Azad Madni has discovered a cash stream that many Silicon Valley prospectors may not know about, and rather than hide the source, he's willing to share.

For almost six years, Madni has been swimming in comfortable financing waters. The company he founded, Intelligent Systems Technology, has become $9 million richer without sacrificing a drop of equity along the way. As an alternative to venture capital funding, he bids on contracts through the Small Business Innovation Research program. That program and other federal government channels help fund research on technologies that apply to products being developed, which is a key criterion, he says. As a bonus, the government allows contractors to retain commercial rights.

"The real payoff here is that it's a proving ground for people to see if they really have an entrepreneurial streak in them, if they have the technology that stands up to scrutiny, if they have a good strategy," says Madni, who says he receives daily investment offers. "Once you start winning these awards, investors get attracted because they know you have something competitive."

His advice to bidders: Brush up on proposal writing and be prepared to make contingent offers to consultants and others to build an attractive team. And be patient. It may be three months after a bid is submitted before the winner is notified. The most opportunities are in areas related to manufacturing, biotechnology, semiconductors, and physics-based systems he says.