Start Up Companies --- Grant Money: When “Free” is not “Free”

In a down VC market, in the heart of flyover country, it is perhaps inevitable that the lure of free money – SBIR grants, stimulus funds, etc. – would be compelling for Wisconsin’s life sciences entrepreneurs.  And if “free” meant, well, “free” I suppose that would be a good, as well as inevitable, thing.  But, alas, “free” does not always mean “free.”  In fact, from a strategic business building perspective “free” all too often means “a lot more costly than you think.”  So, before you spend another dollop of time, energy and, yes, even money pursuing the next too-good-to-be-true free money from the good folks in Washington and Madison that dole out all those tax dollars, consider a few things.

1) What, ultimately, do the vast majority of folks that offer free money to life sciences and other technology companies look for in grant apps?  The answer: good science with very early stage commercial potential that consenting adults, with cash to invest, won’t invest in.  What, on the other hand, makes for a good commercial project worthy of financing from a business perspective?  Projects that can generate products – and revenue – sooner rather than later.  You know, the kinds of projects that investors want to fund, rather than the kind that scientific/academic researchers want to fund.

2) What time does business run on these days?  Internet time.  What time do public agencies and grant programs run on?  Government time (or, worse, academic time).  Seriously, how often do grant application, consideration and funding timelines come even close to matching the timelines imposed by financial and consumer markets?  Almost never.

3) Do grants scale?  Well, sort of.  If your Phase I SBIR goes well, there is a big step-up at Phase II.  But seriously, how big?  Not relative to the puny Phase I, but relative to how much capital will actually be needed to get something to the market: something that a freely consenting adult will actually pay for? 

4) Just how much bandwidth does your team have?  In terms of how much talent/time can you profitably afford chasing grants?  And if the answer is “lots of talent/time” is available for hunting down “free” money what does that say about the commercial prospects of where your business is headed?

5) Just because the academics on the team are good at finding and writing grants is no reason to apply for grants.  Indeed, grants too often end up blinding the lab coats running a startup to the realities of the market, to the ultimate regret of all concerned – including even the lab coats themselves when they eventually find out that customers don’t care about peer-reviewed research, they care about value adding products.

Now I am not suggesting that grants shouldn’t be part of a good start-up’s financial model.  But the financial model should serve the needs of the business and it’s investors, not the needs of grant writers.  So by all means, use grants – sparingly – to establish credibility.  And, if from time to time you run across a grant opportunity that actually dovetails nicely with your real business needs and timing, by all means go for it.  But if you ever find yourself thinking that getting grants is what your  business is all about – well, don’t tell that to your investors.