Having worked for over ten years with hundreds of innovative companies to raise strategic funding, I have seen a huge variety of funding strategies. While most innovators use a mix of equity financing and non-dilutive funding, there is one strategy that caught my interest: those that have been able to develop innovative products and build their companies (almost) completely without the use of grants and loans. They specifically develop a funding strategy focused on investors or funding from a services model. Why would they not make use of the benefits that grants and loans have to offer?
The benefits of grants
Grants are a great funding source to help finance the different product development stages, including feasibility studies, product development, and validation. The early product development stages are particularly suited to financing through grants because of the high risks involved, which make them less interesting to investors. Grants enable the founding partners, management, and existing shareholders to retain company ownership and control while developing the product, mitigating risks, and building company value. Despite these obvious benefits, grants are neither ideal nor easy to come by.
The downside of grants
Grant applications can be complex in terms of the application templates and can take up a lot of time, have specific deadlines for submission, and often have very specific requirements to be eligible for funding. As a result, the grant project that is submitted, may not be directly aligned with the actual company strategy and the application process forms a distraction from the actual R&D and business development. On top of that, the chances of success are fairly low and the administrative reporting of awarded grants is often bureaucratic and time-consuming.
Most grants also require a personal contribution in money and/or time and will not cover the full project costs. This cannot be supplemented by applying for other grants, as the rules generally do not allow the use of multiple grants at the same time for the same R&D project. Clearly, the application for and management of grants brings a new level of complexity to each company that makes use of them.
Five reasons why entrepreneurs avoid grants
From my discussions with hundreds of directors of innovative companies and projects, I have diluted five top reasons why they (and you?) would want to avoid grants:
- Bad experiences with collaborators within obligatory partnerships that failed to deliver or withdrew from the project halfway through;
- Consortium management and arranging or participating in consortium meetings can be a cumbersome activity that was not part of the core business activities;
- The requirements for application, reporting, and administration can form a hurdle as they may not be aligned with the core operations and focus of the company;
- Grants are usually too small to cover a full development step, causing more complicated financial bookkeeping and hourly administration per grant-project, especially when multiple grants run through the company;
- Grants are often paid in upfront milestones, but since they are most often provided by governmental institutions, each payment is only released when all documents for reporting have been accepted and approved by the funding body. This often creates delays in payments and therefore cash-flow challenges in the company.
As a result, various innovators seek other financial sources to develop their products, such as building a revenue stream from services to finance the R&D, seeking strategic partnerships with bigger companies that contribute to the financing, facilities, and network, or attracting large investors/ convertible loans to take over the company. Needless to say, these funding sources come with their own impact on the company and when they do not suit the preferred future for the company, or are not accessible to you, applying for grants may need to become part of your strategy after all.
Overcoming challenges
The challenges that come with the award of a grant to your company may seem daunting. They are manageable, however, as long as you are aware of the dynamics that come with the acquisition of a grant. Furthermore, they also provide a great opportunity to set up the next level of administration, monitoring, and management in your company to professionalize the business operations. Especially when product development and production depend on expertise that you will not hire in your core team, applying for grants provides a great opportunity to test potential long-term partnerships.
Download FFUND’s paper on funding strategies
Each funding source will have an impact on your company. Besides the access to financial resources that they bring, they also have pros and cons that need to be considered. At the end of the day, the financing that runs through R&D-heavy SMEs is a personal choice. Next to an element of ‘luck’ in securing your preferred funding, the optimal funding strategy is directly linked to the goals of the product, the company, and its leaders. Would you like to know more and identify your ideal funding strategy? Download our latest paper ‘Three essential steps towards successfully financing your innovative R&D company’.
