As many of you know who follow me, I am a big fan of Fred Wilson of Union Square Ventures (USV) with a blog, AVC. I have been following his blog and learning a lot for over 5 years. Fred put up a great post today, where he talks about Government Grants as a financing source that you might consider. Fred points out that among the positive aspects of government grants are that they are Free Money, you don’t have to pay it back, and you don’t have to give up any of your company stock for it.
Fred also points out that there might be some drawbacks that might turn some entrepreneurs off. The application process can be time-consuming and time to approval, if you can get a grant, may take a long time. Fred points out a few other “strings” you might encounter. He specifically mentions the Small Business Innovation Research (SBIR) grants.
Fred’s not high on startups getting this type of funding. It seems a lot of his bias comes from the investment sectors that USV focuses on. There are a number of other sectors like bio-tech including medical devices, and clean-tech that need enormous amounts of capital that are hard to fit into a VC time cycle. For example, getting a new drug approved by the FDA is potentially a 10 year process and most VC funds are structured with a 10 year life span. Or, how about the tens of millions of dollars it might take to get a medical device through the FDA’s 510 (k) process. I realize that there are VC firms that invest in this segment, but this is not for the faint of heart. A VC has to believe in the investment without clearly knowing when the device will come to market (the 510 (k) process), and they won’t know exactly how much reimbursement will be allowed by the Center for Medicare and Medicaid (CMS). So, getting some early dollars from a NIH grant to help the process along can be huge for companies.
When you read Fred’s article, be sure to go through some of the comments to get some idea about the network of conversations about grants.
In the meantime, if you are in Southern California and have a product or device that you think might fit a government grant program, there is a great resource at TriTech Small Business Development Center (SBDC) with offices in Irvine and Riverside. They recently brought on a SBIR/STTR and federal grant expert to help companies understand the available programs and whether there might be a fit between a grant and the company. They are currently putting on SBIR workshops that are worthwhile attending if you might be interested or want to know more.
Being someone who likes full disclosure, I feel compelled to say that I have been mentoring high-tech startups at TriTech for a couple of years. I recently sat through a session with one of my clients who was not convinced that going after a Phase 2 grant was worthwhile. After about an hour with the new expert, he better understood the process and why he had nothing to lose in applying.