“Grantrepreneurs” - How to Avoid Becoming One and Why Should Investors Exercise Caution When Investing in Them
Grantrepreneurs
“Young founders should be mindful about not becoming GrantrepreneUrs and investors weighing up opportunities should view GrantrepreneUrs as a potential red flag - a negative signal as per their overall entrepreneurial strength.”
There appears to be a growing trend amongst entrepreneurs, particularly within Europe. Founders are becoming fascinated with grants and government funding, often at the expense of growing their early-stage ventures in the ‘common’ investor-funding (or bootsrapping) way. There is nothing inherently wrong with seeking grants; In many cases, grants are a positive contribution to startups’ growth. But it also embeds a certain risk for early-stage companies, especially when founders are being drawn to their relatively easy-to-get nature, spending too much time on several grant applications, or counting on repeated and follow-on financing from this type.
These serial grant-seekers, or “Grantrepreneurs”, as I’ve coined them, are relying on governmental sources to fund their ventures, thinking, consciously or not, that by doing so they will manage to avoid the ‘necessary evil’ of private equity fundraising. As a matter of fact, they might actually decrease their chances to reaching a healthy growth, ‘genuine’ traction indicators and a better product-market fit.
That’s why young founders should be mindful about not becoming Grantrepreneurs and investors weighing up opportunities should view Grantrepreneurs as a potential red flag - a negative signal as per their overall entrepreneurial strength.
But how can you strike the right balance as a founder or investor?
The Advantages of Grant-Funding
Source of Funding - As startups simply do not exist without a source of funding, when a founding team doesn’t have much in the way of personal or friends-and-family economic resources, grants can help cash-strapped entrepreneurs take those vital first steps.
No strings attached (sometimes) - What’s excellent about some of the grants is that they don’t have many of the strings that are attached to private funding, such as equity. Better still, many grants have no repayment terms, so you are securing what is effectively free money for your new business.
Grants are relatively accessible and straightforward – Though the grant process can be long and arduous, at least the terms, procedures, and requirements are clear (or transparent) for everyone to see. And as long as you’re eligible, you can apply.
Lighter due diligence (if at all) - Grants represent a much higher chance of securing funding than seeking support from VCs and angels. The selection criteria are often much broader, and the due diligence is certainly much lighter than checks carried out by angels or private firms.
Equality – Some of the grant providers implement equality values in their selection criteria. That’s one of the most important (and my favourite) advantage in grants. Certain grants can be fully dedicated for, or set quotas for groups such as female entrepreneurs, entrepreneurs from challenged geographical areas, or from certain backgrounds. That, naturally, increases the chances to get these grants if as an entrepreneur you belong to one of these groups.
“Investors like to invest in what others have already invested. Sounds trivial but grant-funding can assist startups by being a positive signal for other investors.”
Additional forms of support - governmental grants sometimes deliver more than monetary support. Depending on the awarding organisation, you may also receive networking support, access to office spaces or piloting options.
Increases your chances to follow-on investments – Investors like to invest in what others have already invested. Sounds trivial but grant-funding can assist startups by being a positive signal for other investors. Research shows that public startup support comes with higher likelihood of follow-on investments, especially by other government VCs and sometimes by angels (however not by private VCs).
The Disadvantages of Grant-Funding
Grants are bogged down in bureaucracy (and paperwork) - From reading calls for applications, to filling forms, going through selection processes, legal documents and negotiating the final amount and conditions (with government employees) - some grants can take many months to secure. Time is money for both a founder and a startup business, and founders may have run out of runway or lose market momentum, before a grant arrives in their business bank account.
Smaller tickets - While private funding sources do come with more strings, they tend to give founders a lot more money which is what needed to get the idea off the ground. EU grants are usually nowhere near as big, meaning founders will have to go through the process several times to secure a comparative amount of funding.
Free Money is Disappearing - More and more grant providers are moving to the direction of tying their funding to equity. That means that as a founder you give a percentage of your company to a government organisation, with all the implications apply. Ideally, giving up a percentage of your company should come not only in exchange for money, but also with high-level and impactful business development support and network – benefits which are normally provided by investors such as angels or private VCs.
“There is something in the inevitably hard, and often painful, stages of private fundraising, which help founders to sharpen-up their business model, improve their problem-solving definition and strengthen their business-experience and leadership skills”.
Grants might be restrictive with how you can spend them - While angels and VCs may well deposit the money into your account and (hopefully) leave you to go and do what needs to be done, the process is not always that simple when dealing with grants. Especially if the grants are bigger, they might be tied to a rigid spending plan which you cannot alter, even if circumstances change within your business. In other words, you lose the agility that is so vital in early-stage companies.
Avoiding the necessary pain? – That’s perhaps the most important point here. Grant funding, and in particular serial grant-funding, goes against the principal ethos (and the ‘common’ path as we know it) of successful startups. There is something in the inevitably hard, and often painful, stages of private fundraising, which help founders to sharpen-up their business model, improve their problem-solving definition and strengthen their business-experience and leadership skills.
Not only being constantly challenged by potential investors, founders who go on fundraising journeys are also required to demonstrate real traction in their business, or in other words – present concrete proofs that their startup is having some level of popularity out there. However hard it may be, founders should strive to achieve minimal traction before they fundraise, otherwise the money might come too early and sabotage their growth.
Should You Seek Grants as an Entrepreneur? Should You Invest in Startups Relying Upon Grants?
As we normally tend to analyse things, it’s not an matter of black or white, but rather a matter of black and white, co-existing, and it’s the context, and the right balances made, that should provide each one of us with the ‘right’ answer.
In short, it’s better not to rely upon grants as an entrepreneur. If a grant perfectly aligns with what you need, feel free to pursue it. If it helps you buy time or to (relatively-quickly) pilot and validate your business idea, then great. Just make sure that the terms of the funding don’t sabotage later efforts to raise money, that it’s within your overall strategy and vision framework, and that you give very little equity away.
As an investor you should be wary of entrepreneurs who invest too much time and energy in securing governmental support rather than focusing on scaling their product to market. If you see several grant investments on the books during due diligence, you should seriously question the startup leader’s ability to solve problems and scale the company.
Good luck!
Keren Beit-Cohen
Inventor of the 3P Model / Startup Investment Advisor
“Always be yourself. Unless you can be a unicorn, then always be a unicorn.”