The following excerpt is from Entrepreneur’s book Finance Your Business. Buy it now from Amazon | Barnes & Noble | iTunes
Looking to fund your startup? Let’s take a look at something everybody dreams of: free money or, in other words, landing a grant from the federal government.
“But wait,” you may be thinking. “I’m not a nonprofit — I can’t get a grant.” Well, as it turns out, nonprofits aren’t the only organizations eligible for government grants. For example, from 2010 to 2014, for-profit company Canopy Apps received $2 million in National Institutes of Health (NIH) grants to develop translation technology for medical professionals working with patients who don’t speak English.
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Jerrit Tan, former CEO of New York City-based Canopy, believes more entrepreneurs should take advantage of the billions of dollars in business grants offered by government agencies, which can buy a startup valuable R&D time and boost credibility.
“You’re literally turning stacks of paper [grant applications]into money for your business,” Tan says. “And the government usually doesn’t take equity.”
Of course, nabbing local, state and federal grants involves more than cutting and pasting your business plan into an application. Here’s what you should consider:
1. Aim high
A revolutionary idea is essential, says Tan, whose translation app targets the language barriers that plague 15 percent of U.S. patients. “Incremental ideas usually don’t win,” he says. “It’s almost like the crazier, the better — within reason. This is the government, after all.”
It’s essential to be able to quantify the effect your product will have on the market, says Amy Baxter, an Atlanta pediatric emergency doctor who in 2009 scored $1.1 million in NIH funding for Buzzy, a pain-blocking device used for administering injections to children. “Make it clear how big the impact of the problem you want to solve is,” she says, “and how inadequate the previous solutions are. Even better is to have a way to measure how well your solution is working.”
2. Put in the time
For large federal grants, expect to spend several months preparing an application.
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“It’s not a fast process,” says Michael Patterson, CEO of Graphene Frontiers in Philadelphia, an advanced materials and nanotechnology company that has won ten grants from local, state and federal agencies totaling nearly $1.3 million. Payments can be slow to arrive too. To tide you over, he says, “You have to have funding from other sources or be able to get other funding quickly, whether that’s revenue or equity investments or something else.”
3. Find the right opportunities
“There are grants out there that can be more trouble than they’re worth,” Patterson warns. Some have big payouts but overly restrictive stipulations on how the money can be used. Others seem almost too good to be true, such as the $930,000 Graphene received from the National Science Foundation, including a match on outside investments of 50 cents on the dollar.
But don’t discount smaller grants. Many have less stringent application requirements and spending restrictions. A $2,000 grant Graphene received from a Pennsylvania economic-development program was designed to support larger grant-writing opportunities. Graphene used the money to bankroll proposal efforts for a hefty Department of Defense grant.
4. Get external feedback
When pursuing a grant, Canopy runs its application by “as many smart people as we can find,” Tan says. The more removed from the business reviewers are, the more likely it is they’ll find the hidden flaws in the proposal.
Outsiders may also come up with new commercialization ideas. In Canopy’s case, that meant selling the translation app to the legal, construction, travel and education sectors, industries the NIH has no vested interest in. As Tan points out, even with a grant, “it’s still up to you to find other ways to commercialize your product.”
Getting startup grants and seed investments from your city
After earning an MBA from the Wharton School of the University of Pennsylvania, Ashrit Kamireddi was prepared to go wherever he had to in order to raise seed money to grow VeryApt, his apartment-review platform. But thanks to a $100,000 angel investment from Philadelphia’s StartUp PHL program, which invests in local entrepreneurs, he didn’t have to leave town.
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Kamireddi has since hired four full-time employees, raised a total of $270,000 in seed funds and expanded his operations to 10 other cities. Philly, which launched its $6 million startup fund in 2012, is among several major cities offering grants and seed investments for entrepreneurs. Among them, Detroit boasts two venture funds for early-stage companies, with a portfolio of nearly 80 startups; Denver awards $35,000 in annual grants to new companies.
So what’s the best way to gain access to these funds? To identify opportunities, check with your city’s economic development office, incubators, accelerators, co-working spaces, networking groups and anywhere else startup founders and advisors congregate. Begin building relationships long before you’re ready to raise capital — even a year or two in advance, advises Archna Sahay, Philadelphia’s director of entrepreneurial investment, who regularly counsels entrepreneurs about pitching StartUp PHL. “The minute you realize you want to take on the investment is when you need to start having that conversation,” she says.
City information sessions on startup grants and seed funds are a great place to start. Be sure to introduce yourself to key players while there. Also set up one-on-ones with stakeholders receptive to meeting with you.
“Don’t be shy about asking to run things by them,” says Bethlehem, Pennsylvania-based Steve Boerner, founder and president of Hatch House, a 12-month live-work program for entrepreneurs in or just out of college. Boerner turned to Asher Schiavone — economic development coordinator for the city of Bethlehem, which has awarded millions in business grants to local startups since 2004 — who offered suggestions on everything from what to include in the application to the details of his slide deck to his pitch. That dialogue led to Boerner landing $15,000 from the city.
Prepare thoroughly for these meetups so you can speak with authority about your venture. “You really get one chance with municipal grants,” Boerner explains.
Make that chance count by understanding the fund’s motives. Municipal governments have good reasons for giving money to startups — mainly job creation and economic stimulation. Be sure your goals align with those of the investment program and that you’re clear on all stipulations, advises Kamireddi, whose equity investment from Philadelphia came with the caveat that VeryApt stay local for a minimum of 18 months.
To gain extra intel, Kamireddi suggests talking to entrepreneurs in the city’s investment portfolio about their experiences with the program.
“Often people think it’s just about the dollars,” says Patricia Glaza, vice president and managing director at Invest Detroit, which runs the city’s community development funds. But ensuring that an investor’s agenda meshes with yours is equally important. Also key: the mentorship that comes with the funding. For Jonathan Frankel, founder of Nucleus, a wireless intercom that scored $100,000 from StartUp PHL this year, having the ear of Josh Kopelman, partner at First Round Capital, the VC firm that manages and selects StartUp PHL’s investments, sweetened the deal. “You want to take smart money,” Frankel says. “You want to take money that comes with good advice.”