A critical stage for most first-time entrepreneurs is getting their idea developed into at least a prototype to validate their technology. This process costs money, which professional investors are not willing to contribute, since their interest is in scaling a proven product and business model into a growth business. Investors want potential for a large and timely return, with reduced risk.
Acquiring seed-stage funding is admittedly tough, but a source that I find often overlooked is government grant funding, accessible in the U.S. through Grants.gov, an online directory of more than 1,000 federal grant programs that don’t look for equity or payback. Specifically, I often point to the NSF or the Small Business Innovation Research (SBIR) program for high-tech startups.
Government grants start as small a few thousand dollars, but can provide a million dollars or more in capital to new ventures. But before you conclude that your funding problems can be easily solved with grant applications, you should consider the direct and indirect costs of this approach:
- Applications are complex and labor-intensive. Many grants require special expertise and background knowledge, which will take time and people away from the thousands of other tasks required to get your business going. You should expect that a winning grant application, with all the reviews and required certifications, can take months of work.
- The approval process is long and bureaucratic. For grants, you are often tied to pre-defined government application and approval schedules, perhaps once or twice a year, which may not coincide with your needs. The resulting delays can give your competitors an edge, or the market requirements can change before you get the funding you need.
- Experts are available to help, but fees are high. There are professionals who specialize in grant applications, and they may even have relationships with key decision makers in the approval process, but they do cost money that you may not. You need to make an ROI assessment of value versus cost on outside help at this stage.
- Detailed grant accounting requirements. All grants require a detailed accounting of every dollar spent, and adherence to guidelines. This may go beyond your normal capabilities at this stage of your business, but be aware that violations can result in loss of funding, or even stiffer penalties. Expect regular audits of your project and spending.
Also, it’s important that you understand just how the SBIR program works. Overall it is structured in three phases:
- In Phase I, you can be awarded up to $150,000 for six months. This award is intended to allow you to establish the technical merit, feasibility, and commercial potential of the proposed R&D efforts and to allow them to determine the quality of your organization before additional awards are considered.
- In Phase II, amounts up to a million dollars over a two year period awarded. This phase is intended to allow you to complete the research and development on your innovative product.
- Phase III is all about helping you take your innovation to market, or commercialize it. While the SBIR does not provide direct funding in Phase III, funding can often be acquired through referred Federal agencies, like the Department of Defense, who may intend to use the innovation once the development is complete.
All you have to do to qualify for government grant consideration is pass the initial eligibility test:
- At least 51 percent owned and controlled by one or more individuals who are citizens of, or permanent resident aliens in, the United States.
- Be a small business of no more than 500 employees, including affiliates, located in the United States, and organized for profit.
In any case, I do recommend that you don’t try the grant process alone the first time. If you still have any connections at the local university, look for some guidance there from related subject-matter professors. Professors live on grants for research, but they need you for a current focus on commercialization. Another alternative is to find an inexpensive class on grant writing.
Of course, for speed to market, and to retain maximum control of your innovation, it’s always better to fund the R&D stage of your business yourself. Then seek angel investors or crowdfunding, as required, for the rollout, and venture capital for scaling the business across multiple geographies.
The best entrepreneurs I know don’t let initial funding constraints discourage them from starting. They don’t overlook any of the many sources out there, including government grants, but they do it with their eyes open, and get the help they need along the way. It’s time to get started today.
