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Government grants  

Renowned VC Fred Wilson dismisses government grants:

The application process is usually long, involved, and distracting. And sometimes the grants come with strings attached; you can't move, you have to use it for a specific purpose, you have to hire a certain number of people with it, etc, etc.

(...)

I'm not a fan of this form of financing. First, in principle I think that government ought to stay out of the business of picking winners and let the market do that. But more practically, I've never seen an entrepreneur change the outcome of their startup with government money. It is never enough to really move the needle and the strings that are attached usually make it uninteresting to me.

Given that, these days, I spend most of my time getting tech companies government money, I can't quite agree with Fred here. Perhaps things are different in the US (in fact, they almost certainly are), but here's the situation in the UK:

Tax Credits

The first mechanism that the UK government has to help tech companies is a tax break. It can be quite complicated to apply for, and so many companies that should be getting that tax break don't apply for it. If you're spending at least £50k a year on developing your own software products, you can get a chunk of that reimbursed by the government.

It's easy to dismiss the amount (you might get about £10k back on a £50k expense, for example), as Fred does, but actually, several companies in our portfolio would argue differently. One of them was in the middle of raising funding when the tax credit (over £40k in their case) came in, and it gave them that extra couple of months of runway that allowed them to negotiate themselves a good funding deal.

In their own words, they were "on the floor, laughing" when they saw the money come into their account at that critical time. So much for not moving the needle.

How much work did it take them to get this money? None at all. We handled all the filing for them. It cost them money, but that money was a "success fee" - in other words, it was money they wouldn't have had anyway if it wasn't for our help.

But enough about these unsexy tax matters. What about grants? Are they really that hard to file for?

UK Government Grants

Currently, GrantTree specialises in one of those grants, the Grants for R&D, which comes in the form of match funding with very few strings attached.

Are they hard to file? Yes, absolutely. The application form adds up to about 10 pages of very dense writing. It takes a lot of effort, great writing, persuasion, and technical skills, and of course experience in going through the process, to do this well, and it really does need your full attention for at least a few days to just get it done.

I certainly agree that in most cases, it's absolutely not worth it for tech founders, who already have their hands full with building their business, to dedicate a week or two of their mind-space to learning about the grant and preparing the application.

But here again, they can get help. And here again, the work is done mostly on a success fee, so that the cost is basically coming out of money which they wouldn't have had without the grant anyway. So it works out, once again, as free money.

Moving the needle

Can these things move the needle for entrepreneurs? Absolutely.

One entrepreneur I spoke to over a startup-themed dinner a few months ago claimed to have raised over £2m of government grants for his business, over the space of a few years. The Grants for R&D mentioned earlier can effectively extend your runway by 45% to 60% depending on the grant you apply for. Some UK-based companies can and do claim hundreds of thousands of pounds of tax credits every year. Even for a decently sized, mature company, that makes a difference. Money can clearly "move the needle". If it didn't, then why would people give up precious equity in exchange for it?

The same entrepreneur who had raised £2m of government funding made a great point that night. He said that the US, and in particular Silicon Valley, had a huge advantage in the density of VCs and hyperactive investment culture. In the UK, where VCs are scarcer and more risk-averse, the advantage that we have is that the government is willing to directly support small, innovative technology businesses.

If you want to learn more...

I don't want to turn this article into a pitch for my company's services, but if you're a UK company and you want to learn more, do get in touch. There's no guarantee that we can get you money (many startups are just too small and scrappy and don't qualify for either grants or tax credits), but we're always happy to discuss your options.

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