VCs have little spare capital to invest in new startups and are concentrating on their current portfolio companies. But some startups could qualify for various government programs.

A good example is the Small Business Innovation Research (SBIR) grants, and the Small Business Technology Transfer (SBTT) grants from five agencies: Defense, Energy, Health and Human Services, National Security Agency, and NASA. The first phase funding is $100,000 and second phase funding is even better at $750,000 per grant.

Maureen Farrell at Forbes has written a good article on this topic. How To Get Uncle Sam To Fund Your Start-Up - Forbes.com

While just 13% of Phase 1 proposals are accepted, the hit rate for Phase 2 apps jumps to roughly 45%, estimates John Mills, director of the SBIR assistance program in Georgia.

If you want to bag SBIR funding, you'd better be able to communicate precisely how the research is going to lead to a salable product. "Most entrepreneurs we work with find it's a challenge to discuss how their technology is commercialized," says Mills.