Which Type of Financing is Right For Your Startup? The Pros and Cons of Government Funding

Having a great idea for a business is one thing. Getting the financial backing to grow, scale and make it a success is quite another.

Most entrepreneurs approach funding in stages, starting by dipping into their own savings, going cap-in-hand to friends and family, taking advantage of government grants, crowdfunding and potentially seeking angel and venture capital.

The best funding option depends on the business, its track record and growth plans. Some companies stay self-funded forever, while others need the capital injection and expertise from outsiders. Getting the right investment, in the right sums at the right time can often make the different between a startup’s success or failure.

Techvibes has put together a list of common investment options for startups, and pros and cons or each. It will cover the following:

1. Bootstrapping
2. Government grants
3. Angel investing
4. Crowdfunding
5. Equity Crowdfunding
6. Venture Capital

GOVERNMENT FUNDING

The nice thing about having a startup is that governments want to help. You can argue with that statement all you want, but how else can you get free money to start your company?

Government funding can come as a grant, which you don’t have to repay, or tax incentives, which are a deduction to help encourage spending and investment.

In the U.S., startups can apply for the Small Business Innovation Research (SBIR) program, which supports technological innovation and R&D. There are also funding options as part of the White House’s “Startup America” initiative, which expands access to capital for high-growth startups. This site helps you search for federal grants, based on your industry and/or market.

There are a number of grants and tax incentives available for startups across Canada. Here’s another list here. The most cited include the Scientific Research & Experimental Development (SR&ED), which promotes research & development, as well as the Industrial Research Assistance Program (IRAP). Others include the Futurpreneur Canada Start-Up Program, the Western Innovation (WINN) Initiative in Western Canada, the Investing in Business Innovation fund in Ontario and the Atlantic Innovation Fund in Eastern Canada, to name just a few.

Of course nothing in business is really free, so below are the pros and cons to consider when looking at government grants and other funding sources to help grow your startup:

Pros

Free money: Enough said. “In principle, it’s an amazing thing,” says Yuri Navarro CEO and executive director at the National Angel Capital Organization.

Less pressure:  Unlike money you might get from your parents, friends or big-name investors, the government isn’t looking for a return on their money – at least not on paper. It can take some pressure off of your business, while still knowing someone is willing to make a bet on your success. “They’re able to take a risk a bank or maybe an investor wouldn’t … especially in the early stage,” Navarro says of the government grants.

Money attracts more money: If the government is giving you money, you must be doing something right, right? That’s at least the impression from potential investors. Receiving government funding is a good thing to have on your business resume.

Foreign investors in particular are familiar with grants such as SR&ED and IRAP, which could mean more outside money and even connections to international markets. You might even get more money from the government. “Once you are granted money from one government source, it’s not uncommon to receive further funding from the source if you meet program requirements,” BDC says on its website.

Cons

Narrow focus: Most government grants have very specific criteria. So while there may be a lot of them out there to choose from, your startup may not qualify either because of where you’re based or your product or services. You may be too early stage, or even too far along in your business to qualify for a grant. Read the fine print before wasting your time applying.

Strings attached. Just because you have the money doesn’t mean you can spend it however you want. Some grants and other incentives are specifically for R&D or to hire employees. Startups may also be forced to pay back the money, or could lose a tax incentive under certain circumstance.

Take a grant for example: “Technically, a grant is a sum of money conditionally given to your business that you don’t have to repay,” BDC says. “However, you’re bound legally to use it under the terms of the grant, or otherwise you may be asked to repay it.” An example could be if you sell the company to a buyer outside of Canada. Know what you’re getting into before you take the government’s money.

It can suck up a lot of time, energy and patience: If you thought getting into university or finding a daycare space for your kid took perseverance, you might want to brace yourself for the government grant process. Think paperwork, interviews and more paperwork. Then plan to wait for what might seem like forever to hear back on whether you get the money.

It’s not that it’s not worth it, but startup founders should consider how much time and energy the want to put into applying for grants against how much it would take away from the job of growing the business. Time, after all, is money.

Takeaway

Government grants are a great way to get money to grow your business. However, be strategic about which grants to apply for, how much time you’ll spend on the process (and outside of your daily operations) and what the consequences might be if your business backfires, changes course or even if becomes wildly successful.