Grant Funding

Winning Grant funding through competitions and applying for government-backed grants are both good options for start-ups - but they take different kinds of skills and present very different challenges

Getting funding under the DTI's R&D grants programme is like going to counselling, according to one entrepreneur. You don't think you need it, it feels pretty terrible when you're sitting on the couch - but on balance you're probably better off for having done it.

The R&D grants programme is just one of many government-backed schemes that provide funding for start-ups beyond traditional venture capital and bank lending. Competitions differ from grants in the way they're administered and in how the money is awarded, and they're often perceived to be more difficult to apply for. So which approach will work best for you?

A perfect fit?

First of all, don't be put off by the rules and regulations of either scheme. Invariably, there are conditions attached to the awards, which often require match funding and specific project deliverables. But many entrepreneurs who've successfully gone through the process argue that it's relatively straightforward so long as you provide all the information the administrators are looking for first time round. The most important consideration, they say, is to find a scheme that fits what you're trying to achieve - not to try to force your business idea to fit a scheme's requirements.

'People do try to shoehorn an inappropriate idea into a grant application,' says Gary Hellen, manager of the Grant for R&D programme at the London Development Agency. 'Some applications try to bundle several projects into one and that's often a reason we have to turn them down. If it's inappropriate we'll find out.'

Novacta Biosystems in Hatfield won over �500,000 funding in the Spring 2005 Collaborative R&D competition with its partner, Edinburgh-based Ingenza. The project was a three-year initiative to find new industrial processes using enzymes, and according to Dr Mike Dawson, research director at Novacta, meeting the scheme's criteria was key. 'It fitted pretty well, not just in terms of the science but on the commercial side and the objectives of the funding scheme,' he says. 'There are a whole load of criteria that the funding mechanism is looking for and it's important to meet them all.'

Winners and losers in competitions

When it comes to choosing between grants and competitions, bear in mind that the latter can be harder to apply for, primarily because they have very specific aims and cut-off dates that often provide little room for manoeuvre. The Autumn Technology Strategy Board Collaborative R&D competition, for example, opened at the Innovate Conference in November with a �50m pot for six priority areas. But if you're thinking of applying now, you're probably already too late - applications need to be in by January 15th. Likewise a �10m Competition of Ideas at the Ministry of Defence, which kicked off in October, closes on January 31st.

'The timelines are very tight from the announcement of the scheme to the deadline for submission of applications,' says Dawson. 'Given the collaborative goals, it's a relatively short timeframe to bring a consortium together.' To tackle that problem, Novacta keeps a rolling programme of ideas that it's seeking funding for and a network of contacts that can help fulfil them - that way, if an appropriate scheme is announced, it can quickly pull together the various partners.

There are also questions over efficiency. Competitions are most effective when they focus on a specific output - such as producing an energy-efficient battery - and offer one award (or at most, just a handful). But that invariably means some perfectly good ideas will be ruled out because they don't meet the specific goals. From 10,000 outline assessments made by the Technology Strategy Board since 2004, for example, only 500 projects have been approved for funding. This ratio is likely to improve now that the TSB has streamlined its two-stage process: in this year's spring competition, a new Fast Track approach made it easier and quicker for small businesses to gain smaller awards under �250,000.

'If [the competition organisers] know where they want to go and how to get there, then broadly competitions are good; they set a goal and let the market meet it,' says Richard Halkett, executive director of policy and research at the National Endowment for Science, Technology and the Arts (Nesta). 'But there's a lot of waste in them - they are not a perfect market mechanism.' Steps are rarely taken to capture the rejected ideas, for example. 'If they don't take account of the waste, they can be a blunt instrument and quite damaging - if they do, then it's more of a contract than a competition.'

Streamlining grants

By contrast, the world of grants can appear a sea of calm. The DTI has reduced the number of business support schemes over the past few years from several hundred to 10, but this is in the context of an ongoing reduction of business support schemes across all central and local government departments from 3,000 to 100. 'It's all about making things simpler for business,' says a spokesperson.

Devolving administration of various grants to the regional development agencies has also made things more straightforward. Hellen says the R&D grant programme used to be a competition itself but adds: 'Rolling programmes tend to be more flexible than competitions and more customer-friendly. Competitions have closing dates and are not open door.'

One common mistake entrepreneurs make is to look for funding after a project has already started, which rules it out of a competition. Under a rolling grant programme, however, the concept of 'additionality' allows the entrepreneur to return to a grants body for funding once the project enters its next phase.

It's also worth bearing in mind that most grant schemes require some sort of output in the form of commercial demand for the product you're developing and a route to market. There are exceptions, of course - the Grant for Investigating an Innovative Idea, for example, refunds consultancy costs in early stages of research projects. But generally speaking, you'll need to be able to explain the commercial potential of what you are developing.

Ultimately, the application process itself can be a useful exercise for future funding rounds when you find yourself in front of potential investors. 'People know their technology but not necessarily how to run a business,' says Hellen. 'This process tends to make them think about preparing accounts and bookkeeping and so on. Most people do find the structure useful, but we do sometimes spend some time going back and forth with them.'

By David Longworth, Webster Buchanan Research