Startup Grants — Free lunches with a purpose (mostly)
Hope you are doing well and staying safe. Thanks a lot for your feedback and comments on my previous note on fundraising sources. Based on a few requests from founders, I seek to double-click on each of the sources in the coming days — i.e. grants, debt and equity. Let me talk about grants in this blog.
Grants: How about unlocking new opportunities?
Like I mentioned in my pervious blog, grants are a great way to fork out new experiments and seek opportunities which you wouldn’t have otherwise planned in your business-as-usual.
I have commonly seen how grants have helped startups substantially:
- Many founders were able to beat the opportunity-cost conundrum to kick-off their venture, a plan they were putting-off for the ‘future’
- Early stage ventures have built new product-lines and validate them through pilots and early adopters
- Growth stage ventures have built teams for strategic projects that you couldn’t fund otherwise, or invest in team and partners to acquire new markets etc.
Types of Grants
The title suggests that grants are like free lunches, well for most part it’s true:
It’s one-way (repayable grant is a misnomer! Remember your old friend — debt?)
The quantum of a grant is typically defined upfront and can come in a single shot or across multiple tranches
Except (the strings-attached part)
A grant is typically for a particular project plan and a budget that is pre-submitted and agreed upon by the grant giver
A grant is also typically time-bound and needs to be utilized in the set period.
Any non-adherence to the plan, budget or timeline could result in:
- Subsequent tranches being withheld
- And in some cases, repayment of any ‘unspent money’
I haven’t seen cases where the grantor would demand any utilized funds (that would really make it debt-like!)
Sources of Grants and Non-Dilutive Capital
That said, let’s discuss the different kinds of grants and sources of non-dilutive capital with a few examples:
Grant-In-Aid
Well this is a typical sarkaari word you’ll come across in grants involving the government. If you are interested in a bit of background reading, I found this report which could be relevant, which defines grant-in-aid as payments in the nature of assistance, donations or contributions made by one government to another government, body, institution or individual.
They are typically given for the purpose for delivery of public goods and is reflected as a revenue expenditure in govt’s budget.
In fact it is one of the largest public expenditures items in government’s budget. In case of startups, several governments — central and state give out grants-in-aid across several programs to promote innovation, R&D, prototype development, pilots, go-to-market etc. Some examples relevant for startups: BIRAC Grants to startups: BIG, SIBIRI, BIPP etc., grants for innovation and prototyping at state govt. level — Karnataka Elevate etc.
You can find a consolidated list of various state govt. schemes here on Startup India’s website.
Procurement or Work-Order
In some cases, instead of giving a grant-in-aid, governments or to that matter a foundation or an incubator could give out a procurement order or work-order to acquire goods and services from startups thus enabling market access. The scope of the goods and services consumed, quality and other expectations are detailed in advance before releasing the grant. One of the states that pioneered this concept was Maharashtra who have been running ‘Startup Week’ every year and awarding 24 startups each year with about INR 15 lakhs of procurement grant. This can be comparable to a revenue stream as it is in lieu of goods and services, just that the payer is different from the user.
Btw. Maharashtra Startup Week 2021 applications are live. Any startup in the country can apply to it. Stay tuned for more on Maharashtra Startup Week in the coming days. :)
The Classic Grant
This is what a typical philanthropy or CSR would give to organisations. It works similar as a grant-in-aid. The purpose can be flexible, but, in practice, such grants are more outcome and impact oriented as donor agencies need to quantify the impact for every dollar spent to their donors. So you typically do not find grants given out for pure-play innovation or R&D purposes. Incubators and Accelerators are a great way to disburse such grants to startups. Some examples include: Social Alpha Assistive Technology Quest or NSRCEL-CapGemini Social Incubator program etc.
Reimbursements
Many donor agencies, esp. govts, might prefer to give reimbursements against bills to startups when the intention is to cover only a particular kind of costs incurred by startups. Some examples are Patent reimbursement programs by Karnataka govt. and Maharashtra govt. for startups. The advantage for donors is there is very little leakage of grant amounts to purposes otherwise not allowed by grantors.
Subsidy
This too is a kind of reimbursement, with the only difference being, subsidy is used to make-up the total revenue of a good or a service while reimbursement is to compensate an expense. Subsidies are prevalent in agriculture, education, financial inclusion, health, disability and related sectors where affordability by the end consumer is a challenge.
