasing outreach and lowering barriers to entry for external entities. The PI role is to increase outreach and engagement with small business firms, institutes of higher education, and non-traditional partners.
What makes the use of the PIA unique is that DOE is both establishing a relationship with the PIA as a trusted partner, and it directs funds through the PIA to make new solicitations available to potential awardees.
Title 15 U.S.C 3715, Use of Partnership Intermediaries, provides the authority to enter into agreements with PIs. PIAs have evolved from agreements primarily focused on intellectual property (IP) management and technology scouting, to agreements covering a broad spectrum of activities.
Until early 2023, PIAs were very rarely (if ever) used by DOE. DEFENSEWERX was selected as a PI for a two-year pilot under the ENERGYWERX trademark, but due to the immediate impact and use of it, the agreement has been extended through April 2028. Additionally, to ensure adequate PI bandwidth to meet project demand, in July 2024, the Office of Technology Commercialization (formerly the Office of Technology Transitions) entered into PIAs with two additional PIs, RTI International (operating as TechWerx) and Advanced Technology International (operating as ConnectWerx).
Through the Office of Technology Commercialization, the DOE directs solicitations through three PI partners. The solicitations are intentionally designed to be a lighter mechanism, with less application requirements and shorter periods for review. Because of the distributed nature of the way these solicitations are managed, they don’t run on a typical schedule and are shaped to match the needs of the agency.
Through the PIAs there are two types of awards distributed - in kind, through service providers, and through execution of business to business agreements. This allows for flexibility in the terms agreed to between the PIA and selected award.
Project Average Duration: 3-24 months
Type of Recipient: Academia, Industry, Small Businesses, Individuals
Funding Amount: $50,000-$1,000,000+ in funds or in-kind for awardees; contract ceiling for PIA negotiated between the agency and selected organization and can exceed $100,000,000+ for management with a management fee structure
Goals: Fund prototype development, consortia, or other models that would be otherwise challenged by all of the FAR and CFR for award management
Cost Share: Negotiated
Vouchers and Technical Assistance
The federal government can provide technical assistance (sometimes referred to as a ‘voucher’) to both companies and to communities/governments. This can range from providing technical diligence, access to physical facilities, access to expertise to support commercialization, prototyping facilities, non-hardware deployment related activities, and/or specialized equipment. This can include resources at the 17 national laboratories, or through expertise and equipment at other approved vendors and institutions.
Some examples of technical assistance includes:
Technology Commercialization Voucher Program
In partnership with ENERGYWERX - one of the Partnership Intermediary Agreements executed by DOE and explained more in the section following - DOE offers support to increase adoption readiness of new technologies through a Voucher Program from selected Voucher Providers (to include National Laboratories and private sector entities). In addition, ENERGYWERX facilitates the identification and matching of capabilities to Voucher Recipients who need support in overcoming their energy adoption challenges.
ENERGYWERX pays the Voucher Provider for the work they have completed to the benefit of the Voucher Recipients. The recipient receives the capability they applied for from the Voucher Providers at no cost. This can range from access to facilities at the laboratories, entrepreneurial support via incubators and accelerators, or manufacturing design assistance. Note that no voucher funds go directly to the recipient for their use .
Energy Planning Assistance
The Energy Technology Innovation Partnership Project (ETIPP) is an example of a technical assistance program that provides free access to experts and systems to help communities plan for future energy scenarios, with a particular focus on works coastal, remote, and island communities that are seeking to improve the resilience, affordability, and reliability of their energy systems. This multi-year, cross-sector technical assistance program applies a tailored approach to each participating community. Leveraging the experience and expertise of its partner network—a broad coalition of local stakeholders, regional organizations, national laboratories, and DOE offices—ETIPP helps communities proactively identify and implement solutions that suit their particular needs.
Selected communities receive support for a project scoping phase (one to six months), followed by energy planning and analysis projects (12 to 18 months) that:
Address the community’s energy priorities, goals, challenges, and opportunities.
Advance the community’s ability to implement strategic, whole-systems solutions.
Develop replicable approaches that can add value in neighboring communities, or those with similar characteristics.
These are two examples of a myriad of different voucher and technical assistance programs. As seen through these examples, there is no monolith for how vouchers/assistance can be announced, and they can be appended to other mechanisms (e.g. FOA, NOFO, and prizes) or be provided as standalone services.
Project Average Duration: 12-24 months
Type of Recipient: Academia, Industry, Small Businesses, Individuals
Federal Funding Amount: No funding provided, worth in-kind of $10,000-$1,000,000+
Goals: Provide access to facilities and expertise at the nation’s laboratories and private test facilities
Cost Share: None
In (Sort of) Conclusion
You might ask why only cover these at a high level? Having a common baseline of mechanisms to refer back to in subsequent posts is important. Many of these mechanisms may seem like second nature to people and organizations that have been either within or working with the federal government, but still remain a mystery to most people and organizations. This is one of the things we’re trying to demystify for folks both here and through our work at Waypoint Strategy Group.
In subsequent posts we’ll provide a lot more context and lessons learned from these various mechanisms, but our hope is that this will serve as an evergreen post and an explainer at a 100,000 foot level about the primary mechanisms that are used to structure programs and for applicants to access resources to grow their concepts, technologies and capabilities.
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