Government Grants Are Not As Free As You Think

Now that President Barack Obama’s economic stimulus package has been out for a while, including $50 billion aimed at alternative-energy initiatives, applying for grants has become the rage for high-tech startups. I applaud the initiative, and encourage startups in this direction, but there are costs.

In the US, many entrepreneurs see grants as “free money,” since they are not loans and don’t have to be repaid. A grant is not an equity investment, so the entrepreneur doesn’t have to give up a stake in the company either. Typically they can be used to fund product development and commercialization that would otherwise require outside investors.

A good place to start is the Small Business Innovation Research (SBIR) program, which is a lifeline for high-tech startups. Another is the Database of State Incentives for Renewables and Efficiencies (DSIRE), which controls state energy efficiency and clean energy grants. Grants start as small a few thousand dollars, but can provide millions of dollars in capital to new ventures.

But before you conclude that your funding problems are solved with grants, you should consider the direct and indirect costs of grant funding:

  • Grant applications are bureaucratic. Even experienced people dealing with grants tell me that it can take a couple of months of concerted effort to gather data, fill out the forms, and get the necessary certifications to submit a credible grant application. That is time and resource that you must add to the million other high-priority startup tasks.
  • Processing and approvals take time. If you meet all the requirements, complete all the paperwork, and submit your grant application today, it will likely be six to nine months before you see any money. In today’s fast moving technology world, that may give your competitor the edge, or your startup may wither and die waiting.
  • Professional help costs money. Of course, there are “experts” at grant preparation, available for a fee, and even people who can introduce you to key decision makers in the grant approval process. For all the value of a large grant, isn’t it worth a small investment to get your application “on the fast path,” and optimise your selection probabilities?

Here are a few tips that I would recommend to startup clients, on how to position themselves for funding success through grants:

  1. Use local university connections. For university professors, grants are their lifeblood, and they know the process well. They need you, since grants associated with commercializing products are favoured over ones allocated simply for academic study and papers. If they do the application for you, and get to publish the results, that’s a win-win situation.
  2. Pursue grants and investors in parallel. Putting your grant application intent and status in you business plan will greatly enhance your potential to get angel funding for the interim. To the investors, it means less dilution and lower overall risk.
  3. Research related tax credits and incentives. You need to enhance your business plan and marketing with all the benefits to your customers of the multiple “stimulus” plans and tax breaks now being put together, especially related to alternative energy products.
  4. Extend your networking. Let’s face it, the business world and the political world are getting tightly intertwined. It’s time for you to meet state and local government officials, make them aware of what you are doing, and get them excited and working for you.

Money has always been tight for high-tech entrepreneurs who need to raise capital from investors willing to gamble on a new idea. But the situation is more critical right now, with venture capital way down, and angels still nursing their wounds. Now is the time to get on the grant bandwagon, but do it with your eyes open, and budget for it.

Marty Zwilling

NOW WATCH: Ideas videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.