(FORTUNE Small Business) – Shelley Coldiron, a Ph.D. scientist-turned-entrepreneur, learned of an exciting scientific breakthrough at Iowa State University in Ames. Researchers had come up with a device that could test chemical and biological compounds 96 times faster than any other technique on the market. Coldiron suspected the technology could have a huge impact in the pharmaceuticals field and also in genomics. So she licensed the rights to the technology and created a company called CombiSep Inc. in late 1999. The only problem was that Coldiron lacked the money to create a real business. Iowa isn't exactly known for its early-stage venture capitalists. "We would have tried to raise private money, but that wasn't the best arena," she says.

So, like hundreds of other entrepreneurs, Coldiron turned to a donor housed deep within the U.S. Department of Commerce: the National Institute of Standards and Technology's Advanced Technology Program. Since its inception in 1990, ATP has awarded $1.8 billion in grants to some 4,600 companies--including Advanced Cell Technology, a startup in Worcester, Mass., that engineered the world's first cloned human embryo. Some large companies, like GE, have won grants, but the vast majority have been newbies often attempting to commercialize technology from a university or research lab. The grants, which range from $5,000 to $2 million, are awarded to tech startups in all fields, from biotech to metals processing. But only about 12% of applicants get funding, since the awards are given only to businesses that are targeting a niche that can help broad sectors of the economy.

ATP grants serve as a lifeline for high-tech fledglings until they can raise financing from traditional sources and start eking out a profit. In Coldiron's case, the $2 million that she got should be enough for her company to survive until it breaks even next winter. Her sales totaled $215,000 in 2001 and should increase this year.

Despite the need small businesses have for ATP's financial sustenance, the program has been under attack, and a question mark hangs over its future. Conservative Republicans began attacking the program in the mid-'90s because President Clinton embraced it so eagerly, pushing funding to a high of $431 million in 1995. They succeeded in whittling down its funding to $200 million. George W. Bush took office aiming to kill new funding for the ATP because it represented corporate welfare. The war on terror has stalled the debate for now, but a Commerce Department spokesman confirms that the ATP's funding is still under "informal review."

According to entrepreneurs like Coldiron, the elimination of the ATP couldn't come at a worse time. A credit crunch has left innovators with few funding sources. Banks have tightened credit standards, making it harder for startups to get loans. Even angels and VCs have tightened their money belts. According to Venture Economics, seed and startup financing has fallen off a cliff since it hit its peak in the second quarter of 2000. Through the third quarter of 2001, VCs invested about $6 billion in tech ventures, vs. $15 billion during the same period in 2000. That's a 60% decline.

Marc Stanley, acting director of the ATP, naturally is in favor of the continued existence of his program. But his dilemma is that he lacks the ammunition to plead his case. The agency has never kept tabs on former program recipients, and it doesn't know how many ATP-backed companies are still in existence. The rough rule of thumb for companies so young is that three out of ten may make it, but seven don't. "ATP does no better and no worse in terms of companies moving to success than venture capitalists," argues Stanley. "We think we do a pretty good job with taxpayer money." It's an argument that a lot of entrepreneurs hope he wins.