This analysis by the ChubbyBrain team originally appeared on Fast Company here as part of their recently launched Getting Funded content area.  Fast Company & ChubbyBrain also issued a 44 page Q3 Venture Capital activity report which you can view and download for free here.

Amidst the ads, books and late night TV commercials promising inside information about little known government programs and free money, there actually is money out there for your business.  In fact, in Q3 2009, ChubbyBrain which tracks venture capital, angel investment and several other types of investment in private companies tracked $2.3B going to 65 young companies from various governmental or government-affiliated entities.  These government programs and government sponsored public private partnerships offer funding via loans, grants and equity investments into promising young companies and technologies.

In Q3 2009, the average deal was $36.2M but this aggregate number is misleading because of several large fundings by the Department of Energy which distort the number.  The more interesting highlight for early stage entrepreneurs is seen in the chart below.  As can be seen, the great majority of investments are under $5M with the median across the 65 deals standing at $1.1M. 

 Before getting too excited about this governmental funding source, it’s worth considering it in relation to venture capital investment in Q3 2009.  ChubbyBrain tracked $6.1B in venture capital investment over 680 deals in the quarter so keeping things in perspective, it is clear that venture investment dwarfs these governmental funding sources.  But for an entrepreneur looking for capital to grow, these governmental funding sources may be worth considering in addition to the angel investment or venture capital funding sources that they may be pursuing. (Note: Download the 44 page Fast Company-ChubbyBrain Q3 2009 Venture Capital activity report for a quantitative view into VC activity in the quarter)

Now let’s take a closer look at government funding to startups in Q3 2009.

First, the 65 deals ChubbyBrain tracked in the quarter were spread across twelve sectors with seven sectors accounting for over 80% of the deals as shown below.  The Energy and Healthcare sectors led amongst sectors accounting for almost 50% of the deals.

In terms of where the government funding is going, it was spread across ventures in 21 different states.  Interestingly, California and Massachusetts which are the top two destinations for venture investment also saw a large number of government funding deals representing 13% and 11% of such fundings (based on number of deals), respectively.  Interestingly, however, Ohio took the top spot with 14% of deals.  Rounding out the top five were Texas and South Carolina.  Interestingly, despite the top 5 states for government funding having California, Massachusetts and Texas which are perennial venture capital hubs, the government funding does show activity in states which are not amongst the usual suspects for venture investment including the aforementioned Ohio and South Carolina and also states like Maine and Michigan. 

What may be most interesting to entrepreneurs is that unlike angel investors or venture capitalists who take a stake in the company, almost 70% of the government financings were in the form of grants to the startup companies. 

Startups looking for money would be well-served to look at governmental funding vehicles in addition to the more traditional angel and venture capital investment sources.  With federal stimulus money and other efforts by local and state governments to spur entrepreneurship and economic development, activity by such sources may continue to show healthy levels of activity.