P R Ganapathy | December 9, 2014

Grant funding for companies: Boon or bane?

One of the special benefits of being a social entrepreneur is the ability to tap into grant funding to support your work. Almost any social sector today – microfinance, water, renewable energy, etc – has benefited from grant funding at some point in its history.

However, entrepreneurs are often confused, and therefore wary, about taking grant funding. In this post, I want to talk to some of the issues to bear in mind when considering this source of money.

The pros
First things first: why should you take grant funding at all? There are many reasons why you should:

* It’s really cheap, if not free. Grants come with little financial cost to the enterprise and is, therefore, an incredibly inexpensive source of funding.

* It’s available for high-risk activities. Investors often shy away from risk, but sometimes when you’re creating a really game-changing social startup, you’re doing things that are really new and different, and therefore risky. Grant makers are often set up to fund precisely that sort of high-risk, high-impact, game-changing work, and are therefore much less risk-averse than other investors.

* It’s often easier to get. Grant makers often have a simple and straight-forward application process, and give you a quick decision with few strings attached. Raising this sort of funding can be very efficient, as compared to say Venture Capital.

* Fewer non-cash concessions. Grant funders rarely ask for board seats, rights of first refusal, drag-along or tag-along rights, etc, and you therefore have to make fewer non-cash concessions to raise this sort of funding.

* Time-bound commitments. A grant typically has a grant period, after which you are free (within reasonable limits) to go along your merry way. Equity capital, on the other hand, stays around for a very long time, and has a long-term influence on your business.

The Cons
All this sounds great. Then why shouldn’t you take grant funding? There are an equally powerful set of considerations to keep in mind.

* It can be corrupting. There are many purists who believe that grant funding is corrupting, and reduces the purity of the for-profit social enterprise. Besides the principle, grant funding can corrupt in direct ways. Organisations spend money unwisely because it’s grant money – on expensive consultants, unnecessary travel. They rush to spend the money because the grant period is coming to an end.

* It may take you down a path that you don’t necessarily want to go down. Grant givers have their own priorities, and sometimes these may not be your own. However, once you’ve taken a grant, you’re obligated to fulfill the conditions of the grant. You may have to continue doing things that you would have killed if you had been able to.

* It could be restrictive. Grants often allow you to use funding only for specific items. The grant budget will specify how much is to be spent on salaries, or travel, or capex. You may not have a lot of flexibility in moving things around, if the actual project is different from the projections you submitted with your application.

* You may be giving up things that harm your long-term prospects. Some big grant-giving organisations require that any IP generated through the project is made open source, or put in the public domain. This could seriously harm your investability as investors may not be as benevolent about opening up the organisation’s greatest assets, its intellectual property.

* It may have onerous reporting requirements. Grants come with reporting requirements, and sometimes I’ve seen these become quite detailed and onerous, making serious demands on an organisation’s bandwidth and resources.

* It may make you less attractive to investors. Investors like to see simple and clean business models that are self-sustained and complete. A business model that has taken grants in the past, or continues to use grants to perform critical activities such as capacity building, advocacy and market development, or R&D, raises red-flags in investors’ minds. What if the supply of grants dries up? What happens then?

As I’ve laid out, grants can be fantastic, but they can also be problematic. Make sure you go in with your eyes open, and you will reap some of the benefits, but also avoid the pitfalls.