Eg: several state governments give upto 90% subsidy for buying irrigation pumps. However, sometimes these well intended efforts might have unintended consequences.
For example, there might be a case of adverse selection as consumers go only for products that have been subsidised by the government and not the one which is most suitable or optimal for their use case.
Hence, many small farmers still go for high-capacity diesel pumps while affordable solar based pumps are available for their farm dimension.
Crowdfunding
Of-late, crowdfunding has become a great way to collect non-dilutive funds from hundreds and thousands of donors for startups. It also acts as a great validation tool before bringing a product to the market. This was pioneered by Kickstarter. This is also generally used in cases where the user cannot afford the end product. Several times, the funds are collected by an NGO for tax benefit purposes and are then given to startup as a procurement or work-order.
The advantage of crowdfunding at times is that the money is routed as a donation and could be unrestricted in nature, which means the startup can use it for any kind of expenses and not bound by say a grant-agreement etc.
Awards and Prizes from Competitions
Like individuals, organisations too can win prizes and awards. The most typical example is a b-plan or a pitching event conducted by academic institutions or corporates etc. A few examples are: National Startup Awards, Infosys — Aarohan Social Innovation Awards, HULT Prize etc.
Individual Stipends
There are some programs that incentivise individual founders for a definite period of time, especially in the early stages of the startup or even before the startup is formed. This is typically in case of entrepreneur-in-residence programs or founder matching programs such as Entrepreneur First etc.
Blended Finance and Innovative Finance
This is mostly applicable for startups to scale their impact through their product and innovation through a diversified financing mechanism. Typically a business grows from its internal accruals generated from the revenue. What if the customer cannot afford your product or service which is also a core essential need like health, education, housing etc. Finance experts in such cases structure innovative financial instruments to optimally blend revenue, grant and debt to create a modelled that can be systemically be scaled over a large population. Such instruments are also called — Development Impact Bonds (DIB) or Social Impact bonds. This too is a scalable form of non-dilutive capital available for startups. here’s an example of an Education DIB that was implemented in the past. Do indicate your interest to know more about this and I can get an expert to shed more light on this in the coming days.
In this regard, I recently came across a live application for blended finance by Samridh Health — an initiative by USAID, National health Authority, IIT Delhi, Rockefeller Foundation and IPE Global. The consortium is inviting applications from healthcare enterprises, offering scalable market solutions to strengthen India’s COVID-19 response, augment health infrastructure, and improve capacities of healthcare workers. The consortium plans to offer customised financial support, including grant funding and other forms of blended finance.
So these are all kinds of one-way, non-dilutive sources of capital available to startups. Not all are applicable to every startup.
Also, most grants do have a specific ‘purpose’ and very few might be ‘unrestricted’ in nature, which means the company can use it for any purpose.
So do read-up about them and apply to them at the right time based on relevance to your business model.
Last but not the least: Beware of Taxes & Accounting
Another important aspect that founders need to keep in mind is how they reflect these grants or non-dilutive forms of capital onto their books. Since it is neither debt nor equity, it does make its way to the Income statement (P&L) and would be subject to taxes. The question is whether it is subject to a flat tax (deduction at source) or can be brought into the books and be netted-off with expenses.
Some sources are quite obvious — like prize money or an award — this is subject to the typical 30+% tax deduction at source. While some other incomes can be netted against your expenses which would be a favourable treatment for the startup.
I am not an expert in this area, hence I would recommend you to take professional advise on this in advance so that you can plan the grant utilisation accordingly. I’ll try to get an expert view on this in the coming editions.
Some goodies before goodbyes: Grant & Program Tracker for Startups
I have also created a shared spreadsheet to keep track of some opportunities and intend to update it regularly with the latest live applications that startups can apply for, along with some basic details for you to decide if your startup qualifies. I hope you would find this useful. If you find your favourite grant source missing, please drop me an email and I’ll have it updated for the benefit of others. :)
Finally, while, grants aren’t a sustainable source, they do provide an unexpected cushion for startups to try out new experiments to unlock possibilities.
Hence, like I said in the past: Don’t plan for it. And if you get it, don’t squander it.
Take care and stay safe.
Do hit me up: srikanth@qapitacorp.com
