Are Grants Leading Your Startup to a Dead End?

The Takeaway: Grants are a blessing because they provide critical, early, non-dilutive funding and credibility for founders, especially those with PhD backgrounds. But the time and paperwork are intense, and they can introduce competing priorities for startups short on time. Thinking strategically about why and how to use grants is key for success.

A founder pinged me out of the blue this week to ask for a catch-up. I was happy to schedule a call, but he left the agenda vague and open-ended.

After we exchanged the catch-up small talk, he asked me the question that was really on his mind.

“So, we’ve gotten lots of grants, which is great. Navy, Air Force, NIH. And I know that non-dilutive funding is the cheapest form of funding. But I’m worried.”

He paused, and I could see him searching for the right words.

“At some point, will our grants become a distraction? Will we spend too much time on them and not make progress on the technical development of a customer product? Should I be concerned about this?”

I nodded slowly, considering the question.

“Well, your intuition is right: you should be concerned.”

This article is part of a series about PhD founders and the entrepreneurial challenges they face. Make sure to check out our earlier posts: The Questions Every PhD Founder Should Answer Before Starting a Company and The 3 Mistakes that Derail PhD Founders (and How to Fix Them).

I love grants. I work with founders to secure Phase I SBIR grants through Gliding Ant’s SBIR Academy, and I wrote in April about changes to the SBIR program to help founders adapt to the new normal. My previous startup, BlueDot Photonics, received $1.5M in non-dilutive funding through three grants. Without that money, BlueDot would never have existed. I recommend that most PhD founders, especially those at the earliest stages or fresh out of university, apply for grants.1

But let me be real with you for a second: A grant is both a blessing and a curse.

• Non-dilutive - If you are wildly successful as a founder, your company can be worth billions of dollars. What’s 1% of $1B? It’s $10M. That’s real money. This is why people say equity financing is the most expensive capital you will ever raise. Selling too much equity now can cost you millions of dollars in the future. But a grant? No equity is exchanged. You can get the cash now without giving up equity and risking millions of dollars in the future.

• Credibility-building: Do you know the award rate for a Phase I SBIR grant? Only 14%.2 Winning one means you have convinced several experts in your field that your idea has merit. This is huge for an early-stage startup with no track record. In most cases, investors look favorably on startups that have secured grant funding, which helps address the science-project-versus-business concerns that can crop up.

• Paperwork - We tell first-time applicants for a Phase I SBIR that they should be prepared to spend 40-80 hours on their application. Grant applications are often dozens of pages. And given the low award rates, you will often need to write a few applications before one comes through. This is time you can’t spend with the customer or working on the product.

• Competing priorities - Funding agencies have agendas. They want solutions to specific problems. Looking back at the example at the beginning, do you think the Navy, Air Force, and NIH all want the same product for the same purpose? My guess is no. This can incur significant non-recurring engineering costs and ultimately be a distraction for teams.

How can you avoid most of the curses while still getting most of the blessings from a grant?

The most important thing is to treat grants as a core part of your strategy, not just a way to pay your team. Your strategy isn’t to be a research-and-development service provider. The strategy is to build a solution to a customer’s specific problem and sell it to them at a profit.

So make sure you ask yourself the following questions before you start chasing more grant money:

Startups’ resources and time are limited. Successfully achieving product-market fit with a single customer is challenging. Introducing one or two more customers into the mix makes it impossible to reach product-market fit.

A company I was working with last year had two grant projects underway. In one project, the company was developing a product to identify and classify events for power plant operators using a static environmental observation system. The other project was developing a 3D scanning technology for environmental monitoring and mapping. Radically different products and customer segments.

This was causing all sorts of problems for the company. Given that the two products were orthogonal (continuous static observation vs. periodic scanning), their pitches to investors and customers, and their internal resource prioritization were all confusing. Although both projects were successful from a technology development standpoint, they struggled to gain the commercial traction needed to attract private capital or grow their customer base.

One of the most powerful ways to use a grant is to build a relationship with a key stakeholder of your strategy. A grant-funded project lowers the barrier to customer or partner engagement by removing the negotiation over who pays for what during joint development or pilot projects.

I worked with a founder briefly, and they had secured several million dollars in grant funding over about five years. Unfortunately, during those five years, they never developed a paying customer. When their latest round of applications was rejected, they found themselves scrambling to build customer relationships and pitch to investors. The founder had taken a loan against their retirement savings to keep the company solvent while he pursued a late-stage pivot from grants to another funding source. We advised him to push for a sale of the company or a licensing deal for some non-core IP to recoup the cash he had put into the venture, but he thought this would be giving up too much value.

A large part of strategy is about deciding what you aren’t going to do. Saying “no” to a project can be the right decision. As I discussed earlier, for the grant to be worth pursuing, it has to bring you or your product closer to your customer. That’s the only thing that matters. If the reason for pursuing the grant is more like, “We won’t be able to pay the team without it,” that's not enough of a reason by itself to pursue the grant.

But lots of PhD founders are comfortable applying for and winning grants. It feels like traction, and it keeps the team together by having a steady stream of funding. But this can be a trap. Eventually, the grant money dries up. Eventually, without commercial success to pair with the R&D success, funding agencies start looking less favorably on your applications. All it takes is a few misses on grant applications, and suddenly you're forced to furlough or lay off your R&D team.

The only path to a sustainable business is to find product-market fit and become profitable. Everything else is a bridge to get you there.

Whenever I start working with a startup on a grant application, I ask them, “How does this grant help your startup achieve its strategy?” Lots of times, the answer is, “I don’t know. I just think we can win this grant, and we need the money.” We then spend the next 15-30 minutes unpacking it and ensuring the grant is the right next step for the team.

It’s time well spent. Because there is nothing worse than spending 2-3 years on a research project to suddenly realize you’ve built something no one wants.

But what do you think? Am I being too harsh on grants? Have you ever regretted applying for a grant?

If you’re a founder who is trying to decide how to use grants to successfully fund your startup, I’d be happy to connect. Subscribe to this newsletter and leave a comment, and I’ll reach out to set up a 30-minute call.

And if you enjoyed this article, please Like and Restack it. Thanks.

Jared Silvia, PhD, has worked in the energy and materials sector for over 15 years, as a consultant at McKinsey & Company, Director of Product Management and Marketing at Doosan GridTech, and CEO and Co-founder of BlueDot Photonics. He is now a Partner at Gliding Ant Ventures, where he co-builds deep tech companies with technical founders from science and engineering backgrounds.