Why innovation grants are difficult funding solutions for start-ups
Grant funding is one of the few sources of funding available very early in the life cycle of a start-up company. A company can use it to fund the development of key components for its technology, so it is often seen as the best solution for founders with no capital at a pre-product, pre-revenue stage.
While this can be true, our experience working with hundreds of start-ups over the last 7 years, shows that grant funding can be a very difficult tool to use correctly. We will explain why it is difficult, and present some real-life examples of good practice around innovation grants.
3 things that make grant funding difficult for start-ups
- Match funding and arrears
Most grants fund only a fraction (typically between 40 and 70%) of the total cost of the project – and thus needs to be match funded. To make matters worse, the funds are very rarely available upfront; most funding organisations like Innovate UK will ask for proof of spending and check eligibility before issuing the grant in arrears. This means that other sources of funding have to be in place to fully meet the costs of the project.
- Runway vs. time-to-grant
Pre-revenue start-ups will typically have a limited runway – i.e. operational time before they run out of cash – usually around 6 to 9 months. This is unfortunately also the typical time-to-cash for innovation grants: from preparing the application to getting the results from the competition, going through the due diligence, starting the project and arriving at the first claiming period; the turnaround time for Innovate UK is typically around 9 months.
- The project is the company
Start-ups are usually built around an innovative idea, a transformative product/service. This means that at the start, the company often is the project, and the accomplishment of that project can make or break the start-up. Clearly, timing in this situation is key. Because of the elements described above (arrears payments and time-to-grant), using grants to fund anything that is mission-critical and tightly time-bound will make it even more risky and challenging.
When can grants be useful?
- To create your company: e.g. BrokerSense
The co-founders had a great idea that was commercially and technically validated, they had incorporated the company, but it was not yet trading. They would not have launched it without this line of funding.
- To kick-start a project (go/no go): e.g. ActiveCell
ActiveCell had a side-project with a lot of potential in the context of the pandemic, but it was one they weren’t willing to develop without a grant. As the company was already making sales by then, they had some finance in place for match-funding (which proved unnecessary as the grant they won offered a 100% coverage).
- To take your company to the next level: e.g. whatimpact
Whatimpact had an MVP that was revenue-generating, but they saw a gap to fill in the market. They needed funding to build an advanced AI system that would transform the impact of their services and reach their new customer segmentation. They were able to secure a grant with a 70% cost coverage for their innovation project, enabling them to increase their productivity and grow their team. This has also had an effect in regard to private investments, making their venture more attractive.
Want to find out about what funding options could be available for your business? Get in touch with us here
By Dr Vivien Badaut, Managing Director and Founder, DRIAD