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Why grants are my funding instrument of choice

The majority of innovative life science companies operate in the so-called ‘valley of death’ – aptly nicknamed for the high risk and high capital needs for a long period of time. They need to attract external financing to fund their research and development (R&D) activities. As a life science entrepreneur, I favor a good financing mix to build company value, mitigate risks, and stay on track. Within that mix, particularly in the early R&D phases, I always try to exploit the specific benefits grants have to offer. Let me explain why. 

At DC4U, a preclinical life sciences company of which I am the Chief Executive Officer, we have been awarded a €1.7 million Eurostars (SiaDM) grant together with three co-development partners for the joint development of an innovative treatment for Type I diabetes. Over the years, I have made use of various grants, which has given us access to a substantial amount of money for R&D, access to an international network, and the ability to derisk the projects. 

Funding the early phases

Grants are particularly interesting for funding the early phases of a project, when most of the R&D work still needs to be done and investors are wary because of the high risks involved. If they do come onboard at that stage, they do so in return for a substantial amount of company shares resulting in significant dilution. Grants, on the other hand, give you the opportunity to build company value without losing shares in the company. I therefore consider grants the perfect funding tool for de-risking projects, extending the runway, and leveraging investments.

Smart mix of funding

Grants can be used to fund a substantial part of your R&D at all technology readiness levels (TRLs), but are always earmarked for a specific goal, such as R&D, business operations, or feasibility studies. Furthermore, grants hardly ever cover all of the financing needs for projects and company operations, which require own contributions. This means that you need access to additional financial resources, usually from investors or revenues from sales. This enables you to pay additional costs, such as patent costs, lawyers, accountants, rent, and most management salaries (including your own), which are usually not covered by grants. Grants and investments therefore go hand in hand. I try to leverage grants as much as possible in the early R&D phases and gradually move to larger investments when the project is further de-risked and the company value increases.

Benefits of different funding instruments

Investors bring the benefit of speeding up processes with their financial injection, network, and expertise. You should also be aware, however, that in many cases they want to see a high return on investment (ROI) within a relatively short timeframe. This is not always compatible with the long development times of life science products. Like investors, grants are much more than simply financial instruments. Collaborative grants, for example, can offer interesting opportunities to form partnerships that could benefit your company and product development. Additionally, grants may open the door to investors, since they act as a reference for your company: they show that you are working in the right direction, have managed to de-risk the enterprise, and have raised capital to fund R&D.

Challenges when using grants

The downside is that grants are notoriously difficult to obtain, the average success rate being around 10 percent. The application deadlines (and therefore access to money) are usually only once or twice per year, and the application process takes up a lot of time, which could be lost time in your development strategy if you are unsuccessful. And if you are successful, you will need to comply with the administrative burden, which can be quite considerable, but critical to unlocking each interim payment in time. Finally, the grant that you receive will only cover up to a maximum of around 75 percent of your R&D project costs and you are not allowed to use other grants to cover the financing gap. As a result, the grants that you obtain provide important financial support, but also make managing the company’s financial runway a challenging puzzle, both in terms of the timing to gain access to the grant money and filling the funding gaps not covered by the grant.

Create a strategy with which you feel comfortable

At the end of the day, you need to develop a financing strategy with which you feel comfortable and which fits the goals for yourself, the company, and the product. Personally, I have always been very successful at grant applications. They have enabled me to extend our runway, mitigate risks, get projects off the ground, and set up partnerships. I have a knack for applying for grants and find it more challenging to go through the process of raising private equity. Where you feel most comfortable and where your talents lie can differ from one person to another.

Download FFUND’s paper on funding strategies

In conclusion, successfully raising funding truly is one of the biggest challenges in developing an innovative life science idea into a market-ready product. Would you like to know more and find your optimal funding strategy? Download our latest paper ‘Three essential steps towards successfully financing your innovative R&D company’

Whitepaper 3 essential steps towards successfully financing your innovative R&D company grants
About the author
Picture of Henk Viëtor

Henk Viëtor