There’s No Such Thing As “Free” Funding for Your Startup

Paul Jones

July 2, 2013 · 3 minutes read

Uncategorized

Unless you are one of those entrepreneurs who has made a boatload of money for venture investors before, you have probably noticed that raising early stage venture capital is pretty challenging these days.  All the more so if your base of operations is somewhere in flyover country.  And if you do stumble upon  some early stage risk capital, you’ll likely pay a high price for it, both in terms of dilution and control.

It’s enough to make a lot of entrepreneurs turn to the world of grants and other non-dilutive funding options.  If the good folks who collect all of those tax dollars want to send some of the loot in your direction, well, what’s not to like?  But before you go too far down that golden road, do yourself a favor: think long and hard about whether “free” really means, well, free.  In my experience, as often as not it doesn’t. Herewith a look at some of the things that can make free money more expensive than advertised.

1. What time does your startup run on?  Probably internet time.  What time do the folks who dole out economic development money and grants run on?  Government time and academic time.  In my experience, if a business is running on a timeline that matches up with government or academic clocks, most likely the business is running way too slow.  Waiting on bureaucrats and academics to make decisions is usually a waste of time–and thus, money.

2. What do the folks doling out government grants look for in grant applications?  Usually, good science.  Good science with some commercial potential, perhaps, but ultimately  science that consenting adults looking to make a buck likely won’t finance.  If you can’t find someone out to make a dollar on your idea to invest in it, chances are it’s because it’s not such a good idea–at least to the extent making money is your objective.

3. Just how much time and money does your startup have? Enough to dedicate key folks to chasing grants and economic development loans?  Seriously, if you can’t find anything better to do with your people and other resources than chase down tax dollars, well, you should at least ask yourself if the world of high risk/reward entrepreneurship is where you belong.  Or, at least don’t be surprised if your investors ask.

4. Just because you have a bunch of academics who are good at writing grants doesn’t make that something you should focus on.  In fact, you should probably be pushing your academic types to adjust to the business world – where the focus is (well, should be) on the next commercially relevant experiment, not the next publishable experiment.

5. Debacles like Solyndra aside, free money doesn’t generally scale very well. Sure, a Phase II SBIR grant might be 10x a Phase I SBIR grant, but relative to how much money it will take to get to market, even the Phase II grant usually doesn’t amount to much.  Particularly when you factor in the time and resources to get and manage it.

If you think getting a grant, or an economic development loan, somehow validates your technology or business model, you might want to think again.  While most sophisticated investors will applaud judicious use of “free” financing, most of them are also wary of “grant mills” posing as investment opportunities.

Now, I am not saying that chasing down the odd tax dollar is always a bad way to fund your company.  I have used grant money in some of my own ventures when the fit with the business plan was solid and easily seen. But, I am saying that you should figure out the real cost of the chase, in terms of time, resources, and alternative opportunities, before getting into the game.  If a particular “free” money opportunity really is a “better, faster, cheaper” way to knock off an important business milestone, by all means go for it.  Otherwise, proceed cautiously, if at all.

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