Written by Ansley Fender, Founder & CEO of Grantcycle
Startups are no stranger to cash constraints. After all, startups live or die by their ability to keep their bank balance above $0 until they can build, launch, and achieve profitability. But this is no easy feat, especially since monthly burn rate estimates range from $18,000 per month for pre-seed companies up to $400,000 per month for Series A. In this article, we explore different startup funding methods and how founders and small business owners can leverage start up business grants to fund their operations.
How can startups fund their operations?
There are three main types of funding that startups use to fund their operations: debt financing, venture capital, and startup business grants.
Debt financing, such as lines of credit, loans, microloans, and CDFI funding are funding vehicles that give cash based on a business’ track record of success and historical revenue. This cash must be repaid in periodic payments with interest. Unfortunately, most startups have insufficient historical or current revenue to qualify for debt financing.
Venture capital is a type of financing that is available exclusively for high-growth startups and large businesses. Unlike debt financing, venture capital does not require periodic payments and does not charge interest. Rather, investors, such as venture capitalists or angel investors, take equity in the company, which grows as the value of the company grows. At an exit event, such as a merger, acquisition, or IPO, the investors receive the cash value of their equity, which is (hopefully) much larger than the original investment. Unfortunately, only 0.05% of startups raise venture capital. Additionally, venture funding is far from equitable with a mere 1.87% of venture funding going to women- and minority-owned startups.
Startup Business Grants
Unlike debt financing, grants do not have to be repaid, and unlike venture funding, grants do not require recipients to give up equity in their company. In addition, small business grant programs do not require startups to have a track record of success, revenue, or even a product. Lastly, because grants are considered revenue, they increase a startup’s bottom line, which can increase the possibility of qualifying for debt financing or securing venture capital in the future.
Let’s take a closer look at small business grants and grant funding for startups.
What is a Startup Business Grant?
Essentially, a grant is money with contractual obligations to spend the money for a specific purpose in order to generate specified outcomes, both of which are established in the grant application. Grants can be used for anything that a grant funder is willing to fund, such as research and development, environmental remediation, space travel, or artificial intelligence.
Who is eligible for a small business grant?
Grant eligibility requirements vary from funder to funder, but they are laid out in the grant application, which is sometimes called a Request for Proposal (RFP) or a Notice of Funding Opportunity (NOFO). Grant applications can take take up to 120 hours to prepare, so it is imperative to thoroughly review eligibility requirements as soon as a potential grant opportunity is identified.
What types of grant funding are available?
There are four main types of grant programs:
Competitive Grants are awarded through a competitive application process in which grant funders evaluate proposals submitted by grant seekers. Competitive grants are the most common types of grant money received by businesses and nonprofit organizations.
Formula grants are a type of federal grant that is awarded based on a formula set by law. An example of a formula grant is funding for highway construction that the federal government awards to states or provinces based on road age and usage.
Continuation grants that are a type of follow-on funding that is awarded as a continuation or extension of a previous grant. An example of a continuation grant is a Phase 2 Small Business Innovation Research Grant after the grant recipient has successfully completed Phase 1.
Pass-through grants are awarded to one recipient and then distributed–or passed through–to other recipients. They are commonly used in situations where the grant-making agency wants to provide funding to organizations that are not eligible to receive grants directly.
Startups are typically eligible for competitive grants only, but they may be eligible for a continuation grant if they have previously received funding.
Startups that are interested in a competitive grant must submit an application to the funder detailing information about their company, product, proposed grant budget, and expected. After the application deadline passes, the funder reviews the applications to determine which proposals are likely to have the biggest impact and then gives awards based on alignment with their priorities and funding availability.
How to find grant opportunities
Unfortunately, there is no single database that lists all available grants, and there are dozens of free and paid databases that list unique funding opportunities. To minimize search time, startups should identify funders in their industry or impact area, which can be done with a simple Google search. For startups focused on research and development into cutting edge technology, the federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs provide roughly $4B per year of competitive and continuation grants for businesses that align with their funding topics.
Tips for applying for startup business grants
Writing a grant proposal is a time-consuming process, but at its core, it is similar to pitching. Like investors, every grant funder has stakeholders they have to report to, so they have a vested interest in making sure to choose grant proposals that are likely to produce the outcomes stated in the application. To make a proposal stand out:
- Articulate the startup’s vision and tie it back to the grant proposal evaluation criteria.
- Describe why the startup is the right one to pursue your vision.
- Convince the funder that they are the right partners to help the startup achieve its vision.
Startups are in a race against time to get their product built, launched, and generating enough revenue to cover operations before they run out of money. Most startups are not eligible for loans due to a lack of revenue, and only a small percentage of startups successful raise venture capital. Grants provide accessible capital for pre-revenue (and even pre-product, in some cases) startups that does not have to be paid and does not require equity dilution.