A critical step for most first-time entrepreneurs is getting their idea developed into at least a functional prototype so they can validate their technology. This process costs money, and professional investors are typically unwilling to contribute capital until your technology is viable. Once this is true, investors will likely invest if you can further demonstrate that your product can be scaled and turned into a growth business. Investors want the potential for substantial and timely returns while minimizing risks.
Acquiring seed-stage funding is admittedly a challenge. However, government grant funding is a viable but frequently overlooked source. You can find U.S.-based government grants through Grants.gov, an online directory of more than 1,000 federal grant programs that don’t require you to give up a piece of your company (like an equity investment) or to pay back the funds (like a loan). Specifically, I often point to the NSF or the Small Business Innovation Research (SBIR) program for high-tech startups.
Government grants start as small as a few thousand dollars but can provide a million dollars or more in capital to new ventures. However, while there are many grant programs that you may qualify for, you should consider the direct and indirect costs of this approach before you begin the application process:
- Applications are complex and labor-intensive. Many grants require specialized expertise and background knowledge, which will take time and focus away from the thousands of other tasks necessary to get your business going. You should expect that completing a winning grant proposal, with all the reviews and required certifications, can take months of work.
- The approval process is long and bureaucratic. Grants usually will tie you 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. Some professionals specialize in writing grant proposals, and they may even have relationships with key decision-makers in the approval process. Because grant specialists are usually quite costly, you need to make an ROI assessment of value versus cost on outside help at this stage.
- Detailed grant accounting requirements. All grants require strict adherence to guidelines and a detailed accounting of every dollar spent. Because of this, you should expect regular audits of your project and spending. The audits may require you to provide reporting that may go beyond your standard capabilities at this stage of your business, so you may need to acquire help to meet the reporting standards set by the granting agency. Before you receive your grant, you’ll want to be sure you fully understand your grant’s requirements and that you are prepared to properly document your project’s progress and spending because violations can result in the loss of funding or even stiffer penalties.
Also, it’s essential 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. Also, they will assess the quality of your organization during this period before considering additional awards.
- In Phase II, amounts up to a million dollars over a two year period can be 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, referred Federal agencies might. For example, you might be a candidate to receive funds from the Department of Defense if they intend to use your 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 with no more than 500 employees, including affiliates, located in the United States, and organized for profit.
In any case, I recommend that you don’t try the grant process alone the first time. If you have connections at your local university, try getting in touch with a professor whose focus is related to your subject matter. Professors live on grants for research, but they need outside partners like you with a current focus on commercialization. Another alternative is to take classes on grant writing.
Of course, for speed to market, and to retain maximum control of your innovation, it’s always better to fund the initial R&D stage of your business yourself. Then seek angel investors or crowdfunding, as required, for the rollout, and then 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 funding 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.